Customers’ average life in SaaS space
Earlier in this series, we discussed how the expected appreciation of the US dollar (UUP) could make Salesforce (CRM) an option among investors. The average “life” of the customer of SaaS companies like Salesforce depends on the time the company has had customers and the amount of churn.
Relationship between churn, customers’ average life, and profits
Churn lowers the average customers’ life as the older customers who churn must be substituted with new customers. The lower the churn, the higher is the average customer life, which enhances the company’s profits.
The equation above explains the relationship between average customer life and churn rate. Salesforce pioneered the SaaS model and had a first mover advantage. Thus, Salesforce’s average customer’s life would be longer than its peers and so would be its profitability. This explains the strategic acquisitions of LinkedIn and NetSuite in the SaaS space by Microsoft (MSFT) and Oracle (ORCL), respectively.
The chart above shows the impact of upgrades and upselling on the profitability of companies in the SaaS space. As a result, SaaS companies can speed up the time to profit by upgrading and upselling current customers.
However, the company must adhere to low-cost purchases that are different from the new customer acquisition process. This explains why SaaS companies like Salesforce are so intent on customer relationship management.