The Incredible Impact of Churn on the Value of Your Company

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 MurphyCustomer Success Evangelist

[email protected]

@lincolnmurphy

Todd GardnerFounder & Managing Director

[email protected]

@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

www.saas-capital.com

Valuing a SaaS Company5

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 Worth6

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)

MarketCap(billions)

RevenuetoMarketCap


The Impact of Growth on Valuation7

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

RevenueMul ple

RevenueMul pletoExpectedGrowth(size=MarketCap)


How fast should you be growing?

8Survey of

275 SaaS

Companies

Growth rates

are hard to

maintain (its

math)

0

20

40

60

80

100

120

Lessthan$1million

$1to$5million$5to$10million$10to$20millionGreaterthan$20million

MedianRevenueGrowthbyCompanySize


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:

1Reducing

Churn

2Increasing

Customer

Lifetime Value

(LTV)

3Creating a

Cycle of

Advocacy

Churn

Reduction

IncreasesCarryover 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/

http://tomtunguz.com/churn-predictability-valuation/

Q&A

Lincoln MurphyCustomer Success Evangelist

[email protected]

@lincolnmurphy

Todd GardnerFounder & Managing Director

[email protected]

@SaaSCapital

Thank You!

March 19, 2015

The Incredible Impact of Churn on the Value of Your Company

Investor Relations

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