The definition. Contribution is generally defined as the aggregate ARR from an annual cohort at the end of a given fiscal year, less the estimated associated cost of revenue and estimated allocated sales and marketing expense.
For Sumo, at the end of fiscal 2019, the 2018 cohort accounted for $14.6 million in ARR and $7.6 million in associated costs, representing a contribution of $7.0 million, or a contribution margin of 48%. At the end of fiscal 2020, the 2018 cohort accounted for $18.3 million in ARR and $8.2 million in associated costs, representing a contribution of $10.1 million, or a contribution margin of 55%.
The revenue grew. Note that for Bill.com, revenue in year 1 was only $6.7mm. In years 2 and 3, it was $14mm and $17mm respectively, meaning the cohort grew materially. Indeed, good SaaS businesses have cohorts that grow over time, as upgrades in the customer base outpace downgrades and churn. For Sumo, year 1 revenue was $10.1mm, but then grew to $14.6mm in 2019 and $18.3mm by 2020. Confluent’s revenue went from $21mm in year 1 to $40.7mm and $46.7mm respectively. All of these companies enjoy net dollar retention over 100%. For instance, Confluent’s NDR in 2020 is 125%.
Bill.com, Sumo, and Confluent’s customer cohorts are a nice example of what a good SaaS business will experience: i) you lose money on the customer in year 1 (about -100% marign); ii) in year 2 the customer becomes very profitable and you recover the cost of acquiring the customer; iii) over time, your customers buy more product from you rather than less so long as net dollar retention is over 100%+. Maintain these same attributes in your own SaaS business and you’ll be on your way to joining these companies in an IPO.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.comhttps://blossomstreetventures.com/metrics/
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