SaaS Business in Latin America (part 2)
In the previous article (part 1), we ended the conversation concluding that Latin American SaaS companies cannot be compared directly with US SaaS companies, mostly because of cultural and technological reasons. If you haven’t read the first article, I recommend you to do so: https://www.linkedin.com/pulse/saas-business-latin-america-part-1-roberto-león-velasco
If we cannot directly compare… how do we know that the KPIs results (key process indicator) from a Latin American SaaS company are good enough?
Well… there are several differences that we should definitely look at, but first, I will describe briefly the most important KPIs from a SaaS company (I won’t get very mathematical at this, I promise):
- MRR (Monthly Recurring Revenue): It’s the sum of revenue that clients are supposed to pay you monthly for your services. If a client pays you Yearly or every 6 months, just sum the equivalent if it were monthly (dividing by 12 or 6 in those cases). This indicator is different from monthly cashflow or revenue.
- LTV (Life Time Value): It’s the sum of every recurring payment that the client pays you along the relationship with him. Basically is the sum of money that he/she paid you during the life time using the service. This KPI is very important, because it basically shows how much money you can get on average by every user, so you can calculate the cost of acquiring and maintaining this user, and get the margin :) The bigger the client (B2B mostly), the bigger the LTV. B2SB and B2C companies tend to have lower LTVs than B2B companies.
- CR (User Churn Rate): It’s the amount of users from a controlled group of initial users that cancelled your service throughout a period of time. If you have 100 users now, and from these 100 users, 20 cancelled your service by the end of the year, the yearly CR is 20% ((100–80)/100). You must NOT consider new sales that you could get throughout the year, because you only have to consider the initial control group as reference. Usually B2B companies have lower CR compared to B2SB and B2C (a good thing!), but the sales cycle tend to be bigger (a bad thing!). There’s also another way of measuring the CR, that takes the amount of revenue per users, instead of the amount of users, but we won’t get deeper on this article. I would say a good CR is 5% or lower a year.
- CAC (Cost of Acquiring a Customer): It’s the sum of money that you need to spend to get a new user. Basically if the CAC is bigger than the LTV, you don’t have a business! (I would say a good business at least has 3 times the value on LTV compared to the CAC).
There are many more KPI, but we will focus on these 4 only.
MRR and LTV. The difference between US and Latin America.
If you think on a 1 million USD revenue company in the US, it means this Startup is basically growing and proving that it can get traction! but if you think on company with the same revenue in latin America, it’s considered a medium size company (that’s right… medium by the government standards).
So… what’s the difference?
Basically, the costs are different, so maybe with a million dollars in the US you are able to pay 1–2 good sales people their salaries for only a year, while in Latin America you can pay their salaries for 5–7 year. The difference is brutal. It means the scale is different! it’s not something you can compare directly. The effort to get a 1 million dollar revenue company it’s usually bigger in Latin America…
CAC and the difference between Latin America and the US.
You have different costs regarding to acquiring a new customer:
- Online marketing (Adwords, Facebook Ads, etc).
- General Marketing (Events, advertising, etc).
- Sales and marketing team (salaries).
- Implementation cost (cost of getting the customer to use the software).
While you get advantages in Latin America for having lower online competition (because most of the great apps and services are in English), you get the technological cultural disadvantage of having to teach everything to your customers… (yes everything). In Latin America there’s NO DIY (Do it Yourself) culture at all! Customers are used to be held by the hand throughout every process, which means you have to spend more resources on people (training, implementations, general help).
You don’t believe me?
Let’s use a real case…
Homecenter vs The Homedepot
A few year ago, “The Home Depot” tried to enter the Chilean market, and here it already existed a player called “Homecenter”. To be honest, Homecenter is not the best company for the “End user”, but… we are used to it.
When The Home Depot entered the market, they brought every cool thing about the DIY world, even better prices and everything… but… it was a total failure… why? One of the main reasons is that Chilean people (as Latin American people), are not used to do everything by them selfs, and The Home Depot didn’t have much staff to help people at the halls, while Homecenter had (and still has in 2017) almost 1 person per every hall.
You might think this type of business has nothing to do with a SaaS business… if you think that… you are wrong. If you check the average revenue that you get year, divided on the amount of employees that you have, you will find that Latin American SaaS companies have between 25%-30% more people that a US SaaS company of the same revenue. Why? 2 main reasons…
- DIY Culture does not existe in Latin America, which probably means higher CAC/LTV rate.
- Lower average monthly ticket per customer, which means that if you have a 1 million USD revenue company, you probably have more customers that a US SaaS company with the same product.
Last year I went to San Francisco to see a friend at SalesForce, and we talked long about the problem they have had entering the Latin American market, mainly because of letting customers “alone” during the sales and implementation process…
Obviously, there might be specific industries in which this does not apply, but in general it’s something that you can see through different SaaS companies.
So… Is it still a good idea to invest on a SaaS company? Yeah of course! but you have to adjust the metrics, and look for different strategies, because a lot of them (that worked for the US), don’t apply for the Latin American market. We will talk more about that on part 3 ;)
Originally published at https://www.linkedin.com on March 6, 2017.