SaaS Business Models

SaaS Business Models

I see every company, even in the services business, wants to pivot toward the #SaaSbusinessmodel. One of the reasons is that SaaS companies command a #valuation premium. However, in my view, before we pay a bonus, we need to evaluate the value drivers as not every SaaS company is valuable.

Value of SaaS business =Present value ( Marginal profits from existing subscribers + Marginal profits from new subscribers)

Thus #valuedrivers for the SaaS business are:

1)Count of existing subscribers/customers across a period. Higher the count, the higher the value.

2)#Customerchurn and renewal rates: Higher renewal rates increase value, and higher churn reduces weight.

3)#Contributionmargin for each customer – Higher the CM, the higher the value.

4)Subscribers/Customers growth over a period: SaaS companies that acquired two customers and lost none are more valuable than those that gained ten customers and eight customers.

5)Customer acquisition cost – Lower the CAC, higher the value.

Investors need to factor in the value drivers before paying any additional premium to the SaaS business.

Many services businesses position themselves as SaaS businesses by reporting % of recurring and reoccurring revenues out of their reported revenues. However, in my view, these do not qualify as SaaS businesses.