SaaS Valuation: How to Boost the Value of Your Business Before a Sale
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Software as a Service (SaaS) is an exciting industry that is packed with inexhaustible opportunities. When doing business with SaaS, it is critical to understand the way metrics utilized in SaaS valuations can boost the market value of your enterprise prior to a sale.
This article covers the basics of SaaS valuations that apply to your business model.
How do SaaS businesses get valued?
It is quite common not to understand how investors attach value to a business. There are several factors that come into play before an investor arrives at their final assessment. These factors might not necessarily have anything to do with the size or rate at which the business has been growing. Check out the following to get a baseline understanding of which methods investors employ to value a particular company.
Seller Discretionary Earnings (SDE)
This is just another way to describe pre-tax and pre-interest profits that are calculated before the deduction of non-cash expenses, benefits of the owner, investments, and other costs.
Seller Discretionary Earnings go a long way in determining the value of a company. What this means is every seller should have an understanding of how SDE is calculated. This will contribute towards more accurate progress evaluation, and it will help you set definite targets when placing your business on the market.
When calculating profits, SDEs take into account the owner's salary as well. They give a clearer picture of the actual earnings currently running the company.
Interest, Taxes, Depreciation and Amortization (EBITDA)
This method works for a company that has rather complicated ownership. The calculations are done in a straightforward manner. The information used to calculate EBITDA can be found easily on the business' balance sheet. The following are taken into account:
- Net income
SDE and EBITDA are almost equal in value with the principal difference based on the fact that with SDE, the operations managers' earnings are also taken into account. EBITDA is often employed when working with companies valued above $ 5,000,000.
What sets SaaS companies apart is that they often have to put forward a lot of upfront investment to boost growth. When making an evaluation with EBITDA, the upfront inputs are regarded as expenses. This is why it would be sensible when dealing with companies that are still growing to measure revenue as well. If a company is not growing at all, there will be no revenue to support the forecast and determine whether it's a good idea to purchase the business. This can be deemed an overvaluation.
Factors influencing how much a SaaS business is worth
The following has to be taken into account for one to have a general idea of whether or not a business is likely to be profitable.
Looking at a business retrospectively can allow one to assess whether or not the company has been profitable or not. This will enable them also to make an estimate of how much growth the business is likely to experience in the future.
The Owner's Responsibilities
A lot of businesses depend on the input of their owners to a great extent. This means that their success or failure is directly proportional to the owner's competency.
To avoid this, owners can set up their businesses to be independent by employing responsible personnel and qualified management. Employment of people who can execute the company's daily tasks with little or no supervision can allow the business to progress without depending too much on one person.
Investors will be more interested in purchasing a SaaS business that profits from a product that is still in its growth phase as opposed to one that's been in the market for a long time.
Investors use customer metrics to determine the quality and pattern of the business's revenue. It helps them decide when they can expect to start reaping the profits from their purchase.
SaaS metrics that matter
Consider the following most commonly evaluated metrics in SaaS valuation for determining the multiple.
1. Customer Churn Rate
Customer churn refers to the speed at which customers cancel a subscription to a particular service. It is basically the rate at which a business loses customers.
To come up with such a figure, you simply divide the customers lost within a given time period by the customers at the beginning of that period.
An example is as follows:
Number of customers at the beginning of January = 900
Name of the customer on January month-end = 850
Customer Churn Rate = (Customers on the first day of the month - Customers on the last day of the month) / Customers at the start of the month.
(900-850)/900 = 50/900 = 5%
If the customer church rate is low, then the particular business still has the potential for growth. The lower figure shows that the company is gaining way more customers than it is losing. This lowers the risk of value loss over time, which is a good indicator for investors. A business with a high customer churn rate would, therefore, not be preferable.
The majority of investors prefer a yearly rate that is under 10% for large SaaS businesses. This rate should ideally be zero for smaller companies owing to the fact that they are generally more susceptible to higher customer churn. That is to be expected since older businesses can invest more in customer retention when compared to smaller ones.
2. Сustomer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)
Customer Acquisition Cost (CAC) reflects how much it costs a business to acquire a new customer.
To calculate the figure, you have to get the sum of marketing and onboarding costs. You can then divide this sum by the total number of customers acquired over a given period of time.
A quick example:
$10000 + $6000 = the marketing and onboarding cost, divide the figure by 400 new customers, and you have CAC = 40
Customer Lifetime Value (LTV) refers to the mean revenue gained from a single customer in a given period of time.
The calculation is usually done as follows:
Gross margin per customer lifespan multiplied by retention rate / (1+ Rate of discount – Retention rate)
The gross margin refers to the average profits per customer calculated by taking into consideration how much revenue they brought in and how long they have been a customer. You can then factor in the percentage of customers who remain loyal to the business over a precise period (retention rate). Please note that you also have to take into consideration inflation at the typical 10% (discount rate).
Here is an example:
GML = $4200
Retention rate = 60%
Discount rate = 10%
1 + 0.6 – 0.1 = 1.5
We divide the retention rate of 0.60 by 1.5 to get 0.4
We can then multiply that by our GML of $4200.
CLV = 0.4 x 4200
CLV = $1680
The business will be considered a loss if it is churning out more funds to retain customers who are, in turn, not bringing in as much revenue. A business has to have a high return on investment, also known as ROI for investors to consider it a worthwhile investment. Return on investment will tell you if the customers you are acquiring are at all profitable to the business. It also gives you insights on whether or not your marketing strategies are working, and if not, what might need adjusting.
CAC is closely linked with conversion rates. Conversion rates offer insight into the ROI in customer acquisition channels. It gives investors a general idea of the number of value customers attach to your products.
3. Monthly Recurring Revenue (MRR) vs Annual Recurring Revenue (ARR)
In modern times, a lot of SaaS utilizes the subscription model, which is usually monthly or yearly. Because of this, Monthly Recurring Revenue (MRR) is often used also to value a business. It is the amount of income that companies make through their recurring client subscriptions.
To calculate this amount, you just calculate the sum of the recurring revenue for a given month.
MRR = Σ Recurring Revenue for the specified month
The calculation below simulates a business with a 30-day subscription of $300. The service had 2 subscriptions in the month of January. An additional subscription was made in February, thereby adding to the existing MRR.
January: 300 + 300 = $600 MRR
February: 300 + 300 + 300 = $900 MRR
March: 300 + 300 + 300 = $900 MRR
Investors also take into account what is known as Annual Recurring Revenue (ARR). It is more or less like MRR but is measured on a yearly basis.
To calculate this figure, it's just a matter of adding up all the recurring revenue the business reeled in over a yearly period.
ARR = Σ Recurring Revenue
With MRR and ARR, you can then come up with an MRR/ARR ratio. It is also a critical piece of information. A lot of investors prefer that the MRR be more than ARR. While Annual contracts might quickly boost revenue, they do not give a clear picture when it comes to whether the business will keep making profits or not. Apart from that, a lot of companies offer annual subs at hugely discounted rates. If you add up subscription amounts of 12 months, they will sometimes double a single yearly subscription. With that in mind, you can see why a high MRR is more preferable to investors than a high ARR.
4. Revenue Churn Rate
Investors will also take into consideration the percentage of revenue gained, otherwise known as the revenue churn rate.
To arrive at this figure, it is just a matter of dividing the initial MRR with the amount lost during the particular month. You should, however, not include any user upgrades when making this calculation.
The following is an example of a revenue churn rate calculation.
Initial MRR in the month of January = $600,000
MRR at January month-end = $500,000
MRR acquired from existing customers in upgrades = $40,000
Revenue Churn Rate = [(Start of January MRR - MRR January month-end) - MRR gained from January upgrades] / MRR beginning of the month
(($600,000 – $500,000) – $40,000)/$600,000 =
($100,000 – $40,000)/$600,000 =
($60,000)/$300,000 = 2%
If the answer is a positive figure, it becomes a clear indication to the investor that the company in question made losses in that particular period of time.
How to increase the value of your business before a sale
There are a lot of factors that affect the value of a SaaS business, as seen in this article. The good thing is the majority of them can be easily regulated by the company in question. This much applies to metrics as well. How then does one go about increasing the value of their business to make it more appealing to investors?
As seen before, churn is quite an essential factor when it comes to SaaS business valuations. It would work in a business' favor if it can be reduced as much as possible in the period leading to a sale. Some of the factors that can be improved include boosting customer satisfaction and experience. This allows you to retain more of the customers that engage your business, and there creates some sort of a closed-loop. Apart from decreasing churn, this will also work in favor of your other metrics as well.
It is crucial to keep a detailed record of the following:
- Up to date Accounting
Always maintain clear and up to date accounting records and have them ready whenever you wish to make a sale. All investors will want to take a look at your accounting records first before you can negotiate a deal..
- Standard Operating Procedures (SOP)
If you were an investor, you would also likely want to be presented with clean and well-documented operations. This will indicate the order and seriousness with which the business is run. An organized company is definitely more appealing to investors.
- Source Code
It is also essential to keep a well-documented source code as this will help those investors who have plans of scaling the business. This is quite important if the company is a startup.
Collect Customer Metrics
In modern businesses, customer metrics are the pillar of most successful enterprises. Every company should ensure that they have detailed customer metrics, as this will be an indication of just how strong the business actually is. There are several solutions that can be made use of to gather and analyze customer metrics.
Outsource development and support
SaaS enterprises that have a higher potential for passive income usually fetch a market value than those that need active participation from the owner. This is why it would be beneficial for a business to outsource tasks and work closely with appropriate third parties like contractors if need be. This reduces the knowledge base needed by anyone looking to take over the business. Investors might not want to dig deep into the nitty-gritty of how a business is run. It should be a well-oiled machine that can run itself independently.
Hold off releasing new products
It is also essential to put a pause when it comes to launching new products if you are looking to make a sale. The reason is simple. Customers take time to warm up to a product, and by the time you want to sell, they might not be fully engaged; therefore, you won't be generating any profits from it.
Secure Intellectual Property (IP)
Always apply for trademarks when it comes to intellectual property to make sure that your innovations are indeed the property of your business. This will also improve the value of the company.
How to Sell a SaaS Business
There are four basic ways of selling your business.
There are a lot of networks that allow you to list your business for sale and attract interested buyers. This would be a good option if you fully understand the sale process since you might have to deal with the buyers on your own.
Just like any other Auction, you can also have buyers bid for your business. The business will then be sold to the highest bidder. This is advantageous as it allows you to get a premium offer for your enterprise. You will, however, have to pay a listing and success fee to the auction service that you would have employed. This option is excellent if you have experience selling businesses.
Hiring a broker
Brokers can help you to get a premium offer for your business. They will also handle most of the sale and ensure your IP, data, and other vital processes are secure throughout the sale proceedings.
To ensure that the process is smooth and quick, you should make available all the documents needed to make the sale. A broker will also charge their own fee, which is usually between 10% and 15% of the final sale.
You can also choose to deal first hand with investors and buyers. While this might cost less in terms of services and other selling related costs, you need to be a very experienced seller. The process might also be prolonged. It is definitely the least preferred method of all, as there are a lot of risks involved in selling a business.
Over to you
Now that you are furnished with details about the valuation and sale of SaaS businesses, you can begin planning for a successful, timely exit strategy today by leveraging these insights. If need be, you can aslo hire the services of a professional to help you deal with your sale. All the best! Cheers to early retirement!
How to Pick up Your Best SaaS Tools in Cloud Chaos
Each year more and more businesses are moving their operations into the cloud. According to the SaaS Trends Report, companies spent 50% more on SaaS tools in 2020 than two years before. The COVID-19 crisis ramped up the SaaS industry making remote work the only way possible for a significant number of small businesses and large enterprises. And there is no reason to think the SaaS growth will slow down in upcoming years.
The 2020 year-end research revealed that out of 105 companies participating in a survey, most of them were using 26-75 different SaaS tools. Just think of this figure. That’s HUGE!
Along with the complexity of managing all these tools, it’s getting more challenging to figure out how to choose the right SaaS product for your business among thousands of offerings. We gathered the essential knowledge on actual SaaS types and trends in this article to shed light on this issue. Also, you’ll find some tips on how to build SaaS tools stack for your business and not become lost in cloud chaos.
SaaS tools types
To be on the same page, let’s clarify what we understand under the “SaaS tools” concept.
SaaS tools definition is straightforward. It stands for all cloud applications you use to perform various business processes. If to divide SaaS tools into groups, we’ll have the following split.
Vertical SaaS products are focused on a particular industry aiming to perform specific tasks. The applications for pharmaceutical, automotive, construction, property management industries belong to vertical SaaS. For example, Procore is a construction management software assisting in delivering projects on time.
On the contrary, horizontal SaaS applications serve general business needs regardless of the industry. The most notable example is Office 365, Microsoft productivity software you can use on a subscription basis.
Packaged SaaS solutions are created to automate and facilitate specific business processes like sales, marketing, and support. Hubspot, an all-in-one marketing, sales, and customer service software, would be the best example of packaged SaaS tool.
Organized teamwork is what collaborative SaaS products help with. Applications like Slack and Asana make the team’s cooperation more efficient, ensuring business goals achievement. If you are curious to know more about SaaS types, check our article dedicated to the most widely-used types of SaaS software.
Like all markets, a SaaS tools market has its mainstreams, which are worth being aware of to keep yourself up to date with the latest trends. This knowledge will help you understand whether you also need to implement tools that other market players use to improve your business performance.
SaaS tools trends
Here are the main 2021 SaaS trends, which are likely to keep growing in the next couple of years.
Collaboration, integrations, analytics
The world pandemic put on the table the necessity to arrange remote team collaboration to be a decent alternative to in-office work. Collaboration tools differ depending on the functionality they offer to users. For example, Slack focuses on communication and information sharing between the teams, whereas Figma enables joint work on visuals being a collaborative interface design tool. At Eleken, we use both tools to boost our effectiveness as speed and quality of work are our highest priority.
Smooth collaboration is impossible without the integrations of one tool with another. As Slack and Figma have become the heroes of this episode, let’s continue with their examples. Figma supports in-app commenting, so you can see comment threads in Slack. Also, Figma is fully integrated with Zeplin, a collaboration tool built specifically for UX designers and front-end developers to efficiently work on a project.
Slack integrates with a large number of apps providing its customers the most seamless experience possible.
However, the truth is that the bigger number of integrations an application supports, the more complicated it gets to maintain the stack.
Analytics tools adoption is one of the hottest SaaS trends. You will never know if your assumptions are valid unless you check them with unbiased data. Gartner analysts foresee companies will increase spending on business intelligence tools by 23% up to 2022.
To learn more about SaaS trends, check the article entirely devoted to SaaS trends 2021.
Building a “working” stack
Considering that SaaS companies use up to 70+ different SaaS tools, the need to make those tools seamlessly work together is steadily increasing. Ideally, the applications should be natively integrated one into another and have a two-way synchronization with iPaaS (Integration Platform as a Service) help.
To give businesses the ideas of tech stacks they can build, special events like MarTech are organized. During the conference, marketing teams compete for Stackie Awards demonstrating their tech ecosystems.
We’ve already got used to automated emails, and now automated processes are going beyond solely sales and marketing functions. They are penetrating into the accounting systems, customer relationships, satisfaction, and retention management.
For example, Gusto, an accounting and HR automation software, facilitates payroll and employee benefits calculations.
In a fast-paced environment, automation helps reduce time spent on the manual job and concentrate more on strategic steps.
Niche or Micro-SaaS
Micro-SaaS is focused on satisfying niche market needs. Actually, add-ons we are all accustomed to can be seen as micro-SaaS apps inside a bigger SaaS product. Grammarly for Google Docs would be the top-of-mind micro-SaaS example.
Usually, micro-SaaS business ideas are generated by small teams or even individual entrepreneurs and do not require significant product development investments.
If during the last decades companies fought for greater market share and broader market coverage, nowadays many SaaS businesses changed their focus to providing a valuable offering to the underserved market niches. They develop tailored solutions for particular industries with specific requirements. With small or no competition in the niche, vertical SaaS vendors feel free to set high prices for their products, being sure they have no analogs available on the market.
Battle for CX
In a saturated SaaS market, customer experience, or CX, becomes crucial as never before. You don’t have to put up anymore if a product doesn’t fully satisfy your needs or customer experience is frankly bad. You can always move to competitors searching for better price-quality options. The truth is, a SaaS product with a better customer experience may easily beat the one packed with robust functionality.
Whereas excellent user experience is taken for granted, SaaS companies are looking to expand their offerings with additional services like consulting, implementation, or adoption support.
According to analysts’ forecasts, this trend will keep increasing with the 28% growth rate by 2022.
Besides additional services, SaaS providers make efforts to prove their thought leadership and influence customer decisions through expert content.
Having the data scattered among dozens of applications, a company faces the risk of sensitive information leakage with every new app added. To protect customers’ private data, SaaS companies invest heavily in security and try consolidating their tech stack to ensure all the data is protected. Ability to keep customers’ personal information safe directly impacts the brand’s credibility and can be a factor that influences purchase decisions.
SaaS chaos and decision paralysis
Have you ever heard the saying “More doesn’t mean better”? These words apply to the SaaS industry as well. From one side, the market offers broad opportunities to choose from various tools, and that’s good. However, it becomes challenging for many businesses to find the right tools that would integrate the best into the company’s tech ecosystem.
Customers crave to focus on generating sales and profit rather than moving back and forth from one SaaS tool to another, desperately searching for the best fit.
One more problem in SaaS chaos is the subscription mess. Employees accountable for tracking subscriptions face difficulty managing the increasing number of tools and ensuring smooth services’ usage.
SaaS market experts predict the drastic growth of SaaS tools up to 50.000 in the upcoming years. And here, you may already have a logical question - how not to sink in the endless offerings ocean and select the very products you need to run your business successfully?
You’ll find some hints in the following lines.
“Must” SaaS tools for your stack
Here are the tools that are worth considering to include in your toolbox.
- Sales (SaaS tools for lead nurturing and deals closing)
- Marketing (the bunch of tools for email automation, social media marketing, and lead generation)
- Finance (payrolls, billing, and invoicing automated tools)
- Analytics and reporting tools
- Communication and VoIP
- Team collaboration
- Project management
- CRM and SaaS support tools
Typically many of these tools are multi-purpose. This will help you avoid functionality overlapping when purchasing separate applications for each business need. Though, think about all tools synchronization to control business entropy.
And now, when you have a basic idea of your hypothetical stack, here are some tips on...
How to choose SaaS tools for your business
First and foremost, think about your overall stack. Can all the tools be synced? Do they complement or overlap each other? And of course, what budget are you ready to spend on building your toolbox?
The pieces of advice below will help you make the right decisions during the selection process.
- Conduct research - customer reviews and analysts rankings are the sources you can be based on while weighing a SaaS tool pros and cons
- Ask for a demo - if you have to choose a tool for an enterprise, the smart decision would be asking for a sales call to view a detailed demo. It’s better to clarify all questions before the money will be charged from your credit card
- Take a free trial - God bless those people who created this pricing strategy! You can test and try a new tool and move back if you feel it’s not a good fit for you
- Think about integrations - it’s crucial to check whether a tool you’re going to add to a company’s toolbox can seamlessly integrate with the existing stack. You’ll avoid unnecessary headaches having thought beforehand if all your tools will play nicely together.
- Define the limits - there is absolutely no need to adopt twenty tools at once. Start from the most vital ones and expand the stack along with your business growth.
Working on building your business SaaS toolbox, it’s vital to remember that the best is the enemy of the good. Go only for those tools that are crucial for your business. For example, at Eleken, we focus solely on the tools helping create a user-centered design in the most effective way possible. By the way, if you’re wondering what the user-centered design is, read our article covering human-centered design examples.
MRR: A Simple yet Tricky SaaS Metric Crucial For Your Business
“Happiness is the longing for repetition,” said the world-known Czech novelist Milan Kundera in one of his novels. And if you wonder what the relation between this phrase and the article’s title is, I would give you a hint - it’s in the word “repetition.” In business, the same as in life, we value constancy because it gives us a feeling of stability and reduces uncertainty stress. The predictable monthly revenue is a foundation of all business growth-related plans.
We at Eleken think that it is a company’s lifeblood and health measurement. The revenue calculation seems as easy as pie yet can show you a distorted picture when performed incorrectly.
If you got excited to know more about MRR metrics, keep reading this article and learn why MRR is important, how to properly calculate it, and what are ways to increase your monthly revenue.
What does MRR stand for?
Let’s start with a quick recap of what MRR is.
MRR means monthly recurring revenue a SaaS company expects to receive each consequent month. Given most B2B SaaS businesses employ a subscription model, as long as their customers stay with a company and pay a fixed amount of money each month, the company can predict its monthly revenue. If customer retention rate is high and churn rate is not significantly deviating from month to month, MRR can be used to forecast the company’s average growth rate in a long perspective. By the way, you can learn more about SaaS churn rate and average SaaS growth rate in devoted articles, elaborating on these crucial business metrics.
Based on the above, it becomes obvious that MRR business metric is the main indicator of a healthy cash flow for subscription-based businesses. For the in-depth analysis, you can separate specific MRR types and get a more detailed understanding of what your total revenue is built from. We’ll talk about this point in a couple of paragraphs.
Why is MRR important for SaaS
Monthly recurring revenue underlies:
- Business stability - predictable income gives freedom to build ambitious plans and ensures they have high chances to become real. Being able to forecast future earnings, it becomes easier to plan the expenses and create a company’s “safety bag” for just-in-case.
- Company growth - based on current MRR, a SaaS business can estimate long-term income growth and create an actionable revenue expansion plan.
- Investor valuation - for an early-stage startup with stable MRR, it’s much easier to receive high valuations from investors and get funded. For mature companies preparing for an IPO, a high investor valuation leads to a greater stock price.
And now, let’s dive into MRR calculation.
How to calculate MRR
The monthly recurring revenue formula is pretty straightforward.
MRR = Monthly users number * Monthly ARPU (average revenue per user)
For example, if you have ten customers paying each month $10 subscription price, your MRR would be 10 * $10 = $100. In case you offer several price plans, then you should do the same exercise for all plans and summarize the results to find out your total MRR.
Though the total revenue figure may be enough to understand the trend, MRR decomposition will unveil the root of income fluctuation in terms of a particular month. Under “decomposition,” I mean MRR types a total MRR consists of.
Types of MRR
Financial experts define five MRR types, which eventually make up the total MRR figure you see in your monthly reports. Understanding what brings you more money and where that gap your revenue leaks out is, you can control your income flow more efficiently.
- New MRR - the revenue from new customers your company acquired in a given month
- Churned MRR - the amount of revenue you lost due to customers’ subscriptions cancellations
- Expansion MRR - MRR from the upgraded users
- Contraction MRR - lost revenue from downgraded users
- Reactivation MRR - the revenue from previously churned customers
For example, below is the report generated with Baremetric tool. You can see a month-to-month revenue breakdown and how it differs compared to the previous period on the graph below.
Even though the MRR formula is not complicated at all, there is a certain risk of including or excluding data, which can confuse MRR calculation and distort the results.
So, let’s clarify what you should or should not take into consideration when calculating your revenue.
What to include into MRR calculation
The five MRR types we discussed in the previous section clearly indicate with their very names, they should be included in the total MRR calculation. But not only those figures are important. Your calculation should also take into account:
- All recurring, new, lost revenue from customers as well as plan upgrades and downgrades. Also, here goes any additional charges for extra users, seats, volume, etc.
- Discounts you provide within a specific month. If not preliminary planned, promotional activities can seriously impact the final revenue you intend to generate this month. For example, if your customer’s regular monthly fee is $150, but they paid a discounted $100 price for the first month of service usage, your MRR from this customer will be $100, not $150.
- Delinquent and transaction charges should also be minded while doing MRR calculation. Whereas some business owners tend not to mix up financial expenses with income from sales, invisible deductions will eventually pile up and “suddenly” diminish expected monthly results.
What to exclude from MRR calculation
Here the simple rule goes: don’t take into account all payments that are not recurring.
Among those are:
- Long-term contracts paid upfront
Even if a customer pays you an annual fee at once, it doesn’t mean it falls into a particular month’s revenue. In this case, the payment should be evenly divided by twelve months. Though getting money upfront is good for a company’s financial health, the MRR metric is not measuring a cash flow. Its primary purpose is to measure how fast and efficiently your business is growing by comparing month-to-month dynamics.
- One-time payments
This point is close to the previous one with a slight difference. If you offer customers not only a SaaS service but also a SaaP (software as a product), which usually implies you sell it once and leave it at customers’ discretion, then you shouldn’t include one-time payment into MRR calculation.
- Trials that don’t convert
SaaS companies’ most common mistake is including “projected” trial customers alongside those who actually paid for the subscription. We clearly understand that not all trial users will eventually convert. Including them into “new” and then “churned” customers, we create wrong monthly income expectations.
Ways to increase your MRR
You can boost your company’s revenue by employing strategies listed below. They can be used at any stage of business growth and adjusted based on the analysis of the results.
Upsell your existing customers
To upgrade your current users is usually more cost-effective than acquiring new ones. Try upselling your customers to higher-tier plans by offering extra product values. What you need to implement this strategy is to know your target audience’s exact needs and pain points.
Utilize different pricing models
If coming to your pricing page, a lead won’t find an appropriate price plan that satisfies their needs, you will more likely lose a potential customer.
Here are the most common SaaS pricing models you can try implementing with your business.
- Per-seat pricing
Freshdesk is an excellent example of this approach. They offer a broad range of pricing plans from a limited-features free plan up to a $99/agent plan suitable for enterprises. The per-seat (or per-user) pricing model’s value is its correlation to a customer’s company growth. The more the business scales, the higher the price plan they may switch to.
- Usage-based pricing
This type of pricing gives users more flexibility in terms of usage intensity. They are fully accountable for the usage volume and the cost they will end up paying. For example, Hubspot charges customers for the number of marketing contacts they will have available within the particular price plan. Though not that straightforward as per-user billing, usage-based pricing may be seen as a win-win model of customer-business relationships.
- Add-on pricing
On top of features you offer within your plans, you can give customers the possibility to enhance their existing plans with additional functionality. Referring again to Hubspot, which is definitely one of my favorite SaaS companies in terms of how they pack their services, they offer to build up to 3.000 custom reports with the increased dashboard limit for an extra $200/month.
Overall, your pricing page should be visually appealing and comprehensive. As a design agency, we are confident that user-centered design matters especially when it’s going about pages where users are expected to make the desired action. Check our SaaS pricing page design article where we gathered the worth-looking examples you can learn from.
Continue improving your product
To retain your customers and make them willing to continuously pay for your SaaS, you should keep enhancing your product and regularly demonstrate the updates to your customers. Communicate them added functionality, upcoming products, new version release, bug fixes, and any other information you find useful to increase customer loyalty resulted in a high retention rate.
Monthly recurring revenue is one of the most critical SaaS metrics you should regularly check to ensure your business is on the right track. To get an accurate result, you need to consider some nuances in MRR calculation. Think about what you need to include or exclude when calculating your MRR based on the information you learned in this article.
You can grow your revenue by price strategies diversification and consistent product improvement that will help retain existing customers and attract new ones. To get a more in-depth knowledge of crucial SaaS metrics, read next about AARRR metric in our blog.