The SaaS Certainty Premium

Its human nature to place a premium on certainty. That’s why fixed rate mortgages cost more than variable. Its also why we buy insurance and other items to manage risk. We just want peace of mind. So, it should come as no surprise then that Software as a Service (SaaS) companies are generally worth more than traditional software companies.

Software Equity Group recently put out a report covering valuations. I have put extracts online for SaaS and traditional software (I apologize, for some reason when Docstoc uploads them they get fuzzy).

The take away is that generally SaaS companies are worth 3.8x times revenue while software companies have a median value / revenue of 2x. That’s a pretty big difference and reflects the beauty of the SaaS model.

Assuming you have low churn rates (the rate at which subscribers cancel), you begin each month, quarter or year already knowing what a good portion of your revenue will be. Yes, you will have new subscribers, cancellations and upgrades, but you are not starting from zero (which is the case when selling perpetual licenses). Many SaaS companies I work with begin each quarter already knowing 75 – 80% of their revenue for the quarter is “in the bag”. That’s a great way to operate.

So, if you ever wanted even more reasons to go SaaS do it for your peace of mind and do it because your business will be worth more.