Tilting a Smidge – Understanding the Numbers

One of the great things about being an entrepreneur these days is the wealth of information and advice out there. A lot of times it can be tough to understand how exactly some of those concepts impact your business. With this series of posts, we’ll be diving into some great posts and showing you how you can apply them to your specific business situation.

When it comes to SaaS, one of the leading experts in the space is Jason Lemkin, the guy behind the incredibly useful SaaStr. So many great posts there it’s hard to pick one to start, but I decided to go with Why Tilting Just a Smidge from Self-Service Can Grow Your Revenue 30x.

Before continuing here, go read Jason’s post if you haven’t already. It illustrates a great concept – how expanding from a single $30/month product by adding a $150/month team edition is often not just a 5x multiplier, but potentially a 20-30x multiplier due to higher lock-in and lower churn in the team edition. Another great resource in this space, Tomasz Tunguz,  references similar churn dynamics as you move up from self-service in Maximum Viable Churn (we’ll tackle that post in a future installment).

Let’s model this and then see how you can apply it to your business. At the end of this post, we’ll show you how to experiment with this model on your own. I’ll start out creating an example similar to Jason’s starting point. A single $30/month product, 1,000 pre-existing subscribers (pre-existing or new impacts CAC calculations), an organic growth rate of 10% per month (you can use multi-value entry to model rates changing over time), a churn rate of 6% per month, and a conversion funnel rate of 4% (used to model leads from marketing). In this post, we’ll focus on the revenue side of things, and tackle the expense side in a follow-up.

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Let’s look at what this single-product business looks like. In year 5, we reach $3M annual revenue and $300,000 MRR. Not bad, but as Jason points out, it’s very hard to scale fast with those churn levels.

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So what happens if we add a team edition? Let’s start one out with a tenth of the subscriber base of the existing product (100 team editions vs 1000 single-seat subs to start). I’ve created a second product with $150 price, 100 sales in the first month, and a 1.5% churn rate instead of 6%.

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Investing in adding this product line will result in increasing year 1 revenues from $451k to $744k. Not bad, but you’ll also probably need to hire a couple of inside sales people, and dedicate some support and engineering resources to make it happen. But let’s jump to five years out. Now the compounding effects of the lower churn product really shine through. Even though we started that product line with just 1/10 the number of subscribers, by year 5 we are at almost SIX TIMES the revenue – $17.7M vs $3M.

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Of course, our expenses will also scale up, but this shows how powerful the compounding effects from lower churn are. In fact, we can see that in about 4.5 years, that churn factor results in the team edition going from 1/10 the subscriber count  to actually having more subscribers than the single seat edition.

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Want to try out how this would look for your specific business? Just click here for a live model and edit the plan items with pricing, churn, and other factors to fit your business. If you’re logged into an existing Opstarts account, a new plan will be created there. Otherwise you’ll see the plan in a guest account that you can save later.

We’ll tackle the expense side of the model in detail in a follow-up post, but as a first step I’ve included a couple of marketing expenses for single-seat ($20/lead) and team edition ($100/lead) – enable/disable them by checking the box in the plan item list on the left. They’ll let you see how every dollar you invest magnifies the compounding effects.

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You can also add employees and other costs required to support your growth, as well as other types of links such as upgrade/downgrade links or expense links for COGS, etc.

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Let us know if you have any more questions or specific topics you’d like us to cover in more detail. We’re really excited to help you put a lot of this great advice to work making your business better. Follow us on Twitter for all the latest Opstarts updates!

 

2 comments

Great explanation. In all SaaS metrics compounding has a really big effect because there is such a long customer lifetime. Do you have a view on how the dynamics of a team edition help reduce churn?

we’ve seen a clear impact on engagement and retention based on every incremental user that joins an account team. Selling a team edition incents companies to add multiple team members right away, contributing to lock-in and reducing churn.

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