The Incredible Impact of Churn on the Value of Your Company

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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.

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  • 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)
  • The Incredible Impact of Churn on the Value of Your Company

    1. 1. The Incredible Impact of Churn on the Value of Your CompanyMarch 19, 2015
    2. 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. 3. Our Speakers Lincoln Murphy Customer Success Evangelist lmurphy@gainsight.com @lincolnmurphy Todd Gardner Founder & Managing Director tgardner@saas-capital.com @SaaSCapital
    4. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 14. CUSTOMER SUCCESS: How Reducing Churn, Growing Customers, and Engaging Advocates can Improve Valuations
    15. 15. Customer Success Increases Valuation by: 1 Reducing Churn 2 Increasing Customer Lifetime Value (LTV) 3 Creating a Cycle of Advocacy
    16. 16. Churn Reduction Increases Carryover Revenue Improves Customer Acquisition Cost (CAC) Efficiency Maintains Market Goodwill [ ]
    17. 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. 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. 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. 20. Q&A Lincoln Murphy Customer Success Evangelist lmurphy@gainsight.com @lincolnmurphy Todd Gardner Founder & Managing Director tgardner@saas-capital.com @SaaSCapital
    21. 21. Thank You! March 19, 2015

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