Here’s what you should know about your net profit margins.
The profit margins of a SaaS company/startup depend on the overall size and age of the software company. During the early years of a SaaS company’s lifecycle, startups tend to generate losses. In later periods, it becomes more important to balance revenue and operating expense growth with gross and net profits.
Based on a KeyBank Capital Markets’ most recent 2021 survey of 354 private SaaS companies, SaaS profit margins in 2021 for the median SaaS company were:
If you would like to get a better understanding of SaaS Company P&Ls, check out our article on how to calculate SaaS profit margins and the benchmarks to keep in mind.
For publicly listed SaaS businesses, information on profit margins can be found on websites such as Bloomberg or the Financial Times.
The median blended customer acquisition cost ratio was $1.20 (meaning every dollar of revenue cost $1.20 in acquisition costs) according to the KeyBanc SaaS survey 2021. (The median represents the middle value of the sample population and is more representative than the mean, or arithmetic average, which is more sensitive to distortion from outliers)
Not surprisingly, customer acquisition cost varies widely by the business: customers reliant mostly on new customers spend a lot more on acquisition than those who mostly upsell or expand contracts with existing customers. Similarly, distribution methods can affect CAC dramatically.
There is firm evidence that it is considerably cheaper to generate one dollar of annual recurring revenue from an existing customer through upselling & expansion than to get a dollar from a new customer. The median CAC ratio for upselling & expansion is $0.63, versus a median new customer CAC ratio of $1.67. So, don’t forget to regularly tap into this goldmine!
The customer acquisition cost (CAC) for a SaaS business also depends on the distribution channel. The two top distribution channels for SaaS businesses, especially B2B ones, are field sales and inside sales. Inside sales is the most important distribution channel for contracts with an average contract value below $25,000 while field sales representatives are the driving force for larger contracts.
In terms of cost, the median customer acquisition cost (CAC) for field sales is $1.72 versus $1.25 for inside sales. Web-based acquisition is by far the most cost-effective acquisition channel. Historically, the median CAC was around $0.30 but the channel is relatively small. You would want to be near or below the median CAC.
Since we now have a good grasp about CAC ratios, let’s look upstream in the funnel at getting sales leads that might turn into customers. It is time to talk about Cost per Lead (CPL). On average, Marketing spend as % of CAC is about 30%. The balance stems from Sales expenditures.
To calculate the Cost per Lead for a given business, add up the total marketing spend for the business and divide it by the number of leads generated. There are two pitfalls here, however.
First, which marketing spend to count? Do you count fixed expenses like salaries? Do you count contractors involved in content production? Or do you only count advertising and other program expenses?
Second, not all leads are created equal. Different SaaS companies use “lead” to mean different things. For some, a lead is “any name that enters our database.” For others, a contact only becomes a lead when they are highly qualified and ready for a sales conversation.
Because of these variations, cost per lead benchmarks across companies aren’t that helpful. What’s more important is to measure cost per lead over time in your business, and also to measure it across different marketing programs. Assuming your definition of “lead” is fixed, you’ll want to get more efficient over time, and one way to do so is to lean into the marketing programs that capture leads more efficiently.
According to several sources, the average sales commission for a SaaS company is roughly 10%. This might not be quite right. There are 5 common SaaS sales compensation models:
All have their pros and cons, but our favorites are profit-based or tiered commission structures.
Automating financial modeling is not straightforward. Accounting frameworks were designed based on a “one size fits all” principle. However, every business has its unique business model that doesn’t necessarily fit this principle and the accounting rules allow for a degree of subjectivity. This makes automation of financial modeling challenging. Peter Lynch from ASimpleModel.com has worded it beautifully in an aged article that is still very relevant as of today. Why Hasn’t Financial Modeling Been Automated? (forbes.com)
OnPlan has developed a modular financial forecasting platform with a powerful Engine and best practice Apps to help you develop, visualize, and operate your financial models faster and more flexibly.
You can learn more at onplan.co.
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