Last version published: 04/11/2016 14:30
Publication number: ELQ-71849-2
View all versions & Certificate
SaaS Model - Net Present Value for Simple Web Business
A simple NPV model for you to evaluate the likelihood of success for your business
"Use Excel, not Magic, to Calculate Success"
Almost all software is now available online as "Software as a Service', more commonly known as "SaaS". If you are in the process of building a SaaS business model, you can expect recurring revenue and high profit margins...if you've hit the nail on the head of course. However, the gist to developing a successful SaaS business is to have numerous paying customers while keeping your costs of sales low.
[Please note that all the facts in this model are linked to ANY high-growth subscription business model. Software as a Service is only one illustration of a subscription based business model.]
Many entrepreneurs and VCs use a "Magic Number" to evaluate the likelihood of success for a SaaS company. The theory says that you are successful only if your annual revenue for a client is at least 75% of your cost of sales (the money needed to acquire a paying customer).
Or in other words. Invest 1$ today to make 75 cents in the year to come.
Excerpt from Scale Venture Partners blog:
“Looking at SaaS deals over the past ten year at Scale, we have found that a simple calculation is highly predictive of which companies have a profitable subscription business model and which ones do not. Take the change in subscription revenue between two quarters, annualize it (multiply by four), and divide the result by the sales and marketing spend for the earlier of the two quarters. A result greater than 1x, has proven to be a compelling business investment, a result below .5x is a company that still has not figured out it’s model, and a result in between, is a deal that will probably get to success and cashflow breakeven but only in a relatively capital in-efficient way. Trying to be cute, we called this the Magic Number.“
A rule like this of course doesn't need to be right 100% of the time to be valid, but it however has to be more often right than incorrect. Sadly, this "Magic Number" used in SaaS is too simple and quite honestly ambiguous when you try to understand it.
David Brode, a friend of mine, actually found that this so called "Magic Number" can give you "False Negatives" (it says that you've got a good business when actually its the opposite) and also "False Positives" (it says that you've got a really bad business, when it's actually pretty decent).
How can this be? There a few things that such a rule cannot bare in mind such as timing of customer payments (monthly, quarterly, annually) and also the churn rate among your customers (number of customers dropped out and were replaced by new ones). Actually, an NPV, Net Present Value Model, is the only way to know the what your SaaS business is truly worth.
Fortunately, its actually straightforward to create a decent SaaS Business Model Excel File which computes Net Present Value (NPV).
The file attached for download here is for you to download, learn from and play with.
The file a free NPV model for a SaaS business and i'd be more than wiling to adapt it to your needs. You can reach out to me to get a FUSE Finance CFO to do this for you.
[With thanks to my friend David Brode, a business valuation and financial modeling expert in Boulder, Colorado and online at at www.BrodeGroup.com!]
- David Worrell
This business tool includes
1 Excel Model
David Worrell offers you this business tool for free!
download for free
Add to bookmarks
- Abi Waqas(last updated: 08/05/2019 09:01)
- eCondos Sistemas(last updated: 26/04/2019 19:44)
- Jean-Claude Barakat(last updated: 08/04/2019 18:46)
- Neel Narsee(last updated: 01/04/2019 03:44)
- lll(last updated: 22/01/2019 15:44)
- Quan Quach(last updated: 30/11/2018 02:42)
- Zunaira Iram Sohaib(last updated: 19/10/2018 05:08)
- Raúl Calvo(last updated: 18/10/2018 14:37)
- Jolly Chen(last updated: 11/10/2018 07:31)
- Mark Israelsen(last updated: 19/06/2018 07:43)
- Saurabh Gupta(last updated: 23/05/2018 08:52)
- Vivian Lee(last updated: 05/05/2018 15:31)
- Øyvind Ludvigsen(last updated: 26/10/2017 07:11)
People using this tool also downloaded
Early Stage SaaS Financial ModelGet up to speed on a SaaS Financial Model with a template and its step by step instructionsbusiness modelingearly-stageentrepreneurshipfinancefinancial model4,833free by Brandon Marker
Simplified Monthly vs Annual Pricing Effects on Cash FlowWhat is better for you in your SaaS Business, monthly or annual payment options?annualbilingcash flow managementearly-stagefinance2,347free by Nicholas Petroski
NPV and IRR CalculationA model for calculating Net Present Value and Internal Rate of Return.calculationfinancefinancial modelinternal rate of returnirr3,964free by Prof. Kerry Back
SaaS/Subscription Financial Excel ModelRobust financial model/budget for any SaaS or subscription businessaccountingbootstrapfinancefinancial modelmodel83$20.00 by Evan Diaz de Arce
SaaS Modeling Revenue Growth and Value Creation Excel Model60 month ready-to-use Revenue Growth and Value Creation model to help plan for growth, including instructions.acquisitionbusinessexcelgrowthmodel188free by Brian Parks
SaaS Financial Model Excel Template - Single Price Tier Version - 30%OFF till end of MayA full SaaS Business Model to back-up your business plan.financial modelraising capitalsaassaas business plansaas cash flow1,990
SaaS Excel Financial Plan TemplateA SaaS financial plan that allows you to create your own financial forecast. Suitable for startups and SMB's.excelfinancial forecastfinancial modelfinancial plansaas1,175free by Ben Murray
Two-Sided Marketplace Financial Excel ModelExcel Model and Explanatory PDF for a 2-Sided Marketplace focusing on a shared economy platform.financial modelmarketplacesprojecting revenuesrevenuestartups2,306free by Justin Potts
SaaS Financial PlanA financial plan template for SaaS startups based on a model created for Zendeskchartsfinancefinancial planmarketingmodel7,246free by Christoph Janz
Valuation - Investor's & Entrepreneur's partial commitmentCalculate the Net Present Value (NPV) for the Entrepreneurs Commitment when Partialcash flowentrepreneurfinancenet present valuenpv473
Any questions on SaaS Model - Net Present Value For Simple Web Business?
The user community and author are here to help. Go ahead!