The Box prospectus offers a great lesson in Enterprise SaaS economics.  Box is a low-priced, simple SaaS application (storage).   It represents the type of SaaS application typically sold to consumers, but Box has the enterprise as their target market.  Box has grown quickly, but has also spent more on sales and marketing (so far) than their revenue!  You need not be a math genius to understand this is not a sustainable business model–though it will often lead to good growth!

As a result, like Lucille Ball, Box “has some ‘splainin to do!”  Because so many other SaaS enterprise companies have gone public, Box also has to clearly make the case its SaaS economics will change with further growth.  Business Insider has provided a great analysis of the Box business case entitled “In Six Slides, Box Shows Investors Why It Thinks It’s Worth Billions“.    The gist of the case for believing in Box is buying into one, or more, of the following ideas:

  • Box will be much more than a storage company (which is now virtually free from Dropbox, One Cloud, Drive, etc.).  The Box argument is that they will be a platform as Salesforce is, or more so.  They already claim to have more than 1300 third-party mobile apps using Box workflow, content management, machine learning, and other tools.
  • Box’s combination of ease of use and enterprise combination will allow it to overcome major competitors each of whom can bundle storage with other enterprise applications .  In other words, Box will have to make a “best-of-breed” argument against suite vendors like Microsoft, Google, and Apple who will provide a bundle including storage.
  • Box has established that once it makes the sale, it can “land and expand”. Renewal rates are consistently over 130%.  The challenge for Box is not renewal rates.  The challenge is their Customer Acquisition Cost (CAC) and, as a result, customer lifetime value (CLV).  That’s the “SaaS economics” way of saying that sales and marketing needs to drop from 100% of revenue to the 35-40% range that Box says is its goal.

It’s this last point that makes Box so classic in terms of SaaS economics in the enterprise.  Enterprise SaaS companies are often able to generate solid renewal rates, lifetime value, and stickiness.  (And, they often compete against gigantic companies offering bundles.) The main question enterprise SaaS start-ups often face is how much it will cost to make the sale and generate widespread adoption within a complex enterprise.  Box provides several anecdotal example of growth within enterprises and presents one very important cohort analysis for customers added in 2010 (not included in the Business Insider analysis):

Image showing Box 2010 Customer Cohort Analysis over time (saas economics)

 

 

 

 

 

 

 

Box informs us there are no guarantees other cohorts will resemble this, but this is the only cohort data provided and we are not actually given CAC.  I would love to see how the 2011 cohort, which still has some good age, on it performed.  Maybe some day the SEC will have rules on how many years of historical SaaS economics a company must provide!

I’m not going to make a call on this one until I see more cohort data and talk to companies that have built on the Box platform.  I think these are critical data to collect.  Either way this one will be a blast to watch.

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