Nathan Latka: "This metric is more important for your SaaS valuation than your ARR" ??? (?? + 3 ways to improve it.)

Two SaaS companies, operating in the same industry, with the same ARR and growth rate.

If you "took them to the bank", would they get the same valuation??

"Of course not" - you may instinctively say. But do you?know?which other SaaS revenue metrics?correlate most with higher multiples??

This is a rather long video rant, but hey, you can play it while doing the dishes or something.

I went to Nathan Latka's talk at SaaStock local on Tuesday and it blew my mind. You don't know it yet but you wish you were there (honestly, I wasn't even a fan of Latka and was quite reluctant to go). Here are the biggest takeaways from the talk, and they are GOOD. I mean it:?

Net Dollar Retention?is the biggest predictor of your valuation multiple. Oh, and being from the US.?

As you can see from the graphic above - higher NDR correlated directly with higher valuations.?

Why??

NDR rate basically answers the question: "If you had no new customers next year, what would you grow by?"?

If you can still grow (hypothetically, of course) from your existing customers, without investing a dime in sales and marketing - you are golden (for the investors, at least.)

It's essentially?free*?money from your existing user base. (*minus any Customer Success costs involved in pushing for upgrades etc.) Achieving expansion revenue from your users also means you're extending their Lifetime Value, while keeping the CAC the same -?so by improving your NDR, you also automatically?improve your LTV:CAC ratio?- another metric essential for your SaaS' valuation! Voila, killing two birds with one stone!????(English is kind of morbid, isn't it??)

NDR is calculated by adding the expansion revenue to the baseline ARR, deducting any churn and downgrades, and dividing by the baseline ARR (basically the same thing as?negative churn).

Since it's cheaper to retain and upsell your existing customers than to acquire a new one - VCs are more interested in the NDR rate than in pure revenue growth.?

You can have a great ARR and massive growth rate, but so what if your churn rate and CAC (Customer Acquisition Cost) are huge??

10% churn means you need to exchange your whole user base every 10 months.??High churn + high CAC = a SaaS death sentence.??

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So how to get a higher NDR??

Nathan had some pretty dope tactics for improving NDR:

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1. Reduce your payback period with a service component?

"Is LTV:CAC ration 5 good or bad?"?

Well, it depends.?

If you have to wait *years* to recoup that initial CAC investment, than even having a Lifetime Value that is 5X x higher than the acquisition cost may not be great.

So then - how do you reduce the payback period, if that's true??

Well - some old-school SaaS folks will eat me alive for saying this, but the quickest way to recoup your CAC is to add a service component to your premium plans/ upsell your new customer on a one-time setup fee.?

E.g. you can offer to set your tool up for your customers, build the first few automations for them, train their employees for them etc. for a fee that would cover part/all of your CAC. I've seen several SaaS companies do it very successfully (e.g. StoryChief is a Content Management Platform for content teams and agencies, but they offer writing services as well; Buzz.ai is an outreach automation tool, but they offer an SDR service to set up and run the campaigns for you - at a fraction of the price of hiring a full-time employee).?

Just think about it.?

2. Implement usage-based pricing?

If you don't have usage-based pricing, you probably have a segment of customers that bought your product and...never use it.?

And now you obviously have the moral qualms: do you send them an email to try to re-activate that account before they realise they're paying for nothing and churn, or do I just let the sleeping dogs lie and keep charging them for a product they aren't using, hoping they don't realize they are paying for nothing and churn??

Either way - these 'dormant' accounts are at high risk of churn.?

You don't have that problem with usage-based pricing. In fact - you are incentivized to keep pushing the users to use your product more (e.g. with in-app modals reminding them about their usage limits like the one from SmallPDF above - you can?build modals like that code-free in Userpilot, btw.!).

To learn more about SaaS pricing strategies, read our?recent article here.?

3. Push for upgrades?

Even if you don't use usage-based pricing, you can push your users to discover premium features (especially the ones you know they'll love!) in a contextual way.?

I know I used this example a dozen times, but it's so good. Let's play it again, Sam.

Hubspot pushes its users to try email templates, which are a premium plan feature, as they copy and paste their messages:?

Now - if you give someone a try of a premium feature for long enough to develop a habit, and they see how much pain it has taken away from them, they will be more than happy to part with some $$ to keep it.?

E.g. I'm?never?going to downgrade my Spotify Premium account. I briefly went back on a free version last year after all my CCs were stolen, and the pain of not being able to play whatever song I want on demand was just too much to bear (I know, first world problems.)?

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So...Raising your next round soon??

Chat with us how to improve your NDR with Userpilot?and get the valuation you really deserve!

See you next week!?