How SaaS Companies Can Increase Gross Margins or Valuations

Summary: In today’s market, buyers anchor on ARR growth, with 20% as a common threshold and 30–50% for growth‑stage companies, then validate the story with NRR, churn, gross margins, and TAM. The fastest way to improve valuation is to show growth and prove it with clean, connected data across your CRM, billing, and ERP systems, so due diligence is smooth, and confidence is high.

What Really Drives SaaS Valuation Today

What do buyers weigh most in 2025?

Investors start by asking: What is your ARR and ARR growth rate? Everything else, including margins, churn, and retention still matter, but growth sets the frame.

In conversations with SaaS buyers, a 20%+ ARR growth rate is a widely cited rule of thumb, and 30–50% is considered strong for growth‑stage companies. Growth matters, but more so does the trajectory of it. Accelerating growth earns more credit than flat or decelerating trends.

Context matters. Buyers segment by company size and maturity, then examine how growth happens (e.g., adding users, expanding products, or just raising prices). Product pricing growth alone can saturate and invite churn risk. It is important to show that users are rising, expansions are real, and pricing is thoughtful, not a crutch.

The SaaS Valuation Metrics That Matter in 2025

Annual Recurring Revenue (ARR) and Growth Rate

What it is: The contractually recurring revenue run‑rate.
Why buyers care: Predictable, compounding cash flows with high gross margin potential.
Benchmarks: A commonly cited threshold is 20%+ growth, with 30–50% for growth‑stage companies viewed as best‑in‑class. Track both the absolute rate and the trend (i.e., Is growth accelerating?).

Ways to move the number (without over relying on price):

• Expand the number of users per customer through adoption programs and role‑based licensing.
• Add adjacent modules or features with clear ROI to increase average revenue per account. Adjacent modules create clear upgrade paths.
• Align packaging with value so customers “grow into” higher tiers. Raising prices alone can cap out and invite churn.

Net Revenue Retention (NRR) and Churn

What they are: NRR captures expansion, contraction, and churn across your base. A >100% NRR means your base grows without new logo adds. Churn should be tight because small leakages compound. Think <5% annual as a directional goal.

Improve NRR by focusing on:

• Onboarding and adoption: Strengthen onboarding so customers realize value quickly. Early value realization reduces Day‑90 and Year‑1 churn.

• Customer success motions: Health scoring, QBRs, and playbooks for expansion (e.g., formalizing customer success playbooks for expansion and renewals).
• Right‑fit packaging: Design upgrade paths from free or discounted tiers to paid ones.

Gross Margin

Range to expect: Most SaaS models scale to a 70–90% gross margin. Enterprise‑oriented products often reach 80–90%, while SMB and infrastructure‑heavy models may run 60–85% until infrastructure and support are optimized.

Lift margin by:

• Optimizing cloud usage and architecture.
• Shifting to self‑service support and standardized implementations.
• Retiring bespoke customizations that create hidden COGS.

TAM, User Growth, and Conversion

A credible TAM/SAM/SOM narrative sets the ceiling for valuation. Two firms with the same ARR can command very different multiples if one proves a larger market and faster user growth with real conversion from free/discounted to paid. Buyers want to see your runway, not just your history.

Make Your Data Work Across Systems

During diligence, buyers reconcile your CRM (e.g., Salesforce), billing (e.g., Stripe), and ERP/GL (e.g., NetSuite). If those systems do not align, diligence slows and confidence drops. The remedy is disciplined data hygiene and an ARR “cube” that reconciles sources of truth.

Practical steps to tighten your data foundation:

• Harmonize CRM, billing, and ERP: Map customers, contracts, and product catalogs across systems. Reconcile ARR to GAAP revenue and explain differences.
• Define clear metric logic: Lock definitions for ARR, MRR, NRR, churn, and cohorts to avoid version control issues during diligence.
• Automate reporting: Build governed dashboards so stakeholders see the same numbers every month.

Choosing and Communicating the Right Multiple and Story

In SaaS, buyers may reference ARR, revenue, or EBITDA multiples. Which lens shows your company best depends on stage, profitability, and the story your data supports.

Typical ranges you will hear in market conversations include:

• EV/ARR: ~3–6x for slower growth, 6–10x for mid‑growth, 10–20x+ for best‑in‑class growth with strong NRR, margins, and TAM.
• EV/Revenue: ~2–5x for slower growth, 5–15x for high growth.
• EV/EBITDA: ~10–20x for mature or PE‑backed SaaS.

Your narrative should match your strengths and data:

• If growth is the headline, lead with ARR growth and cohort‑level expansion.
• If profitability is emerging, show the path to margin expansion with specific levers.
• If the market is vast, back your TAM with bottoms‑up user growth and conversion evidence.

Raising Confidence (And Potentially, Multiples)

• Lock KPIs and definitions: Publish a one‑pager that defines ARR, MRR, NRR, churn, and cohorts. Use it in board decks, lender updates, and due diligence.
• Track relative growth: Report QoQ and YoY growth and the change in growth rate to show whether growth is accelerating or decelerating.
• Prove expansion: Demonstrate expansion with revenue waterfall bridges for adds, expansions, contractions, and churn.
• Segment churn: Separate voluntary vs. involuntary, and product or segment hotspots, then align fixes to each root cause.
• Demonstrate margin scale: Tie COGS initiatives, such as cloud optimization, support automation, standardization, to gross margin progression.
• Validate TAM with user data: Validate TAM by pairing a top‑down market model with bottoms‑up user and conversion data.

Final Thoughts: SaaS Valuation Readiness

Buyers reward growth backed by proof. If you can show 20%+ ARR growth with durable expansion signals, disciplined churn, margins that scale, and a credible TAM pathway, all supported by reconciled systems and repeatable reporting, you will give potential investors confidence in both the numbers and the narrative. That is how you earn attention, reduce friction in diligence, and put yourself in range for stronger outcomes.