SaaS Customer Retention: What Is It & Why It Matters In A Valuation?

To do a SaaS business valuation, experts consider factors such as revenue, assets, debts, users, and other metrics.

However, one element that might be overlooked during this process is customer retention. When looking for new ways to bring more revenue into the business, keeping existing customers and even offering upsells is a smart move, as you don't have to pay for customer acquisition. It is a matter of extending the lifetime value of the users you already have.

According to Boopos' CEO, Juan Ignacio García Braschi, customer retention is one of the most critical metrics for buyers.

An analysis from Chartmogul looked at 2,100 SaaS companies' data and found that "companies with best-in-class retention grow at least 1.5-3x faster than their peers".

In this article, you'll learn what customer retention is and why it is relevant for a business valuation.

What is SaaS customer retention?

Customer retention strategies in SaaS are about offering the best experience possible for customers, as well as new features and functions, to increase the users' lifetime value and keep a loyal client base.

For example, the collaboration platform Miro provides tutorials, courses, and webinars on how to get the most out of the tool. This ensures their existing customers get the most out of the product and don't leave at the first competitor that comes along.

Additionally, creating a community and communicating frequently with customers can serve as customer retention strategies. When the goal is to share the latest news from the business, recently released features, and how the software can help users, the company proves its value.

One of the most common customer retention strategies is gathering customer feedback through surveys and using the collected data to improve the product and fix any potential issue.

Why is SaaS customer retention important? 

Customer retention is key to achieving a constant, recurring, and growing income for any business. When loyal customers keep coming back to pay for the service, and new customers come through different channels, that means that you are providing value.

Furthermore, customer retention is significant because:

1. Increases LTV

A high customer retention has a positive impact on customer lifetime value. This KPI asses the total expected income from a client throughout their whole relationship with the business. The greater the customer loyalty, the higher the customer lifetime value.

2. Can be cost-effective

Acquiring new clients can be expensive. If they leave soon, your cost of acquisition (CAC) might be higher than your customer lifetime value (LTV), which could hurt your financial performance. For this reason, focusing on developing successful customer retention strategies can be cost-effective for your business.

3. Comes with extra benefits

Customer retention translates into recurring purchases. Useful feedback that can be used to enhance your product, referrals (that can bring potential new clients), strengthening the relationship with your client base, and working on delivering an outstanding customer experience, among some other perks that are a win-win for you and your clients.

Why does SaaS customer retention matter in valuation?

When assessing the value of a business, assets, intellectual property, and client portfolio are some of the elements that are usually considered. However, customer retention is an essential metric for a SaaS business valuation. This is because it guarantees a stable and recurring income.

Additionally, customer retention has a direct impact on the business' ROI. Bain & Company found that in the financial service industry, a 5% increase in customer retention can translate into a 25% (or more) boost in profit.

How does a high SaaS customer retention help your valuation?

Customer retention impacts your business valuation by:

1. Maximizing the business's value for a future deal

A constant revenue can determine your business value for future deals, even if you aren't considering selling your venture. Working on the needs and wants of your customer base can help you increase their loyalty and, therefore, your business valuation.

If you plan to sell in the long run, customer retention is key to increasing your business value. Even if you already have a growing net profit and have cracked the formula for attracting new customers, your returning customers can determine your worth.

2. A recurring revenue attracts potential buyers

High customer retention shows a stable revenue stream, profitability over time, a significant market presence in your industry, and overall points to financial health within the business. These indicators can attract new and more potential buyers.

3. Your constant income will help establish your business price

Your business's customer loyalty, retention, CAC, and LTV will help establish a price for your business for potential buyers or investors. Having a steady and reliable monthly recurring revenue from your existing customers will be crucial to setting your business worth.

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