Did you know? A SaaS company with 5% annual revenue churn will be valued 200% higher than a similar company with 15% annual revenue churn.
It’s certainly no secret that churn hurts recurring revenue businesses, but just how much? Beyond simply reducing the revenue you generate, churn hurts the future value of your customers and, ultimately, the future value of your company as a whole.
Join Gainsight Customer Success Evangelist Lincoln Murphy and Todd Gardner, Founder and Managing Director of SaaS Capital, as they dig into the following key questions on why churn hurts and how focusing on Customer Success can have a dramatic impact on your company’s value. This webinar will specifically cover:
- Valuation Drivers of SaaS Companies
- The Impact of Churn through a Case Study
- Measuring, Comparing and Forecasting Churn
The most successful Enterprise SaaS companies know that growing revenue only through new customer acquisition is the less efficient way to scale. Rather, they understand that growing revenue within your existing customer base - through up-sells, cross-sells, and expanded use - is the most profitable way to scale.
In fact, Enterprise SaaS companies that grow revenue - and company valuation - by expanding revenue within their existing customer base also know the key to making this work is to focus on - and operationalize - Customer Success.
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.
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
Investors know SaaS companies can make money, they want to see as big a money maker as possible.
Explain Chart
Relate 50% higher growth to bubbles
Explain Chart
Relate 50% higher growth to bubbles
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.
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.
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.
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.
Carry Over Revenue is the fraction of this year’s revenue generated by renewing customers.
Advocates Spend More (Forrester)
Advocates Bring in More Valuable Customers (Forrester)
Second-Order Revenue (SaaStr)