Valuation of a Saas Company: A Case Study of Salesforce.Com
Valuation of a Saas Company: A Case Study of Salesforce.Com

Author(s): Benjamin Cohen, Michael Neubert
Subject(s): Social Sciences, Economy
Published by: Vysoká škola ekonomická v Praze
Keywords: SaaS; software as a service; corporate valuation; international finance; pay-per-use; price-setting models
Summary/Abstract: Purpose:This paper seeks to identify the critical factors determining the valuation of software as a service (SaaS)companies. This newly created business model, namely software access and licenses as opposed to complete products, renders many evaluation metrics inapplicable. This creates a unique sub-industry of such companies for corporate valuation purposes. Salesforce.com is used as the focal company of evaluation, allowing use of and reference to actual data and prices. This paper aims to evaluate the accuracy and relevancy of specific valuation techniques and identify those best suited for a SaaS company. Design methodology: Individual stock and market index data were collected from publicly available sources. The main stock in focus (CRM = Salesforce.com) was then analyzed using widely accepted evaluation equations, followed by advanced analysis techniques gathered from more recent academic literature and reputable online sources. The findings from these techniques are then discussed to compare valuation estimates as well as applicability towards the SaaS profit model. Findings: This paper provides empirical insights on the impact of SaaS price-setting models on the valuation of firms using a SaaS business model. In contrast to relative valuation methods, cash flow-basedvaluation methods better reflect the impact of pay-per-use price-setting models and growth strategies on corporate valuation. The cash flow being generated by the SaaS firm creates value. The bulk of the valuation comes from the free cash flow growth rate being experienced and the expectation for continued growth in future quarters. These findings confirm our proposed theoretical model describing the strong mutual interdependence of business model, price-setting model, and corporate valuation method of SaaS firms. Research/practical implications:The study results are relevant for researchers, investors, and financial managers of SaaS firms, who need to understand the impact of SaaS price-setting models on the valuation of firms using a SaaS business model and who need to choose the appropriate valuation method. Future scholarly work should include quantitative assessments of additional financial data of salesforce.com and other SaaS firms to provide greater clarification of the statistical significance of the variables of this study or to replicate it with other SaaS firms from different industries and countries. Originality/value:The paper fulfills an identified need and a call for research to study the impact of SaaS price-setting models on corporate valuation using a single case study firm with a SaaS business model and contributes to the research about the influence of SaaS price-setting models on corporate valuation.

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