If you run a SaaS business and have had conversations with potential investors, the likelihood is you’ve heard the term ‘customer datacube’ on more than one occasion.
You know your headline metrics and financials inside-out and have had these externally verified. You’ve shared monthly management accounts and annual audited accounts. All of which support the same aggregate figures you have confidently relayed to potential investors since your very first meeting.
So why is the customer-level revenue data (or ‘customer datacube’) so important to investors and what additional insights are they looking to deduce from it?
The answer is customer cohort analysis: that is the grouping of your customer base into cohorts that share a common characteristic.
In this article, we’ll look at a few of the most important cohort lenses that investors apply when determining the quality and investability of a SaaS business. And why you should never share this data without having performed this analysis yourself and understood what it says and evidences about your equity story.
2. Industry
Exam question: what underlying sectors do you serve and what are the growth, resiliency and concentration dynamics across each?
For horizontal or point solutions, investors are keen to understand the revenue mix and concentration by customer end-vertical. Each vertical has different growth and resiliency characteristics which impact an investor’s view on the blended profile of the business. For example, certain end-verticals including retail & hospitality are considered more cyclical (and therefore risky) than others, like healthcare.
In addition, investors make assessments of vertical expansion opportunities (organically or through M&A) and look for a clear picture of where the business is today and how successfully new use-cases and verticals have been opened-up in the past.
1. SMB vs Mid-Market vs Enterprise
Exam question: what is your Ideal Customer Profile (‘ICP’) and how is that cohort performing?
As SaaS businesses develop and refine their product market fit, this can often lead to an evolution in the size of their target customers ranging from SMB, to Mid-Market, through to Enterprise. And by consequence a mix of customer profiles in the base.
By the time a SaaS business reaches the relative maturity of £5m of ARR, an investor will expect a business to have a clear proposition, reflected in a clear Ideal Customer Profile (or ‘ICP’), typically focused on one of these three groups.
An investor will attach far more significance to the underlying contribution and performance of that ICP group relative to a tail of non-core customers.
The nature of the ICP will also impact the lens through which an investor assesses the business’ proposition. For example, for an SMB customer base, where Average Contract Values (‘ACVs’) are lower, a bigger emphasis is placed on frictionless implementation and automated support relative to Enterprise. Whereas for an Enterprise customer base, greater emphasis is placed on evidencing up-sell and cross-sell, where larger technology budgets and more complex requirements better support organic account growth.
2. Industry
Exam question: what underlying sectors do you serve and what are the growth, resiliency and concentration dynamics across each?
For horizontal or point solutions, investors are keen to understand the revenue mix and concentration by customer end-vertical. Each vertical has different growth and resiliency characteristics which impact an investor’s view on the blended profile of the business. For example, certain end-verticals including retail & hospitality are considered more cyclical (and therefore risky) than others, like healthcare.
In addition, investors make assessments of vertical expansion opportunities (organically or through M&A) and look for a clear picture of where the business is today and how successfully new use-cases and verticals have been opened-up in the past.
Understanding and evidencing the behaviours of your different customer cohorts is critical in building an equity story that not only maximises your business’ potential, but also stands up to rigorous investor scrutiny through diligence.
5. Vintage
Exam question: How is the quality of your customer base evolving over time as you scale?
Cohorting by vintage (being the year a customer was signed-up) allows investors to test and evidence two key characteristics:
- Does each vintage grow year-on-year reflecting an NRR >100% evidencing retention and account growth over time?
This evidences your ability to service your customer base and keep them engaged with your product by adding features and capabilities that drive upsell and retention.
Given each £ of revenue generated by an existing customer is worth a multiple of each £ of revenue generated by a new customer, investors place a significant premium on businesses that are able to evidence significant account management growth (particularly in mature end-markets with sticky products where displacing incumbents is difficult and expensive).
- Is each new cohort more valuable than the last (across key SaaS metrics) meaning the quality of the customer base (and therefore the business) rises over time?
This evidences scale and maturity benefits that support sustainable growth which is key for investors. Maintaining a consistent % growth rate becomes harder as you scale given the growth in absolute £ needed to do this increases with each year. Easier to grow at 50% as a £5m ARR business than it is as a £100m ARR business.
6. Price plan
Exam question: Which combination of pricing model drives the most customer lifetime value (‘LTV’) from the base? And what can cohorting reveal about how to optimise a differential pricing strategy?
With the increasing presence of usage-based pricing rivalling seat-based pricing for SaaS products, businesses are having to weigh-up which model best meets the needs of their customers whilst maximising LTV.
We don’t see any evidence of ‘one-size fits all’ when it comes to which pricing model is best. Although research from software vendor Maxio has found that nearly half of SaaS companies that have pivoted to usage-based pricing have acquired more customers and two-thirds have said this has helped them increase revenues with existing customers.
Hybrid pricing models are relatively new and will lead to increased investor scrutiny as they wrap their heads around the impacts of pricing models on top line growth and profitability.
3. Geography
Exam question: what opportunities for expansion and growth does the current geographical segmentation of your customer base reveal? Track record of launch & penetration into new markets?
International expansion is a key growth lever for investors in SaaS businesses. As product localisation (e.g. language translation) has become quicker and cheaper to implement than ever before, the opportunities for TAM expansion are significant.
Investors want to understand how customer performance and profitability vary between geographies to inform:
- How successful international expansion to date has been: does this support a product and go-to-market which is exportable and globally scalable?
- Maturity and penetration within each international expansion: how much runway does each market still have?
- M&A: can the investor bring additional international acquisition opportunities to the table to accelerate or unlock organic international expansion?
4. Channel (Direct vs Partner/Reseller)
Exam question: Which routes to market have generated the best returns and in which markets?
Again, an investor will look to the cohort data to compare the profile and performance of customers that are either sourced “Direct” or via a “Partner/Reseller” channel. As well as the typical margin implications of these two go-to-market strategies (e.g. commission pay-aways to channel partners), the cohort data may reveal a difference in the quality of customers depending on the channel.
In some cases (e.g. international expansion into the US being the case we come across most frequently), a partner channel strategy will be preferable as it will yield a higher quality customer set at a lower Customer Acquisition Cost (‘CAC’) relative to directly employing a direct sales team in a costly new geography.
In other situations, the additional control, screening and engagement of a direct sale can bring its own advantages and support more valuable customer relationships.
Investors will be comparing key metrics including Gross Revenue Retention (‘GRR’), Net Revenue Retention (‘NRR’), ARR growth, LTV/CAC between these two go-to-market strategies to inform their view on the quality of the sales proposition within the business (e.g. are you sales-led or product-led).
7. Organic vs acquired
Exam question: How have customers acquired via M&A performed (i) relative to historical platform customers; and (ii) relative to their performance pre-acquisition?
The last couple of years have seen increased investor scrutiny on acquisitions made by SaaS businesses. Being able to demonstrate a successful track-record of M&A is seen as a major value driver. But getting M&A wrong can be very damaging, so the bar is high.
Investors will assess the success of acquisitions through several criteria which broadly cover strategic alignment, cultural fit and quality of integration.
The comparison of customer performance pre and post-acquisition extracted from a customer datacube is extremely revelatory: a substantially increased post-acquisition churn rate and inability to expand cross-sell are just two sure fire indicators that an acquisition hasn’t been a success.
The comparison of customer performance between those “acquired” relative to those from the original business can also be very informative. Acquisitions are typically most successful when there is close alignment in the customer bases, supporting a purity and coherence of the ICP. To the extent that the behaviour of the two bases diverge over time, this can suggest a challenge in delivering a unified commercial proposition, which often translates to lower gross-margin and profitability over time.
Conclusion
Understanding and evidencing the behaviours of your different customer cohorts is critical in building an equity story that not only maximises your business’ potential, but also stands up to rigorous investor scrutiny through diligence.
Clearwater’s combination of deep SaaS sector expertise alongside its dedicated data & analytics capabilities ensures every element of your customer datacube is understood and optimally positioned before engaging with investors. This allows our clients to front-foot any challenges from investors and maximise deal value and deliverability.
Talk to the author
Finn O'Driscoll
Partner
I have over ten years of M&A experience advising high-growth technology businesses, founders, management teams, and corporate investors. I lead Clearwater’s software practice and am passionate about contributing to the continued growth and development of the European software industry alongside the talented team here at Clearwater. I also have extensive transaction experience across other technology verticals including IT Managed Services, Digital Transformation, B2B Data, and Information Services. I have transacted to and for many leading international strategic and private equity investors including Vista Equity Partners, Macquarie Capital, ECI Partners, Inflexion, Bowmark, EMK, Livingbridge, LDC, and Tenzing.
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