Much of this post is excerpted from a new eBook co-written by the CEOs of InsightSquared and Gainsight about how the tech downturn affects the way SaaS CEOs think about revenue growth. You can get the full eBook here.
If you were to zoom in on the finances of a single month in the life of a young, growth-stage SaaS company, the numbers probably wouldn’t make much sense.
You would see a lot of cash leaving the company — to keep the lights on, to pay the people building and selling the software, to market to potential customers, etc. — and a much smaller amount of cash coming in. You don’t have to be a finance expert to realize that this setup doesn’t scream “healthy business model.”
Of course, this isn’t news to the people running (and investing in) SaaS companies. They know full well that the math of a single month in the life of a young SaaS company doesn’t add up.
So what gives? How can SaaS companies turn an overall profit if the single-month economics don’t make sense?
The answer lies in the fact that SaaS companies bring in two types of revenue: revenue from new customers and revenue from existing customers. Understanding the difference between (and interplay of) these two revenue types is essential for running a successful SaaS business.
In this post, we will explore the interplay of the two types of revenue by looking at: