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The Incredible Impact of Churn
on the Value of Your CompanyMarch 19, 2015
Housekeeping
• Q&A panel on your right
• Recording for colleagues who can’t make it
• All attendees will receive slides
• Twitter hashtag #customersuccess
Our Speakers
Lincoln Murphy
Customer Success Evangelist
lmurphy@gainsight.com
@lincolnmurphy
Todd Gardner
Founder & Managing Director
tgardner@saas-capital.com
@SaaSCapital
What We’ll Cover Today
• SaaS Capital
• Valuation Drivers of SaaS Companies
• Case Study: Retention Inc. vs. ChurnCo
• Gainsight
• Customer Success Reduces Churn
• Churn Reduction is just the Beginning
• Q&A
Valuing a SaaS Company
5
Four Things Matter:
1. Size of Revenue Stream
2. Rate of Growth
3. Unit Economics
4. Addressable Market
Customer Success Impacts ALL
four.
The Bigger You Are, The More You are Worth
6
More
revenue
means
higher value.
(Also note,
Salesforce is
really big)
0
1
2
3
4
5
6
7
0 5 10 15 20 25 30 35 40 45
Revenue(billions)
Market Cap (billions)
Revenue to Market Cap
The Impact of Growth on Valuation
7
Revenue
multiples
are driven
by growth
rate more
than any
other
factor.
-10%
0%
10%
20%
30%
40%
50%
60%
-2 0 2 4 6 8 10 12 14 16
RevenueGrowthRate
Revenue Mul ple
Revenue Mul ple to Expected Growth
(size = Market Cap)
How fast should you be growing?
8
Survey of
275 SaaS
Companies
Growth rates
are hard to
maintain (its
math)
0
20
40
60
80
100
120
Less than $1
million
$1 to $5 million $5 to $10 million $10 to $20 million Greater than $20
million
Median Revenue Growth by Company Size
The Tale of Two Companies
• Books $120,000 a month in
new Annual Contract Value
• Spends $12,000 to acquire
each customer
• 80% gross margin
• 95% retention rate
• Books $120,000 a month in
new Annual Contract Value
• Spends $12,000 to acquire
each customer
• 80% gross margin
• 80% retention rate
Retention Inc. ChurnCo
Revenue Impacts of Churn
10
Growth Rate is 50% higher
Addressable Market is
Actually “much” bigger
After 5 years, revenue
is 40% greater
Incremental Profit
11
After just 2 years, $24,000
more of profit is generated
each month.
Existing
Customers
are very
profitable.
They can
support
greater
investments
in growth.
Size of
MRR
Growth
Rate
Bigger Market, More
Profit for Marketing,
More Predictability
Company
Valuation
up
280%
Valuation Impact
12 40%
higher
Valuation
Multiple
Doubles
(3x to 6X)
Retention rate positively impacts all
components that determine
enterprise value.
The Bottom Line
• Churn impacts ALL value
drivers of SaaS
• Churn’s impact is
cumulative and harder to
detect over shorter time
horizons
• A small improvement in
churn will have a big
impact on value…over
time.
CUSTOMER SUCCESS:
How Reducing Churn,
Growing Customers, and
Engaging Advocates can
Improve Valuations
Customer Success Increases Valuation by:
1
Reducing
Churn
2
Increasing
Customer
Lifetime Value
(LTV)
3
Creating a
Cycle of
Advocacy
Churn
Reduction
Increases
Carryover
Revenue
Improves Customer
Acquisition Cost
(CAC) Efficiency
Maintains
Market Goodwill
[ ]
Customer Lifetime Value Growth
• Early Upsell Accelerates LTV
Growth
• Upsells Increase Lifetime
(McKinsey)
• Expansion Revenue
– Additional Usage / Seats
– Upsell
– Cross-Sell
LTV
ACV
ARR
Growth
Creating a Cycle of Advocacy
$
Advocates Bring in More
Valuable Customers (Forrester)
Advocates Drive
Second-Order Revenue
(SaaStr)
Advocates May Get You
Included in a Deal You May
Have Missed
Advocates Are both
Internal and
External
Advocates Spend More
(Forrester)
Predictable is Desirable
Predictable businesses are desirable
businesses. If a startup can forecast to a
greater accuracy how the business will
perform, the startup’s management team
can make better decisions about when to
grow the team, increase marketing
spend, raise capital among many other
decisions. The company is one step
closer to creating a money-making
machine.
“
”
Tomasz Tunguz
Redpoint Ventures
http://tomtunguz.com/churn-predictability-valuation/
Q&A
Lincoln Murphy
Customer Success Evangelist
lmurphy@gainsight.com
@lincolnmurphy
Todd Gardner
Founder & Managing Director
tgardner@saas-capital.com
@SaaSCapital
Thank You!
March 19, 2015

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The Incredible Impact of Churn on the Value of Your Company

  • 1. The Incredible Impact of Churn on the Value of Your CompanyMarch 19, 2015
  • 2. Housekeeping • Q&A panel on your right • Recording for colleagues who can’t make it • All attendees will receive slides • Twitter hashtag #customersuccess
  • 3. Our Speakers Lincoln Murphy Customer Success Evangelist lmurphy@gainsight.com @lincolnmurphy Todd Gardner Founder & Managing Director tgardner@saas-capital.com @SaaSCapital
  • 4. What We’ll Cover Today • SaaS Capital • Valuation Drivers of SaaS Companies • Case Study: Retention Inc. vs. ChurnCo • Gainsight • Customer Success Reduces Churn • Churn Reduction is just the Beginning • Q&A
  • 5. Valuing a SaaS Company 5 Four Things Matter: 1. Size of Revenue Stream 2. Rate of Growth 3. Unit Economics 4. Addressable Market Customer Success Impacts ALL four.
  • 6. The Bigger You Are, The More You are Worth 6 More revenue means higher value. (Also note, Salesforce is really big) 0 1 2 3 4 5 6 7 0 5 10 15 20 25 30 35 40 45 Revenue(billions) Market Cap (billions) Revenue to Market Cap
  • 7. The Impact of Growth on Valuation 7 Revenue multiples are driven by growth rate more than any other factor. -10% 0% 10% 20% 30% 40% 50% 60% -2 0 2 4 6 8 10 12 14 16 RevenueGrowthRate Revenue Mul ple Revenue Mul ple to Expected Growth (size = Market Cap)
  • 8. How fast should you be growing? 8 Survey of 275 SaaS Companies Growth rates are hard to maintain (its math) 0 20 40 60 80 100 120 Less than $1 million $1 to $5 million $5 to $10 million $10 to $20 million Greater than $20 million Median Revenue Growth by Company Size
  • 9. The Tale of Two Companies • Books $120,000 a month in new Annual Contract Value • Spends $12,000 to acquire each customer • 80% gross margin • 95% retention rate • Books $120,000 a month in new Annual Contract Value • Spends $12,000 to acquire each customer • 80% gross margin • 80% retention rate Retention Inc. ChurnCo
  • 10. Revenue Impacts of Churn 10 Growth Rate is 50% higher Addressable Market is Actually “much” bigger After 5 years, revenue is 40% greater
  • 11. Incremental Profit 11 After just 2 years, $24,000 more of profit is generated each month. Existing Customers are very profitable. They can support greater investments in growth.
  • 12. Size of MRR Growth Rate Bigger Market, More Profit for Marketing, More Predictability Company Valuation up 280% Valuation Impact 12 40% higher Valuation Multiple Doubles (3x to 6X) Retention rate positively impacts all components that determine enterprise value.
  • 13. The Bottom Line • Churn impacts ALL value drivers of SaaS • Churn’s impact is cumulative and harder to detect over shorter time horizons • A small improvement in churn will have a big impact on value…over time.
  • 14. CUSTOMER SUCCESS: How Reducing Churn, Growing Customers, and Engaging Advocates can Improve Valuations
  • 15. Customer Success Increases Valuation by: 1 Reducing Churn 2 Increasing Customer Lifetime Value (LTV) 3 Creating a Cycle of Advocacy
  • 17. Customer Lifetime Value Growth • Early Upsell Accelerates LTV Growth • Upsells Increase Lifetime (McKinsey) • Expansion Revenue – Additional Usage / Seats – Upsell – Cross-Sell LTV ACV ARR Growth
  • 18. Creating a Cycle of Advocacy $ Advocates Bring in More Valuable Customers (Forrester) Advocates Drive Second-Order Revenue (SaaStr) Advocates May Get You Included in a Deal You May Have Missed Advocates Are both Internal and External Advocates Spend More (Forrester)
  • 19. Predictable is Desirable Predictable businesses are desirable businesses. If a startup can forecast to a greater accuracy how the business will perform, the startup’s management team can make better decisions about when to grow the team, increase marketing spend, raise capital among many other decisions. The company is one step closer to creating a money-making machine. “ ” Tomasz Tunguz Redpoint Ventures http://tomtunguz.com/churn-predictability-valuation/
  • 20. Q&A Lincoln Murphy Customer Success Evangelist lmurphy@gainsight.com @lincolnmurphy Todd Gardner Founder & Managing Director tgardner@saas-capital.com @SaaSCapital

Hinweis der Redaktion

  1. Investors know SaaS companies can make money, they want to see as big a money maker as possible.
  2. Explain Chart Relate 50% higher growth to bubbles
  3. Explain Chart Relate 50% higher growth to bubbles
  4. Everyone has built a projection with churn assumptions. Isolating Churn, so not swamped by a bookings assumption. Projecting it out over many years with the same starting point.
  5. Remember, same new bookings Little impact over 1 year Anticipated impact on the size of ARR, but look at growth. 50% change. ---vc yesterday…..as long as there is growth ---Big SaaS Co. 6 months ago. Must be growing faster than us. By year 10, 2.5x in growth. Who wants to pay up for the blue line.
  6. For this of you not able to imagine 10 years of doing anything, lets look close in. An additional additive element supporting growth. Explain lines; Revenue less COGS, less CAC. What’s interesting is this will never, ever show up on any report or financial statement. ----P&L review focuses on new customer adds and costs. ----Try a what-if, 95% retention over the last 2 years.
  7. Increased ARR worth a multitude of it’s actual size. Growth driven 2 ways, simple math as in the chart, and the reinvestment of higher profits. Predictability is related to risk and is a proxy for the discount rate. Add them up and a seeming small difference between and $4.5 million business and a ^.4 million business is actually $24 milliion. Impact becomes exaggerated/binary at the outer edges of the curves.
  8. Carry Over Revenue is the fraction of this year’s revenue generated by renewing customers.
  9. Advocates Spend More (Forrester) Advocates Bring in More Valuable Customers (Forrester) Second-Order Revenue (SaaStr)