Saas Revenue Primer Tiering Analysis: January 2009

SaaS Revenue Primer Tiering Analysis January 2009

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Overview & Contents Not all customers are the same. Tiering analysis helps companies to segment their customers by size and contribution so that marketing, sales, & support strategies and resources can be optimally aligned Contents      

80/20 Rule Tiering Analysis Example Interpreting Tiering Analysis 20/80 Rule Combining Tiering and Flux Analysis Other SaaS Revenue Primer Topics DevelopmentCorporate Copyright 2009 Development Corporate www.developmentcorporate.com

80/20 Rule •

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Vilfredo Pareto Inventor Pareto Analysis 1906

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Pareto principle - the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%). SaaS Translation • 20% of your customers generate 80% of your revenues Tiering Analysis • Segments customers into tiers based on scale of annual revenues • Enables your firm to design differentiated strategies to address each segment DevelopmentCorporate

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Tiering Analysis Example

• Annual Revenue Tier = Total revenues from customer for 2008 • Customer count = number of customers in that tier • 2008 revenues = Total revenues for customers in tier • Customer Distribution • % Customers = % of total customers represented in tier • Cumulative % of Customers = Cumulative % of customers in this and higher tiers • Revenue Distribution • % of Revenue = % of total revenue represented in tier • Cumulative % of Revenue = Cumulative % of revenues in this and higher tiers Copyright 2009 Development Corporate www.developmentcorporate.com

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Interpreting Tiering Analysis

11.49% of customers accounted for 83.77% of total revenues • 82.51% of customers accounted for less than 16.5% of revenues • A little more than half of the revenue is concentrated 94 accounts • Focused marketing, sales, and customer service resources in these accounts could generate significant value • Over half of the customers accounted for only 1.38% of total revenues • How profitable could these customers be? • How much resource is associated with selling, supporting, billing, and collecting from these customers? •

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20/80 Rule •

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Focusing on low value customers can yield as many benefits as investing in high value customers Low value customers typically consume a disproportionate share of a company’s resources Consider a ‘bottom-dweller’ program •

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Convert customers from month to month to prepaid annual subscriptions Price annual subscription at 2.5x average annual spend for lowest tier customers Expect 55% to 70% customer count attrition Remaining customers should generate about same total revenues Administrative costs dramatically reduced: • 1 invoice instead of 12. 1 cash application instead of 12 • Significantly fewer customers requiring customer service

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Tiering Analysis Combined with Flux Analysis

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Interpreting Tiering/Flux Analysis • Flux Analysis was covered in a prior presentation • Flux analysis examines changes in customer behavior • Attrit = Cancelled business in this period • Decline = Revenues lower this period vs prior • Flat = No change in revenue • Growth = Revenues higher this period vs prior • New = New customer this period • Looks at both units (# of customers) and value (revenue) • Helps companies to better understand the dynamics inside of their customer base • Avoids broad generalizations • In this data set: • New customers are nowhere near offsetting the # and $ of attritting customers • All of the attrition is focused on the lowest revenue tier • The scale of year over year decline in tier #3 deserves investigation • The relative scale of growth in the top 2 tiers is problematic

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Other SaaS Revenue Analysis Topics Here are some other topics that will be covered in this series: •

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Customer Tiering Analysis • How to segment/profile SaaS customers into significant tiers Pricing Analysis • Not all customers pay the same price. What customers are paying what rates and how does it relate to their tier / flux behavior MoneyWheel Analysis • What are the repeatable sales transactions exist in your current as well as prospective customer base?

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