Thanks Brian，really love your video！It would be really helpful if you can elaborate the point where you made in the last part. You said if the net retention is 110%, the churn rate is at least 10%. Thank you very much in advance!
I believe the idea is that a 20% price increase would mean 20% increase in profits and thus you "retain" 120% of previous period's revenue in a scenario where nobody unsubscribed. So if you have a net retention of 110% after the 20% price increase, then you've lost some customers. Remember: Revenue is price per subscription * quantity of subscriptions sold. So if price went up by 20%, then quantity sold had to decrease (~10%, although I think the math is slightly trickier than this in reality?) to get you to the 110. Hope that helps.
What John said below (thanks for responding). Essentially, price increases can distort a metric like "net retention" because a company could cover up a poor cancellation rate just by raising prices substantially on the remaining customers. In fact, sometimes a big enough price increase could *cause* a higher cancellation rate. So when a company presents a "net retention rate" of over 100%, you always want to ask about the effect of price increases and license expansions vs. cancellations.
@Mergers & Inquisitions / Breaking Into Wall Street many thanks for taking the time to share such a great lesson with the community. Could you share the link to the Excel file. Thank you
A lead is a potential customer you can contact because he/she gave you the allowance to do so. Leads can be defined differently by industry. For example a lead in a SaaS business could be something different in comparison to a lead in manufacturing or financial service business. In terms of SaaS a lead is usually someone who showed interest in your product and signed up for a newsletter or a free trial for your product.
What Martin said below (thanks for responding). A lead is just a "prospective customer" from any source (email newsletter, phone, networking, website visitors, etc.). Enterprise-focused businesses always need to be generating leads, which they then speak to and hope to convert into customers eventually.
Really helpful. I have seen varying definitions around how CAC is defined - looks like you are using a New Logo subset of S&M here which makes sense but don't you want to allocate the remainder as a cost of expansion - netting against LTV?
You typically look at new vs. existing customers separately in these calculations because it costs less to maintain an existing customer relationship. You could look at some type of combined ratio that includes the initial subscription + expansions over time and then deduct the S&M cost required to renew, but that would be different from the normal LTV / CAC metric.
Thanks. We do have a full case study of EasyJet in our financial modeling course. I don't know that there's enough to say about just the metrics and ratios to make for an interesting/useful separate video here, but maybe.
Can someone explain why LTV / CAC is useful at ALL? It seems like nonsense to me. Why are we not comparing LTV to total customer costs including both CAC and retention costs? You don't access the full LTV just with the acquisition cost. You need to pay to keep them too, right? Are we basically just assuming that the cost of switching becomes higher as you become more entrenched and thus retention costs are trivially low??
The answer is that the retention costs are even more difficult to determine than the initial acquisition costs. And yes, it costs something to keep each customer, but this is usually much less than the initial acquisition cost, especially if it's a product that's difficult to switch away from. LTC / CAC is mostly a metric that is useful in very broad strokes, i.e., if it's far below 1.0x, you know the company has a problem, but getting something in the 2.0x - 4.0x range doesn't mean much except for "it seems about normal."
![Working Capital and the Change in Working Capital in Valuation and Financial Modeling [REVISED]](/img/n.gif)
Files & Resources:
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/SaaS-Metrics.xlsx
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/SaaS-Metrics-Slides.pdf
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/Confluent-10-K.pdf
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/Confluent-Investor-Presentation.pdf
Love it. Good to know that this channel is actively tracking the hot topics on the market! Please keep the SaaS stuff going. Thank you
Thanks for watching!
Thanks for the point on the "Gross Retention", great point ! Net Retention seems mask many underlying variables.
Really helpful and understandable! Thank you for sharing and keep going with more amazing videos with us! 🙌
Thanks for watching!
damn cac payback is genius. as a marketing director, I'll be adding this to our metrics report.
Glad to contribute to humanity.
Thanks Brian，really love your video！It would be really helpful if you can elaborate the point where you made in the last part. You said if the net retention is 110%, the churn rate is at least 10%. Thank you very much in advance!
I believe the idea is that a 20% price increase would mean 20% increase in profits and thus you "retain" 120% of previous period's revenue in a scenario where nobody unsubscribed. So if you have a net retention of 110% after the 20% price increase, then you've lost some customers. Remember: Revenue is price per subscription * quantity of subscriptions sold. So if price went up by 20%, then quantity sold had to decrease (~10%, although I think the math is slightly trickier than this in reality?) to get you to the 110. Hope that helps.
What John said below (thanks for responding). Essentially, price increases can distort a metric like "net retention" because a company could cover up a poor cancellation rate just by raising prices substantially on the remaining customers. In fact, sometimes a big enough price increase could *cause* a higher cancellation rate. So when a company presents a "net retention rate" of over 100%, you always want to ask about the effect of price increases and license expansions vs. cancellations.
Can’t wait til you release the case studies
Coming soon!
@@financialmodeling Eagerly awaiting the case studies, especially the Confluence one.
really amazing content, sooo informative and comprehensive. Thank you so much
Thanks for watching!
Thank you, this was an enlightening video.
Thanks for watching!
@Mergers & Inquisitions / Breaking Into Wall Street many thanks for taking the time to share such a great lesson with the community. Could you share the link to the Excel file. Thank you
Thanks. You can click "Show More" and scroll to the links below.
Thanks for the content! Super helpful. When you say discount rate, are you referring to the average discount from list? Or cost of capital?
The Cost of Capital or WACC, which changes based on the company's stage and maturity.
What are "leads?" Thanks for the content!
A lead is a potential customer you can contact because he/she gave you the allowance to do so. Leads can be defined differently by industry. For example a lead in a SaaS business could be something different in comparison to a lead in manufacturing or financial service business. In terms of SaaS a lead is usually someone who showed interest in your product and signed up for a newsletter or a free trial for your product.
@@ggas33dfdf THANK YOU! interview coming up :)
What Martin said below (thanks for responding). A lead is just a "prospective customer" from any source (email newsletter, phone, networking, website visitors, etc.). Enterprise-focused businesses always need to be generating leads, which they then speak to and hope to convert into customers eventually.
Really helpful. I have seen varying definitions around how CAC is defined - looks like you are using a New Logo subset of S&M here which makes sense but don't you want to allocate the remainder as a cost of expansion - netting against LTV?
You typically look at new vs. existing customers separately in these calculations because it costs less to maintain an existing customer relationship. You could look at some type of combined ratio that includes the initial subscription + expansions over time and then deduct the S&M cost required to renew, but that would be different from the normal LTV / CAC metric.
More videos on SaaS and VC related topics please
Thanks. We have just posted several recently if you look at the recent uploads.
thanks. appreciate the efforts.@@financialmodeling
Very good. Can we have the excel file to download?
Thanks. Click "Show More" and scroll to the links under "Resources."
Thank you. This is great! You said that we can download the spreadsheet. Where is the link?
Click "Show More" and scroll to the links below Resources.
@@financialmodeling Thank you!! Love your excellent videos.
@@financialmodeling they are only UA-cam links? What about the spreadsheet?
This video is very instructive :) Can we have the excel sheet pls ?
Click on "More" and scroll down to get the files.
Really enjoying your videos! Just wondering if you have any plans to make Shipping & Aviation Metrics as well?
Appreciate it
Thanks. We do have a full case study of EasyJet in our financial modeling course. I don't know that there's enough to say about just the metrics and ratios to make for an interesting/useful separate video here, but maybe.
I’m sorry but there is no link to the excel spreadsheet... am I missing something. Someone pls respond I’d love to get started using this outline.
Click "Show More" and scroll down to the links.
Can someone explain why LTV / CAC is useful at ALL? It seems like nonsense to me. Why are we not comparing LTV to total customer costs including both CAC and retention costs? You don't access the full LTV just with the acquisition cost. You need to pay to keep them too, right? Are we basically just assuming that the cost of switching becomes higher as you become more entrenched and thus retention costs are trivially low??
The answer is that the retention costs are even more difficult to determine than the initial acquisition costs. And yes, it costs something to keep each customer, but this is usually much less than the initial acquisition cost, especially if it's a product that's difficult to switch away from. LTC / CAC is mostly a metric that is useful in very broad strokes, i.e., if it's far below 1.0x, you know the company has a problem, but getting something in the 2.0x - 4.0x range doesn't mean much except for "it seems about normal."