Skip to main content

Posts

Showing posts from February, 2016

Most of the Cloud Business Models Have Been Wrong

Many Cloud startups have built their business models assuming that the cost of acquiring a customer can be recouped in a reasonable amount of time through recurring revenue.   These calculations based on Customer Acquisition Costs (CAC) and Long Term Value of the customers (LTV) have omitted a major factor in running a recurring revenue business – Customer Management Costs (CMC).  As a result, a lot of the Cloud Startups are overvalued because investors incorrectly assume there will be little or no marginal cost to maintain recurring revenue from existing customers.

One of the popular resources (http://www.forentrepreneurs.com/saas-metrics-2-definitions-2/)  talks about this problem in calculating LTV: “However in most SaaS businesses, the gross margin % is high (above 80%), and it’s quite common to use the simpler version of the formula that is not Gross Margin adjusted.” A few other popular resources like Kissmetrics blog (https://blog.kissmetrics.com/9-metrics/) continue making th…