Last week, one B2B SaaS CEO in my network said this:
“I tell my Sales team – If you sell a deal you don’t think you can renew, I don’t want you to seal the deal. I don’t want that ARR. I do not want revenue today that I can’t renew tomorrow.”
This might make you think: What?! revenue is revenue, right? Short-term yes, but beware of the consequences. Renewals and expansion are the essentials that will create your growth down the road.
Now, if you can bootstrap and don’t need money, this might not be that important to you. But if you know you’ll need investment capital, you’ve got to be very conscious.
“Fifteen years ago, all the investors in technology were technologists. They had built previous companies, and they understood the problem you’re solving. All the investors today are young hotshot MBAs. They are very metrics driven. That’s all they care about because they don’t understand what you’re doing, your technology, or your customers. Fact is, they can read a chart and see ARR, Gross margin, Cost of Customer Acquisition, Renewal Rate, and Net Expansion.
So, depending on wherever you are, in the funding cycle, be conscious of your core SaaS metrics because that is what the investors will hammer you on.
They’ll line up to invest in you with 10X valuations if your metric performance falls into the category they call Investor-class metrics. But, conversely, suppose you fall just a little below those metrics, none of those investors will talk to you. You’ll drop into a whole different class of investors; I’m going to call them ‘bottom feeders”, who will want to invest in you at <2x, i.e., a significantly reduced valuation.”
Here’s the thing
If you can’t maintain a Net Renewal Rate above 90%, you got a problem.
If you can’t get a Net Expansion of well over 100%, you got a problem.
What is it that drives renewal and expansion? Its adoption. You got to understand users to create the functionality that will drive adoption. Adoption is going to drive renewals and expansion.
So question for you to reflect upon
On a scale of 1-10, how happy are you with the speed and breadth of adoption of your SaaS product? What can you change tomorrow to improve that?
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