Do you own one of the more than 30,00 SaaS companies scattered throughout the world? If so, you might see your SaaS company valuation increase steadily in the years to come.
By 2026, the SaaS industry is expected to be worth more than $300 billion. This could send your company valuation skyrocketing and make you so glad that you decided to start it up and hold onto it.
It can be tricky trying to come up with an exact SaaS company valuation. There are different types of valuations out there, and your company’s constant business growth can also have your SaaS company valuation changing almost all the time.
There are, however, a few factors that’ll impact your SaaS company valuation and show you where it stands. They should be on your radar at all times.Also, learn about SaaS lead generation.
Here are seven factors that can affect your SaaS company valuation.
1. Age
Did your SaaS company just get off the ground last month? Or have you been running your SaaS company for 5 years now?
Either way, the age of your SaaS company will play a huge part in what it’s worth. More often than not, SaaS companies that have been around for a long time will be worth more than those just getting their feet wet within the SaaS industry.
That being said, it’s worth noting that, from the perspective of investors, the pre vs post-money valuation is also very important. Investors might be able to put themselves in positions to make bigger returns on SaaS company investments when they purchase a piece of them at their pre-money valuation. This will typically be when a SaaS company valuation is still on the newer side.
2. Churn
Most SaaS companies have monthly subscription models set up. Because of this, their churn rates are crucial to their valuations.
A SaaS company’s churn rate refers to how many people cancel their subscription service on either a monthly or annual basis. The higher a SaaS company’s churn rate is, the worse off it’s going to be. It’ll indicate that more people are canceling their subscription service than a SaaS company might like.
When this is the case, a SaaS company valuation can begin to trend in the wrong direction. It’ll suggest that this company isn’t going to be around for the long haul.
3. Customer Acquisition Costs
All SaaS companies are going to need to prepare to spend money to make money. They’ll spend money on their sales and marketing efforts in exchange for new customers.
But not every SaaS company is going to have the same customer acquisition costs. Some will have much higher customer acquisition costs than others. These companies will typically have lower SaaS company valuations than their competitors since they’ll be spending more money than they’d like on acquiring new customers.
4. Lifetime Value
When your SaaS company is looking at your customer acquisition costs, you should also look at the lifetime values attached to your customers. These numbers will reflect how much money you’re raking in from customers over the course of their time with you.
Ideally, you’ll want to see that your lifetime values are higher than your customer acquisition costs if you want your SaaS company to be successful. If they aren’t, it’ll be an indication that you need to start thinking about how to keep customers around for a long time.
If you can’t do this, your SaaS company valuation will suffer over the long run. You’ll ultimately find that you’re spending more money to bring customers in than you’re making from them.
5. Monthly Recurring Revenue
One of the best ways to tell how much your SaaS company might be worth is by simply evaluating how much revenue you’re bringing in per month. This will show you how much your SaaS company is banking once you take things like customer acquisition costs and lifetime values out of the equation.
In a perfect world, you’ll want to see your monthly recurring revenue increasing from one month to the next. If it’s not doing this, you should look for an explanation as to why that is, and if you can’t find one, you’ll need to dig a little deeper.
If your SaaS company suddenly stops making as much money as it once did, there will be a reason for it. You might just have to spend your fair share of time researching to come up with an answer.
6. Annual Recurring Revenue
In addition to analyzing your monthly recurring revenue to come up with your SaaS company valuation, you’ll also need to sneak a peek at your annual recurring revenue. It’ll be even more important for your annual recurring revenue to be on the rise from one year to the next.
There might be certain months when your revenue will fall for one reason or another. You’ll always be able to try to reverse that trend the following month.
But if you see that your annual recurring revenue goes down at all over the course of a year, that’s not going to be a good sign. It could show that there are serious problems that exist with your business model, and it could lead to a much lower SaaS company valuation than you anticipated.
7. Competition
As we alluded to way back at the beginning, the SaaS industry as a whole is becoming quite competitive. There are tens of thousands of companies operating within it, and they’re all fighting over the same piece of the pie.
Your SaaS company valuation could have a lot to do with the competition you face. If you’re able to put yourself in a position where you don’t have any competition, it’ll lead to a much higher SaaS company valuation overall.
Calculate Your SaaS Company Valuation
Keeping a close eye on your SaaS company valuation will be extremely important. You want to do this to see whether your SaaS company is growing or not.
You’ll be able to make changes to the way your SaaS company operates if you’re not happy with its valuation. You’ll also be able to point out what’s working well for your SaaS company and continue doing them.
Find more tips that’ll help your SaaS company grow by browsing through our other blog articles.
