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Payback period in SaaS

by

Sammy Abdullah

To measure payback period, we looked at new revenue to net operating loss for the last 74 SaaS companies to IPO since October 2017, that were still not generating a profit at the time of IPO (55 out of 74). The data is below. The formula for payback period is 1/(new revenue/operating loss). The formula for cost of new revenue is the simpler new revenue/operating loss.

Median cost of new revenue is $1.00. The cost of acquiring new revenue (new rev/operating loss) in the past year for these SaaS companies was $1.00 of operating loss for every $1 of new revenue. Again, an excellent figure. The average was a higher $1.62 of new revenue for every $1 of operating loss.

The lesson here is that if you’re never losing the customer and have a short payback period, operating losses are desirable, especially since SaaS businesses are valued on ARR. Focus on keeping your payback period under 1.5 years, your cost of new revenue under $1.00, and your net dollar retention at or above 100%.

Thank you for reading. Visit www.blossomstreetventures.com

Sammy Abdullah

Managing Partner & Co-Founder

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