In the technology and software space, recurring revenue is a key metric for the reliable revenue stream of a company. Sales to new customers, upsales to existing customers and price increases make up the building blocks to grow annual recurring revenue.
SaaS companies are often characterized by subscription models, which provide predictable revenue streams measured by ARR. What separates the chaff from the wheat is if a SaaS company manages to keep the customers (low churn) and at the same time do upsales. If a company possesses these qualities and manages to make it over time with a sensible investment profile, you will typically see both growth and good profitability.Pareto Securities' technology analyst Fridtjof Semb Fredricsson.
Importance of pricing
As a remedy to achieve both growth and profitability, Viking Venture highlights the importance of a good price plan:
We believe that price changes could be pivotal for a company’s growth journey. To take an example: if a company that has 10 percent profitability margin are able to raise prices by 20 percent, they will typically get an effect on their profitability of 200 percent. The profitability increase can then be used for growth measures like improving the product, hiring more sales people or increasing marketing effort,Senior Investment Manager Magnus Willumsen in Viking Venture
Viking Venture is focused on B2B software companies in the Nordics, and is behind listed SaaS companies like Ørn Software, Mercell, House of Control and EcoOnline.
Magnus Willumsen lists seven specific steps for how a SaaS company can use value-based pricing:
- Segment your customers
- Understand value creation for the customer
- …and what the value drivers are
- Analyze switching costs for existing customers
- Understand the customer’s alternatives
- Create a value-based price model based on the findings
- Test and adjust your price model (forever!)
See Viking Ventures full presentation:
Nordic TechSaaS Conference
The presentation was held at our annual Nordic TechSaaS Conference in November 2021. Learn more about the technology and software sector in the Nordics. During the presentation, Viking Venture’s Managing Director Erik Fjellvær Hagen took part in our panel discussion into how to use M&A as a growth strategy.
Listen to the discussion as a podcast: