Addressing Retention in a SaaS Business to Improve Valuation
Because retention plays a big role in influencing SaaS valuations, founders are often eager to improve their retention metrics.
When we first engage with a SaaS company, we’ll take a look at two main aspects of the business to put their retention into context:
- Their customer base
- Their product
In cases where a SaaS company services SMBs (or consumers), the company’s customer base is usually the culprit for poor retention. When serving SMBs, much of your churn will come as a consequence of volatility in the SMB space. Simply, your customers are going to be less reliable in making payments and more likely to go out of business.
Unfortunately, unless you change who you service as a SaaS provider, there isn’t much you can do about churn related to volatility in your customer base. You can, however, partially offset a valuation discount by highlighting any cost-efficient go-to-market strategies that make even the quick-to-churn customers profitable early in their lifetime.
If, however, you service the enterprise space but have sub-par retention, the problem is potentially more internal than external, which, if so, is something you can address. For example, you may have some holes in your product suite or customer support function. These are areas where you could make adjustments in an effort to improve retention and thereby valuation.
By and large, retention is the hardest metric to improve among the metrics that influence valuation and depends situationally on whom you serve as a SaaS provider. If the issue is in your customer base, you’ll have a difficult time making improvements in retention. If the issue is your product or how you service the product, that you can address.
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