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What Is the Discount Rate and What Does It Mean for SaaS?



If you put a cookie in front of a room of kindergartners with the promise “if you don’t eat it now, you’ll get two later”, most eat the cookie. While these children aren’t necessarily acting rationally, what they are doing is saying that they’d rather less joy now than more joy in the future. 

That’s the essence of the discount rate. It basically stipulates that money today is worth more than money tomorrow, and most people understand this at a fundamental level before the finance people come in and complicate things. 

As people get vaccinated and the pandemic lockdowns seem to be leaving forever, economies across the world are heating up and inflation has hit recent highs. At 4%, without anything else, already $100 today is worth $96 next year. This is a first approximation of the discount rate.

But that isn’t all, if you could earn 1% risk free on that money by buying some government bonds, then the difference grows further. If we add in the opportunity cost, i.e. the amount of money you could earn on that money, then the discount rate grows even higher. Finally, we need to think about risk and put it in there as well. 

All of these factors go into creating a reasonable discount rate for corporate financial planning. 

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Cost of capital vs. discount rate

Before we dive into discount rate, it’s important to note that discount rate and cost of capital are often used interchangeably. While discount rate and the cost of capital are similar and related concepts, there are some key differences. Understanding both is necessary to improve your corporate finance governance.

Discount rate

Discount rate is used to determine the present value of future cash flows. The discount rate allows a company to calculate how much profit will come from a project over time, represented as the NPV (net present value). Since companies exist to earn profit, they need to understand the expected profitability of multi-year decisions. 

Companies base their discount rate on a set of reasonable assumptions considering the inflation rate, level of risk, and the opportunity cost of their decision.

Cost of capital

The cost of capital is the company’s required return. Since lenders and investors expect to be paid back and earn profit, respectively, a company needs to ensure that every new capital outlay can bring in the minimum return necessary to please the bank as well as owners. 

Why do we discount?

Nobody knows what will happen in the future, which is why across the globe there are sayings such as “a bird in the hand is worth two in the bush” or “don’t count your hens before they hatch”. We simply don’t know enough about the future to feel any guarantee that we will be there to enjoy it. 

This is why we value things we have now more than the things we are promised to have in the future. 

In turn, this is why calculating risk and discounting based on risk is important. Let’s say you have the option to get paid $100 today or to flip a coin to potentially win $200. Would you do it? Most people probably wouldn’t since the coin flip has an expected value of $200/2, or $100, so taking the risk-free option would be more logical. But how much more would it take to convince you? A lot of this depends on the individual, but if it were, e.g., $220, then your expected risk premium would be 10%.

Beyond risk, there is opportunity cost. Opportunity cost is essentially the value of the best decision not made. For example, let’s say you sold $1000 of your S&P 500 ETF and used it across a year to start a business. If that ETF went up 30% over that year, then the opportunity cost is $300 since $300 is the money you would have earned from the decision not made. 

While starting a business is a high-risk activity, businesses are usually run to minimize their risk. In this case, picking a discount rate for measuring the value of your projects is a sensible way of maintaining a conservative approach to business. 

Discount rate in SaaS

So how can you use the discount rate in your SaaS business? One obvious situation is when calculating your customer lifetime value (LTV). The LTV is calculated as your average revenue per user (ARPU) times average customer lifetime (ACL). 

For example, if your ARPU is $200/year and the ACL is 2 years, then your LTV is $200 × 2 = $400. This is a pretty standard calculation, but it is also completely wrong. This ignores what value you could get out of the money in the meantime as well as the risk associated with getting the money next year. 

While we will go through some more practical and logical ways of building a discount rate below, for the sake of this simple example, let’s assume you’ve decided on a discount rate of 20%. In that case, the second year doesn’t add $200 to your LTV but only $160, putting your LTV at a significantly lower $360.

Why does this matter? Two things come immediately to mind: First, SaaS companies have an expense structure built highly around CAC (customer acquisition costs). Second, SaaS companies, beyond their CAC, have an average cost of service (ACS) that is heavily frontloaded by the huge R&D expenses of building, testing, and rebuilding their platforms. (PS: If all these acronyms are getting to you, check out our article on SaaS financial metrics!)

Both of these points lead to the same issue: you spend most of your money today and make most of your money tomorrow. If your CAC + ACS over those two years totals $100, then the discount rate might not matter so much. But if it is $380, then that’s the difference between making money on paper and making money in reality. Afterall, if you can earn more returns by putting money in the bank and taking a nap, then your business is in trouble.

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Discount rate chart

To give you an idea of what different discount rates look like, take a look at the chart below. While corporations tend to pick higher discount rates when defining their hurdle rate, even a 5% discount rate makes money 50 years into the future essentially worthless today. 

How can the discount rate be used? 

The discount rate is fundamentally used to tell you two things: the net present value (NPV) and the discounted cash flow (DCF). 

The NPV is essentially the value today of all your future revenue less all your future expenses. It can be calculated for your whole company, an entire service plan, or for each customer. 

While most people know about their cash flow, few appreciate their DCF. As above, when flows out happen before the revenue is making flows in, the timing and size of those flows are important. The fact that money goes out first magnifies its impact on your company and means your revenue flows in need to be even bigger and more consistent to maintain the health of your company. 

The discount rate can also be used to account for the time value of money in general, compare investments that otherwise are too dissimilar for easy comparison, or calculate the riskiness of investments.

Types of discount rates

In corporate finance, the discount rate usually comes down to one of the following numbers:

  • The weighted average cost of capital (WACC) is used to calculate the enterprise value of a firm. 

  • The hurdle rate is a management-defined value that indicates the minimum return on investments needed for internal capital projects.

  • The cost of equity is used to calculate the value of a firm.

  • The cost of debt is used to calculate the value of a bond.

  • The risk-free rate is used to account for the time value of money only. 

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State Street sees CRD tech acquisition pay off with 22% YOY revenue growth



State Street saw 22% year-over-year growth in revenue from deployments of Charles River Development (CRD), a front-office software firm it acquired in 2018. The revenue growth was primarily related to professional services and its software-as-a-service (SaaS) offering, which together grew 18% YoY, Chief Financial Officer Eric Aboaf said during today’s third-quarter earnings call. The technology […]

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6 Product Led Growth Sessions From SaaStr Annual 2021



As OpenView and many others have documented, Product Led Growth (“PLG”) is one of the dominant themes of the SaaS marketplace today.

Unsurprisingly, Product Led Growth was one of the most popular discussion topics at SaaStr Annual 2021.

If you missed out on attending SaaStr Annual 2021 – where our outdoor format earned an analogy to the “Coachella of SaaS” – or just want to understand PLG better, here are 6 sessions to study:

PLG SaaStr Session #1: “Mastermind Masterclass: Beyond Product-led Growth: 7 Lessons Learned in Product-Led Scaling with Dropbox’s GM”

Presented By: Rachel Wolan – GM & VP – Dropbox – @rachelwolan

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #2: “From the Desk of ClickUp’s VP of Operations: Hold Onto Your SaaS: How ClickUp Rocketed from $4M to $70M ARR in Two Years with Product-Led Growth”

Presented By: Aaron Cort – VP of Operations – ClickUp

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #3: “Building a $5.6B Company with a Product-led Flywheel with Postman’s CEO”

Presented By: Abhinav Asthana – Founder and CEO – Postman – @a85

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #4: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: Olivia Nottebohm – Chief Revenue Officer – Notion – @ONottebohm

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #5: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: 
Mark Jung – VP Marketing- Dooly
Rebecca Kline – SVP Marketing – Loom 
Garrett  Scott – Head of Marketing, Growth,  Demand Gen – Calendly

Video: HERE

Intriguing Session Slide – this gives you a sense of the creative + interactive format:

Last but not least:

PLG SaaStr Session #6: “How to Build a Product-led Sales Engine Through Hypergrowth with Dooly’s VP of Revenue”

Presented By: Michelle Pietsch – VP of Revenue – Dooly

Video With Slides: HERE

In the comments below, let us know what Product Led Growth experts you want to speak at SaaStr? 

Published on October 8, 2021

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How To Keep Your Customers For a Decade. Or Longer.



Salesforce likes to talk about “Customers for Life”, and while that’s sort of catchy, it’s a little hard to grok what it really means.

It finally sunk in for me a bit the other day.  At Adobe Sign, there’s a large group of well-known customers that I closed, Back in The Day … that now have been customers for 15 years.  A decade and a half!

We launched on January 1, 2006 on TechCrunch, and while we closed some good names that first year (Dell, BT, Qualcomm, GE, Comcast, etc.), it wasn’t until later on in 2007 that we had enough revenue to create a large enough group of customers to go on a 10 Year Journey with. And the law of Power Laws and Large Numbers means that, obviously, Adobe has closed far more customers under its watch than I ever did.  The business has grown 15x since then.

Still, I’ve learned a lot seeing case studies go up over the years of customers I closed … that 15 years on … are still customers.

Some take-aways:

  • If You Truly Have Net Negative Churn and High NPS — Then Almost Any Reasonable CAC Makes Sense.  If It Lets You Acquire 15+ Year Customers.  I know some VCs will take shots at this statement, and I mean it more as a construct than a reality.  But if your customers last 10 years, and buy more from you each year … I.e. if a $100k ACV deal you close today, over 10 years, ends up being $2m in total revenue … what can you spend to acquire that customer?  A lot.  Really, quite a lot.  A  lot more than say 20% of first year ACV.  But you have to have insane NPS/CSAT + truly high net negative churn (120%-140%) for this math to really work.  If your customers don’t love you and buy more, your CAC has to be very low.  Be cautious if your customers don’t yet truly love you.  But if you’ve got this winning formula with bigger customers especially — be confident.  Run the tables here.
  • Rip-and-Replace Deals Are Worth It.  As you scale, your competitors will try to do Rip-and-Replace deals.  As frustrating as it can be to deal with those, and maybe even unsavory to do them yourself … it’s worth it.  If the customer lasts 10 years.  You can even give away the first 18 months of a Rip-and-Replace if the customer will last 10 years.  These deals make no sense if you aren’t going long.  But if you are … they are worth it.
  • You Can Get Them Back.  Not Always.  But Often Enough to Go Long and Invest There.  Nothing is more painful than losing a big customer.  Most you may not get back, and even if you do, it may take years.  But if you are thinking in terms of Decade Long Relationships … put sales and even customer success back on lost customers.  They may boomerang back.  It happened to me.  Just not often enough in the first 5 years for me to fully understand it.
  • Put Lots of Coverage on Lost Deals, Too.  Similar to the prior point, but different.  Lost a deal to a competitor?  Well, over the next 10 years, your competitor may stumble.  You may have a chance again.  Don’t view them as Gone Forever.  View them as a Special Prospect in Salesforce, instead.  Never stop trying to win them back.  Invite them to your customer conference.  Don’t send them spammy SDR emails.  But keep them close.  Keep them part of the extended family.
  • Get on a Jet (Now That We Can Again).  I never lost a customer I visited.  More on that here.  I know you’re tired.  I know you have no time.  But if you are going long, there’s no better use of your time than visiting customers.  Not prospects.  But customers.  I ask almost every public and unicorn CEO at the SaaStr Annual how much time they spend with customers.  It’s almost always more than you’d expect.  It’s often more than 50% of their time.
  • Slow Down and Get It Right.  Get your VPs of Sales, Customer Success, Product and Engineering right.  They’re key to this 10 Year Journey.   Even if it takes an extra month or two to get a great one.
  • Overdeliver.  Your customers will basically all stay if you overdeliver.  It doesn’t even matter that much if your competitor has caught up, or even in many cases, passed you in some areas.  Customers invest in not just products, but relationships.  They know they are on a 5-10 year journey too.  Overdeliver vs. their expectations.  Focus on that more than the competitive noise per se.   Force your team to launch at least one “Surprise and Delight” feature each quarter than every customer can at least appreciate, even if they don’t use it immediately.
  • Enterprise deals are nothing like SMB deals, most especially over the long term.  We all know this, but over time the difference becomes even more stark.  Small companies churn at a much higher rate, and it’s much harder to get true net negative churn.  If you compare them over 10 year lifetimes, you’ll see you should probably invest much more in the bigger customers.  And make sure your VP DNA matches your core long-term customers.
  • Truly happy customers are magical.  Challenge yourself.  Measure NPS.  Do a customer conference.  Get the feedback.  Whatever you do — don’t assume your customers are happy because they don’t churn.  That’s rookie error #1.
  • Invest — at least in your bigger customers — as if they are worth 10x what they are worth today.  And make sure you measure your customers by potential value over the next ten years.  If you have Google for $99/month, that’s not a real enterprise deal.  But if you have Google for $250k a year — how much can they be worth over 10 years?  Maybe $5,000,000.  Invest like that.
  • Going Long is Incredibly Empowering.  I’d like to say I was always committed for 10+ years, but that’s not exactly the case.  If it had been, I would have approached all our customer relationships differently.  I loved our customers.  I just didn’t really think of them as ten year relationships.  My mistake.
  • Forever Customers build Forever Companies. You know this. But it takes time to see it and feel it. This is the one thing you can really bank on in SaaS and with recurring revenue.
  • Get it Right, Really Right — And You’ll be Unstoppable.  At least for Decades.  SAP, Oracle, Concur, Cvent, Successfactors … you can take some shots at these oldie products, but these brands endure for decades.  Even post-acquisition.  Salesforce is in  its third decade, and still growing 20%+ at $20 billion+ in ARR.  I’ve been a Decade+ Customer of Salesforce myself now.  Invest in your team, your product, your customers for life.  For decades.  It will be hard to do until you come up on $5m-$10m ARR or so, unless you are pretty well funded.  There won’t be enough people, team or resources.  But after that, at least.  Invest for decades to come.  It won’t seem so crazy then.

10+ Year Customers.  It was always an abstract concept to me.  It shouldn’t have been.

SaaS: Maybe Plan for 30+ Years as a Founder

(note:  an update of a classic SaaStr post)

Published on October 7, 2021

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Why a Great Rep Can Close 9x More Than a Poor Rep, and Even 2.5x More Than a Good Rep



We’ve talked a lot on SaaStr about great sales professionals, on driving up Revenue Per Lead, on not capping sales comp systems, and on why you need to manage out your worst reps (because leads are precious).

What we haven’t done yet is put it all together in a simple, quantitative spreadsheet.  Let’s do that — it is eye-opening:

This is what happens in the real world.  A great rep often literally closes 9x more than a poor rep.  And even 2.5x+ that of a decent, mid-pack rep.  With the exact same number — and same quality — of leads.

But how?  How does this happen?  It’s several factors compounding:

  • First, the best reps close more seats / more revenue per deal.  They are better at mapping out business processes, at discovering how many seats, units, whatever there is to sell … and they just sell more.  Like clockwork. The great reps truly and quickly and effectively learn how much each prospect really can buy — and they get that much.  Without fear, and without ripping the customer off.
  • Second, the best reps generally discount less.  Not always, but usually.  The best reps get very confident in the value proposition.  And poor reps and even mediocre reps fall back on the only arrow in their quiver — A Discount!!  But discounting a product a prospect doesn’t really want doesn’t really work.  In fact, it can harm close rates.
  • Finally, the best reps close faster and close more They don’t mess around, or play games.  They know time is the enemy of deals.  They get very good at key objections.  The know the product and the pitch and the value prop cold.  They build strong relationships with prospects, and add enough value they can ask for a favor back — the sale.  They close better and faster.

These 3 factors together have a compounding effect, which is key.  You can still be a good rep and just be good at some of these 3 factors.   If you are great at all 3, then magic happens.

The top reps close larger deals than a mid-pack rep, discount just a bit less, and close faster … and the three factors together pull them far, far ahead of the pack.  For the same amount of effort (and often, even less total time).

This is also why you have to fire the poor reps fast.  You need to see if they can deliver.  But if they can’t, they don’t just miss quota.  They leave all the money in the spreadsheet above on the table.

Put differently, in the above scenario, the above Poor Rep left $160,000 on the table ($189,000-$20,790). In just one quarterRevenue that was there for the taking.  The leads were there.  Waiting to be sold to.

Route those leads to someone better, and magic will happen.  Fast.

(note: an updated SaaStr Classic post)

Published on October 5, 2021

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