The Math Behind SaaS

Math Behind SaaSOur friend Tomasz Tunguz at Redpoint Ventures recently asked Vik Singh to write up his techniques for estimating Infer’s customer lifetime value (LTV) and customer acquisition cost (CAC) using a rolling sales and marketing period. Unlike the standard formulas that most investors use to determine LTV and CAC, Vik’s “expected” CAC/LTV approach is more forward-looking and actionable for SaaS entrepreneurs because it doesn’t require years of historical customer data or perfect attribution of sales and marketing spend.

Below are the formulas Vik uses to measure our business, building off of some basic metrics like cost per opportunity, win rate and average deal size:

Expected # of New Customers = Opportunity win rate X # of opportunities

Expected CAC = Fully-loaded growth spend / Expected new customers

Expected Payback Period = ECAC / Average annual contract value X 12 months

Expected First-year ROI = First-year ACV / ECAC

Expected Second-year ACV = ACV X Expected renewal increase

Expected two-year ROI = ( First-year ACV + Second-year ACV ) / ECAC

Expected LTV = ACV + ACV X Renewal increase X (Renewal increase ^ (3-year lifetime – 1) – 1) / (Renewal increase – 1) 

For a more detailed explanation, check out Vik and Tomasz’ full post over at TechCrunch.

Meagan Busath

Meagan Busath

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