What are the key challenges/problems SaaS businesses face and will face?
Drive revenue growth by acquiring new customers(acquisition), retaining the existing ones(retention) and increasing the revenue generated by them(monetisation).
The key challenges for a SaaS business are different from a traditional software business in that there are two sales that have to be accomplished:
Acquiring the customer
Keeping the customer(to maximize the lifetime value)
This is because the revenue for the service comes over an extended period of time(the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer.
A research report from JP Morgan talks about the factors that drive public company SaaS valuations. While the top factor impacting the multiple on revenue is revenue growth rate, the report clearly shows how both retention and monetisation are strong secondary factors(which both contribute to revenue growth rate). An upsell increase of 2% means a 28% higher public valuation. A churn decrease of 2% means a 20% higher public valuation.
Here is a graph from Intercom that shows the correlation between the EV/R multiple and the expected revenue growth of public SaaS companies:
And here is a graph that shows that SaaS valuations have little correlation to profitability(in contrast to what one may think):