The math that shows an LTV/CAC of 8.58x will take you public

Yesterday we published a post showing that of the 47 publicly traded SaaS businesses we monitor, on median they generated $0.55 of revenue for each $1.00 spent on Sales & Marketing in 2015.  Based on that data as well as a net retention analysis we did earlier this year which showed net retention was on median 103%, we can determine the LTV/CAC ratio for a typical SaaS business is 8.58x, which in our view is quite healthy and something you should strive for in you SaaS business.  The math is below. 

 

The table below shows revenue and sales & marketing expense for the 47 publicly traded SaaS businesses we monitor. By looking at the year over year revenue growth and comparing it to sales & marketing expense, we can determine how much new revenue is generated by spending $1.00 on sales & marketing.  For instance, SalesForce grew revenue by $1.3bln, from $4bln in 2014 to $5.3bln in 2015.  They spent $2.7mm on sales & marketing in 2015 so they generated $0.47 of new revenue for each $1.00 of sales & marketing spend ($1.3bln/$2.7bln).  All 47 companies generated on median $0.55 of new revenue for each dollar of Sales & Marketing spend. 

 

                      New Rev Per S&M
      Revenue   Sales & Marketing  
Name Ticker   2015 2014 2013   2015 2014 2013   2015 2014
2U, Inc TWOU   $150,194 $110,239 $83,127   $82,911 $65,218 $54,103   $0.48 $0.42
Athenahealth, Inc. ATHN   $924,728 $752,599 $595,003   $229,901 $189,688 $149,488   $0.75 $0.83
Bazaarvoice, Inc. BV   $191,181 $168,145 $146,812   $78,373 $86,482 $73,114   $0.29 $0.25
Benefitfocus, Inc. BNFT   $185,143 $137,420 $104,752   $58,589 $48,467 $36,072   $0.81 $0.67
Box, Inc. BOX   $216,440 $124,192 $58,797   $207,749 $171,188 $99,221   $0.44 $0.38
BroadSoft, Inc.  BSFT   $278,843 $216,857 $178,493   $83,806 $69,471 $56,822   $0.74 $0.55
Castlight Health, Inc.  CSLT   $75,315 $45,605 $12,973   $67,414 $62,065 $33,742   $0.44 $0.53
Cornerstone OnDemand, Inc. CSOD   $339,651 $263,568 $185,129   $207,026 $162,552 $109,737   $0.37 $0.48
Cvent, Inc.  CVT   $187,716 $142,245 $111,136   $77,931 $61,764 $48,405   $0.58 $0.50
Demandware, Inc. DWRE   $237,279 $160,553 $106,614   $100,865 $74,432 $52,384   $0.76 $0.72
Five9, Inc.  FIVN   $128,868 $103,102 $84,132   $42,042 $37,445 $28,065   $0.61 $0.51
Fleetmatics Group PLC FLTX   $284,761 $231,581 $177,350   $96,908 $78,885 $56,589   $0.55 $0.69
Hortonworks, Inc. HDP   $121,944 $46,048 $10,998   $133,052 $70,695 $17,187   $0.57 $0.50
HubSpot, Inc. HUBS   $181,943 $115,876 $77,634   $112,629 $78,809 $53,158   $0.59 $0.49
IntraLinks Holdings, Inc. IL   $276,153 $255,821 $234,496   $124,006 $115,867 $108,428   $0.16 $0.18
Jive Software, Inc. JIVE   $195,793 $178,693 $145,763   $78,684 $90,141 $86,083   $0.22 $0.37
Lifelock LOCK   $587,469 $476,016 $369,658   $273,389 $213,984 $162,363   $0.41 $0.50
LinkedIn Corp. LNKD   $2,990,911 $2,218,767 $1,528,545   $1,048,129 $774,411 $522,100   $0.74 $0.89
LivePerson Inc. LPSN   $239,012 $209,931 $177,805   $94,728 $83,253 $62,488   $0.31 $0.39
LogMeIN, Inc. LOGM   $271,600 $221,956 $166,258   $138,946 $119,508 $88,794   $0.36 $0.47
Marin Software, Inc. MRIN   $108,530 $99,354 $77,315   $45,132 $47,716 $42,799   $0.20 $0.46
Marketo, Inc. MKTO   $209,869 $149,954 $95,918   $129,072 $98,843 $62,769   $0.46 $0.55
Medidata Solutions, Inc. MDSO   $392,506 $335,071 $276,849   $103,153 $83,435 $66,337   $0.56 $0.70
MobileIron, Inc. MOBL   $149,298 $132,295 $105,574   $105,520 $99,870 $68,309   $0.16 $0.27
NetSuite Inc. N   $741,149 $556,284 $414,508   $388,741 $290,961 $210,079   $0.48 $0.49
New Relic, Inc. NEWR   $88,589 $52,394 $24,586   $89,162 $58,156 $28,365   $0.41 $0.48
Proofpoint, Inc. PFPT   $265,397 $195,607 $137,931   $156,156 $102,455 $71,781   $0.45 $0.56
Qualys, Inc. QLYS   $164,284 $133,579 $107,962   $49,569 $48,049 $42,523   $0.62 $0.53
RealPage, Inc. RP   $468,520 $404,551 $377,022   $123,108 $111,563 $95,894   $0.52 $0.25
RingCentral, Inc. RNG   $296,228 $219,887 $160,505   $139,851 $104,827 $72,336   $0.55 $0.57
salesforce.com, Inc.  CRM   $5,373,586 $4,071,003 $3,050,195   $2,757,096 $2,168,132 $1,614,026   $0.47 $0.47
ServiceNow, Inc. NOW   $1,005,480 $682,563 $424,650   $498,439 $341,119 $195,190   $0.65 $0.76
Splunk, Inc. SPLK   $450,875 $302,623 $198,944   $344,471 $215,335 $125,098   $0.43 $0.48
SPS Commerce, Inc. SPSC   $158,518 $127,947 $104,391   $55,374 $46,990 $39,621   $0.55 $0.50
Textura TXTR   $86,729 $62,968 $47,537   $21,013 $20,518 $16,971   $1.13 $0.75
The Ultimate Software Group, Inc. ULTI   $618,081 $505,936 $410,397   $169,664 $117,033 $93,879   $0.66 $0.82
Veeva Systems Inc. VEEV   $313,222 $210,151 $129,548   $56,203 $41,507 $19,490   $1.83 $1.94
Wix.com Ltd. WIX   $203,518 $141,841 $80,473   $120,010 $97,742 $53,776   $0.51 $0.63
WorkDay, Inc. WDAY   $787,860 $468,938 $273,657   $315,840 $197,373 $123,440   $1.01 $0.99
Zendesk, Inc. ZEN   $208,768 $127,049 $72,045   $114,052 $77,875 $37,622   $0.72 $0.71
Secureworks SCWX   $262,130 $205,830 ---   $146,324 $133,878 ---   $0.38 ---
Appfolio, Inc. APPF   $74,977 $47,671 $26,542   $26,076 $16,876 $10,337   $1.05 $1.25
Atlassian Corporation TEAM   $319,521 $215,109 $148,512   $67,989 $34,968 $18,795   $1.54 $1.90
Instructure INST   $73,193 $44,352 $26,055   $53,459 $35,390 $20,702   $0.54 $0.52
Mindbody, Inc MB   $101,369 $70,010 $48,687   $46,345 $30,922 $20,957   $0.68 $0.69
Shopify SHOP   $205,233 $105,018 $50,252   $70,374 $45,929 $23,351   $1.42 $1.19
Xactly XTLY   $61,111 $47,220 $36,325   $28,877 $20,532 $15,410   $0.48 $0.53
                         
Mean     $452,202 $338,179 $249,171   $203,365 $156,220 $110,613   $0.61 $0.64
Median     $216,440 $168,145 $120,342   $103,153 $83,253 $56,706   $0.55 $0.53

 

Now that we have revenue generated per dollar of S&M spend ($0.55), we took a look at how long these SaaS businesses are keeping customers.  To determine this, we looked at net revenue retention which is reported by 18 of the 47 companies we monitor.   Net revenue retention is defined as revenue from existing customers at the beginning of the year + revenue expansion from those existing customers during the year – revenue lost from customers who left that year.  The data shows net revenue retention of 103% on median, meaning these SaaS businesses receive more revenue from existing customers than revenue they lose from departing customers, which is a beautiful thing. 

 

    2015 2014 2013    
NET CHURN Ticker Retention Retention Retention Time Period Retention Type
2U TWOU 120% 112% 144% Annual Net
Benefitfocus, Inc. BNFT 95% 95% 95% Annual Net
Box, Inc. BOX 126% 136% 144% Annual Net
Castlight Health, Inc.  CSLT 116% 103% --- Annual Net
Cornerstone OnDemand, Inc. CSOD 95% 95% 95% Annual Net
Cvent, Inc.  CVT 102% 102% --- Annual Net
Demandware, Inc. DWRE 100% 100% 100% Annual Net
Five9, Inc.  FIVN 96% 96% 100% Annual Net
HubSpot, Inc. HUBS 99% 93% 83% Monthly Net
Marketo, Inc. MKTO 105% 109% 100% Annual Net
New Relic, Inc. NEWR 130% 110% --- Monthly Net
Proofpoint, Inc. PFPT 90% 90% 90% Annual Net
RingCentral, Inc. RNG 99% 99% --- Monthly Net
SecureWorks SCWX 105% 102% 99% Annual Net
Veeva Systems Inc. VEEV 136% 166% --- Annual Net
Zendesk, Inc. ZEN 123% --- --- Annual Net
Instructure INST 100% 100% 100% Annual Net
Xactly XTLY 104% 102% --- Annual Net
             
  Median 103% 102% 100%    
  Average 108% 106% 105%    

 

With these figures we can derive LTV.  We take $0.55 in the first year and grow it by 3% per year into perpetuity.  We then discount each of these annual cash flows by 10% to account for the time value of money. The result is an LTV of $8.58 based on a CAC of $1.00, for an LTV/CAC of 8.58x.  The math can be seen at the following link in case this article wasn’t nerdy enough for you already. 

https://www.dropbox.com/s/845035kjg3eysdz/Article%20-%20Sales%20%26%20Marketing.xlsx?dl=0

 

As a SaaS business if you make sure you’re striving for net retention of at least 103% and new revenue per dollar of S&M spend of $0.55 per year, you’ll build great value and hopefully can go public for a nice exit, similar to these SaaS businesses who did just that.          

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