To measure payback period, we looked at new revenue to net operating loss for the last 73 SaaS companies to IPO since October 2017, that were still not generating a profit at the time of IPO (55 out of 73). 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 $0.96. The cost of acquiring new revenue in the past year for these SaaS companies was $0.96 of operating loss for every $1 of new revenue. Again, an excellent figure. The average was a higher $1.59 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%.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at email@example.com://blossomstreetventures.com/metrics/