SaaS Metrics that Drive Valuations Series – Endeavoring to Achieve Customer Immortality
Navidar | January 25, 2017
A key to driving higher valuation for SaaS companies is understanding and extending the duration of customer life while growing dollar retention. By appropriately analyzing, optimizing, and presenting these key metrics, which demonstrate a company’s ability to keep clients happy and sell more over time, companies are “endeavoring to achieve customer immortality.” Navidar has a proven track record of helping our clients accomplish this feat, often resulting in elevated valuations during exit discussions. We compiled the following list of 10 methods to extend customer life and dollar retention, based on our deep SaaS expertise.
Navidar has been the trusted advisor for many SaaS companies that call the middle-corridor of the U.S. home. Collectively, our team has completed more than 50 SaaS transactions, representing $10 billion in M&A, capital raises, and public offerings.
1. Multi-Product Strategy
There is a strong correlation between average number of products per customer and both customer life and dollar retention – our basic formulas are presented later in this note. As such, it often makes sense for point-solution providers to build or buy a suite of related products, which, when executed well, can drive dollar retention north of 100%. We regularly help our clients evaluate these enticing strategic moves.
2. Drive Land and Expand
Besides signing new customers, existing clients ought to buy more over time, which drives up dollar retention. To inspire this behavior, Navidar has advised clients to modify their sales teams’ incentive compensation to drive expansion in the number of products per client as well as users, departments, and divisions at each client.
3. Move Upstream
As the size of customers increases, the duration of customer life typically does as well. Even marginal increases in average customer/contract size can boost retention since it reduces the mix of smaller businesses that tend to fail at a higher rate and increases the mix of larger firms that can be slower to switch vendors.
4. Product Innovation
SaaS customers expect quarterly product releases at a minimum to remain happy. As such, on balance, it is generally better if companies increase their innovation efforts, constantly canvasing their user base, compiling desired features, then ranking and quickly implementing.
5. Engagement Fixation
Companies need to be alerted and quickly respond when customer engagement slows (e.g., declining product usage or missing implementation milestones). This can be accomplished through big-data analysis, tracking actions in-app as well as on social, phone, email, website, events, and other channels. We also encourage implementing a Net Promoter Score where clients are periodically surveyed about likelihood for referrals.
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