Customer Lifetime Value as an Approach for SaaS Startup Valuation

SaaS (Software as a Service) is rapidly growing in the economy specifically driven by startups. Compared to legacy companies, startups tend to undergo changes and innovations in their business models more frequently to gain profits and value for the investors. Among the existing SaaS business models, Freemium and Free Trial are considered as two most commonly used strategies. Usually, business model’s performance is estimated based on the short-run metrics such as customers acquisition costs, conversion to paid customers, retention rate, etc. However, there is still little theoretical and empirical evidence regarding what business model is more effective in terms of the SaaS profitability, specifically considering long-term company orientation. In this paper, we propose Customer Lifetime Value (CLV) calculation based on the Markov process modelling that allows to assess how the transition from Free Trial business model to Freemium business model affects the value of SaaS B2B startup. Contrary to the majority of the existing academic studies for SaaS B2C companies we show that in SaaS B2B setting Freemium model outperforms Free trial. Results obtained in the paper suggest some promising insights on how to boost the firm value with an increase in CLV caused by the change of business model.