Apples Plus Oranges?
How to show different revenue streams in vertical SaaS
A few weeks ago, our portfolio company Jobber announced (besides a $100M Series D) that its 200,000 customers — small businesses that provide home services like lawn care, plumbing, residential cleaning, and painting — have earned $13 billion in revenue in 2022. Handling an increasing percentage of this large payment volume has been a massive driver of Jobber’s rise from its humble beginnings to becoming the leading operations management platform for home service businesses.
The obvious benefit of getting into payments as a vertical SaaS startup is that you add a revenue stream and increase your ARPA. The maybe less obvious advantage is that handling transactions makes your product stickier. Customers who use your payment product will likely have a higher ARPA and a lower churn rate, both of which contribute to a higher LTV in that segment. This, in turn, gives you more room to spend money on CACs.
This characteristic of vertical SaaS companies — being able to add more and more valuable features and products over time, continuously increasing stickiness and wallet share, to ultimately become the operating system that SMBs run on — is why we’re so enthusiastic about Jobber and other vertical SaaS companies from the P9 Family like Graneet, Amenitiz, or NexHealth.
5 apples + 4 oranges = … ?
A question that arises once you have multiple revenue streams with significantly different gross margins is how you report revenue. Vertical SaaS companies that generate payment revenue on top of a SaaS subscription fee are one example. Another example is infrastructure software, which is often priced based on a combination of a (high-margin) flat fee and a (sometimes lower-margin) usage-based component e.g. based on storage, compute, or API calls. If you have, say, $5M of software ARR with a gross margin of 85% and, say, $4M of payments ARR with a gross margin of 30%, there isn’t one number that is a great answer to the question “How much ARR do you have?”. The simple answer, $9M ARR, may be technically correct (if your payment revenue is highly predictable — if there are large fluctuations, including it in Annually Recurring Revenue is problematic). But your blended gross margin on that $9M is ca. 60%, which is not a software margin. So without explanations, $9M is misleading.
Given all the benefits of having multiple revenue streams, this is, of course, a great problem to have. However, given how much investors care about gross margins, it’s worth considering how you show revenue in these cases, e.g. in a board deck or fundraising presentation.
For starters, you definitely have to break down your total ARR or revenue by revenue stream. Simple example:
Here are a few options for how you can visualize the data:
The first chart (top left) makes it easy to see the company’s total ARR growth and Gross Profit margin but doesn’t show how much Gross Profit each of the two revenue streams contributes. The second chart (top right) gives you more details about your revenue streams’ growth and margin differences but makes it harder to see the overall growth quickly. The third one (bottom left) aims to let you easily see overall ARR and Gross Profit growth while still showing the per-revenue-stream breakdown.
The fourth chart (bottom right) is based on an idea I haven’t seen anywhere yet: growth margin adjusted ARR. What I mean by that is that you take your software ARR and add x% of your payment ARR, where x represents the margin difference between the two revenue streams. In case this sounds complicated, here’s an example that makes it very simple: If your software margin is 80% and your payment margin is 40%, discount your payment revenue by 50%.
More generally:
Gross margin adjusted ARR is a calculatory metric that doesn’t have a substrate in the real world, but it tells you how much “software-margin ARR” you have — which I think can be useful if you want to compare different SaaS companies (or one SaaS company at different points in time).
Finally, one more idea for the data visualization geeks among you. There’s no easy way to create a chart like this in Excel or Google Sheets (it probably works with a plugin), so you’ll have to make do with a simple sketch:
The column width represents Gross Margin %, while the column height indicates ARR. Accordingly, the green and blue surface areas correspond with Gross Profit. I’ll let you decide if this is useful at all, but I thought this might be a pretty intuitive way to show the underlying math!
