I've seen many SaaS companies with low churn rates in their client base and ARR, but their monthly revenue still shows high churn. How is this possible? Revenue from monthly subscriptions changes because it’s not recorded correctly. It’s often not matched to the right subscription period or renewals. When revenue isn't matched correctly, duplicate revenue happens. Also, invoices might not be sent on time, making monthly revenue look like it has churn. Another issue is not separating income from subscriptions, training, or customisation. These monthly changes cause big problems for a SaaS company's financials. Investors will ask questions if your monthly revenue keeps going up and down. These fluctuations can hurt your chances of getting more funding.
Constantin Botnari - ACMA, CGMA’s Post
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Working with SAAS companies, I often see confusion around these two crucial metrics. Let's break them down: Monthly Recurring Revenue (MRR): The predictable revenue your business generates each month from all active subscriptions Includes monthly plans + normalized annual plans (divided by 12) Fluctuates monthly based on upgrades, downgrades, and churn Annual Recurring Revenue (ARR): Simply put: MRR × 12 Provides a yearly perspective of your recurring revenue Often used by investors and for company valuations Best for businesses with primarily annual contracts 🔑 Key Differences: Time Frame: MRR is monthly snapshot; ARR is yearly outlook Usage: MRR for operational decisions; ARR for strategic planning Reporting: MRR for month-over-month growth; ARR for year-over-year trends 💡 Pro Tip: Don't include one-time fees or non-recurring charges in either metric. Keep it clean!
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The reason why most SaaS companies have such high churn is because when someone signs up for your offer and they don’t get an immediate benefit (which is really hard to do!) – they move on. BUT… If you can have them realize that what they signed up for is so much more than a SaaS offering, but rather a movement of like-minded people where they will find a sense of belonging you will have engaged them emotionally, which will buy you more time to ensure they get the results that you committed to.
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Raising prices can feel risky, but undercharging could be holding your SaaS back. How do you know it’s time to adjust? Here are 4 signs to watch for: 🚀Your Value Has Grown Added new features? Expanded your support? If your SaaS offers more value than when you started, your pricing should reflect it. 🛒Your Market Says You’re Too Cheap Are competitors charging more for similar value? If your price feels “too good to be true,” customers might undervalue your product. 📈You’re Struggling to Scale If your pricing doesn’t cover costs or fuel growth, it’s time to revisit. Sustainable margins are key to scaling your SaaS. 💪🏼Customer Demand Remains Strong Low churn? Positive feedback? If customers love your product, they’ll likely see the value in paying more. Pricing isn’t just about numbers, it’s about reflecting the value your SaaS provides. Are you charging what your product is truly worth?
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SaaS companies are spending way more to acquire customers right now. CAC Paybacks are way up. Q1 of 2022 - Avg. CAC Payback was 20 months Q1 of 2024 - Avg. is 29.4 Months Some of the outliers: WalkMe - 104 Months Atlassian at 11 months. Link to the report below:
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Early stage SaaS metrics are all about growth and conversion. Later stage SaaS is all about retention and decreasing attrition
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Growth has more impact on valuation than profitability. Revenue Growth is 2.4x more impactful than Free Cash Flow margin on valuation metric Next 12 Months Enterprise Value-to-Revenue Multiple (EV/R). For SaaS companies, 45% of the variation in this valuation metric can be explained by these two factors: revenue growth (37.6 coefficient) and FCF margin (15.6 coefficient). Based on above 2 factors, we can see the distribution of companies into four quadrants and the median value of the valuation metric for each quadrant in (): ▪ High-Value Companies (12.7x) : Monday.com, Crowdstrike, and Datadog are positioned in the most valuable quadrant (high growth, high profitability) ▪ Growth-Focused Companies(9.5x): Companies like GitLab, Confluent, and Shopify prioritize growth over immediate profitability ▪ Lower Multiple Companies: Traditional tech companies like Microsoft and Adobe fall into the low-growth, high-profitability quadrant (6.2x) ▪ Companies with both lower growth and lower profitability receive the lowest multiples (3.7x) So valuation metric for both high growth and profitability is 12.7x , which is: ▪ 2x higher than highly profitable but slow-growing companies (6.2x) ▪ 1.3x higher than low profit but high growth companies (9.5x) This concludes growth has more impact on valuation than profitability. #Wie #SpeakUp #ConvertXWie #SaaS #Valuation #Growth
Growth is 2.4x more impactful than profitability, but public SaaS companies excelling in both earn the highest multiples: I could not find any reliable data on this, but I could imagine that this also holds true in the private market. A 2.4% increase in profits might be worth more than 1% higher growth though. The number of possible exit channels (and therefore demand) is much greater if you can demonstrate profitable growth.
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Average SaaS companies blame the market conditions for slowing their growth. Remarkable SaaS companies embrace the market conditions to speed up growth. It's a mindset.
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Don't just book recurring revenue any old way. There's a right and wrong way to do it. Many think ARR and annual run rate are interchangeable. But that's not how the best do it. Instead, proper revenue recognition is critical for valuation. Here are 7 steps that will help you get it right: 1. Understand the difference between booking and recognizing revenue. 2. Calculate ARR based on subscription term, not billings. 3. Don't confuse ARR with annual run rate. 4. Recognize revenue evenly over the subscription term. 5. Ensure your recognition method can withstand due diligence. 6. Train your team on compliant recognition practices. 7. Monitor revenue recognition accuracy every accounting period. You'll know you're doing it right when your SaaS valuation soars. Remember — you're not just booking recurring revenue. You're building a highly valuable SaaS business.
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Don't compromise the potential of your SaaS business. Are you growing your customer base? Then you can probably become the company people just keep talking about. How? Get brutally clear about who you're NOT IDEAL for. When you do: → You have more room to create unique value. → You become more valuable to the right customers. → You receive a lot more value on the back of that. → You have more ways to create leverage. → You create a flywheel that's hard to stop. Customers want a software provider that gives them value they cannot easily get anywhere else. There's unlimited upside to a SaaS business that delivers that consistently. And very little downside.
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What’s your biggest challenge with SaaS pricing? 👉 Subscribe to PulseHero. net to learn how to price your SaaS product effectively.
Why isn’t your SaaS growing faster? It might just be your pricing. Getting SaaS pricing right isn’t just about numbers—it’s about understanding your customers, value, and competitors. Here’s a sneak peek: ✅ Understand Your Value: What pain point are you solving, and how much is it worth to your customers? ✅ Market Research: Don’t guess—look at how your competitors are pricing. ✅ Experiment: Freemium, tiered plans, pay-as-you-go—test what resonates with your audience. Actually, most SaaS companies undervalue their product. If you don’t get pricing right, it could hurt growth and churn. So, how should you price your SaaS product effectively? What are the things you should consider? 👉 Subscribe to "Why Your SaaS Isn’t Growing Faster" and discover: 1️⃣ Pricing strategies that drive growth. 2️⃣ Why some SaaS companies scale fast while others struggle. 3️⃣ Actionable tips you can use TODAY. Don’t miss out—start growing faster NOW! 🚀 #saas #entrepreneurship #startups
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Strategic CFO | Partnering with businesses for tax compliance, financial clarity and success | Specializing in Service-Based Businesses
3moGreat point, proper bookkeeping is key to accurate reporting. Shame that its often an overlooked part of the business.