2013 Pacific Crest SaaS Survey

We worked together with Pacific Crest, an investment banking firm with a specific focus on SaaS, to survey 155 SaaS companies on a variety of topics such as growth rates, CAC (cost to acquire a customer), gross margins, churn rates, etc. The goal of the survey is to provide useful operational and financial benchmarking data.

Many of the readers of this blog participated in the survey, and I would like to thank them for their time. I’d also like to thank David Spitz at Pacific Crest (@dspitz on Twitter) who did most of the work putting together the survey. The results of the survey are posted below.

Info about the Survey Participants

A broad diversity of SaaS companies participated:

  • $0-$60MM+ in revenues ($5MM median)
  • 25-250+ employees ( 50 median)
  • 10-2,000+ customers ( 78 median)
  • $100s to $MMs median annual contract value ( $20K median)
  • Participants from around the world, although primarily U.S.

Survey Participant Revenue Distribution

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Survey Participant Geography

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Growth Rates

How Fast Did / Will You Grow GAAP Revenues?

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Historical revenue rates for the group are centered just over 40%, while the median projected growth is 47% for 2013. Comparison with previous surveys: very similar historical growth rates, but more optimistic about forecast.

How Fast Did / Will You Grow GAAP Revenues? (Excluding companies <$2m in Revenue)

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We suspected that the high concentration of participants with >100% growth comes from the large number of small companies. Excluding companies with <$2m in revenues, we found growth rates showing a more traditional bell curve centered in the mid 30%s.

Median Growth Rate as a function of Size of Company

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Looked at more directly, it’s clear that the smallest companies experienced the highest growth rates. It’s also interesting to see that, at least among the sample, the mid-tier ($15MM to $40MM) is the slowest growing group.

Median Growth Rate as a Function of Contract Size

(Excluding Companies <$2MM in Revenue)

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Looking at the impact of median contract size on growth, we excluded the smallest companies (<$2MM in revenues), since most of them sell small deals. The resulting analysis, reveals marginal correlation between contract size and growth, with the fastest growers having median contract sizes between $1K and $25K.

Median Growth Rate as a Function of Sales Strategy

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Across the entire group, companies which mainly use internet distribution are realizing the highest growth rates.

Median Growth Rate as a Function of Sales Strategy

(Excluding Companies <$2MM in Revenue)

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However, eliminating the smallest companies again, we found growth rates for companies using mainly internet distribution actually lagged. Meanwhile, those using primarily inside sales experienced growth rates 10 points higher than field sales.

Median Growth Rate as a Function of Target Customer

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Growth rates among companies selling to very small businesses (VSB) are higher than those selling to SMB, which in turn are higher than those selling to Enterprise. The trend holds even after removing the smallest companies.

Go-to-Market

Primary Mode of Distribution

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Field sales remains the most popular way to sell, with 37% of participants employing it as their primary mode of distribution (50% if we exclude companies with <$2MM in revenues). Inside sales is not far behind, however, at 29%. Comparison with Previous Surveys: We saw a strong increase in the use of inside sales. For the 2012 survey, inside sales was the primary mode for just 20% of participants.

Primary Mode of Distribution as a Function of Median Initial Contract Size

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As expected, companies with larger median contract sizes tend to rely more heavily on field sales. Comparison with Previous Surveys: We found much heavier use of inside sales among companies in the mid-tier – in this survey, 54% of respondents in the $5-25k group used inside sales vs. only 33% in 2012.

CAC: How Much Do You Spend for $1 of New ACV from a New Customer?

(Excluding Companies <$2MM in Revenue)

Note: we used this question as a way to get at the metric “Months to recover CAC” that you will have seen me recommending in other blog posts such as SaaS Metrics 2.0.

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Respondents (excluding the smallest companies) spent a median of $0.92 for each dollar of new ACV from a new customer. The result drops to $0.85 if we include companies with <$2MM in revenues. Comparison with Previous Surveys: The result is consistent with the $0.90 and $0.93 we derived in the 2012 and 2011 surveys, respectively.

CAC on New Customers vs. Upsells vs. Renewals

(Excluding Companies <$2MM in Revenues)

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The median CAC for upsells is $0.17, or 19% of the CAC to acquire new customer dollars. The CAC for renewals is $0.14, or 15% of the CAC to acquire new customer dollars. Comparison with Previous Surveys: Similar result for upsells (was 20% in 2012); however, the renewal CAC is markedly higher this year (was just 10% in 2012).

CAC Spend by Primary Mode of Distribution

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The data suggest that field sales has the most expensive CAC at $0.96, with inside sales 10% lower at $0.86 and online distribution 43% lower at $0.55. Comparison with Previous Surveys: These trends were consistent with what we saw in our 2011 survey results, but not with our 2012 results, which showed less differentiation between field and inside, and surprisingly more cost for online distribution.

What Percentage of New ACV is from Upsells to Existing Customers?

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The median respondent gets 13% of new ACV sales from upsells; the largest companies rely more heavily on this “land and expand” phenomenon. Comparison with Previous Surveys: Consistent with our 2012 survey results.

Are the Fastest Growing Companies Relying More on Upsells?

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When we divide our respondent pool by growth rate, we find that the top growers in each size class generally upsell more than the slower growers.

Professional Services Impact on Go-to-Market

(Excluding Companies <$2MM in Revenue)

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Professional services play a minor role for most of the group, with the median company booking P.S. revenues equivalent to 11% of first year contract value. P.S. margins are in the high 20s%. (Note that we excluded companies with <$2MM in revenues, as most do not have significant P.S. revenues). Comparison with Previous Surveys: Very similar results to last year.

Professional Services (% of 1st Year ACV) as a Function of Target Customer

(Excluding Companies <$2MM in Revenue)

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As expected, companies which are focused mainly on enterprise sales have higher levels of P.S. However, at just 21% of first year ACV, we were surprised the number wasn’t higher.

Subscription Gross Margins

“What is your gross profit margin on just subscription/SaaS revenues?”

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Median subscription gross margins are 76% for the group. Note that, while not depicted here, the result does not change materially when removing the small companies from the group.

Freemium / “Try Before You Buy”

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Approximately 25% of companies make use of freemium in some way, although very little new revenues are derived here. Try Before You Buy is much more commonly used: two-thirds of the companies use it and many of those derive significant revenues from it. Comparison with Previous Surveys: Very consistent results with previous years.

Sales Commissions

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Median sales commission rate for the group is 9%. Comparison with Previous Surveys: Consistent with 2012 results.

Sales Commissions as a Function of Median Contract Size

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We were surprised to see very little relationship between sales commission rates and average contract sizes (except at the very low end). Comparison with Previous Surveys: In 2012, we saw the highest commission rates for the <$1k deal companies, and the lowest rates for the “elephant hunters” . That was not the case here.

Commissions for Renewals, Upsells and Multi-Year Deals

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Not surprisingly, commissions on renewals are typically deeply discounted, with a median rate of 2%. Upsells command a median rate of 6%, although roughly half of the companies pay full commissions on upsells. Comparison with Previous Surveys: Very similar results to 2012. The biggest change is in the third column, analyzing commissions on multi-year deals. In the 2013 survey, only 24% of respondents paid no additional commissions on the additional years; in 2012 almost half of the participants paid no additional commissions.

Cost Structure

Cost Structure

(Excluding Companies <$2MM in Revenue)

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The median numbers reflect the most operating leverage from improvements in gross margin, R&D and G&A, surprisingly more so than improvements in Sales & Marketing (Note that results from companies <$2MM in revenues have been excluded, and can be viewed in the breakout on the following page). Comparison with Previous Surveys: Very similar results as in previous years.

Median Cost Structure by Size

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For Comparison: Historical Results of Selected Public SaaS Companies

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Sales & Marketing Spend vs. Projected Growth Rate

(Excluding Companies <$2MM in Revenue)

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Surprisingly and interestingly, there is virtually no correlation in the survey results between sales & marketing spend (as a % of revenue) and growth rates. While this goes against conventional wisdom, it may simply reflect that CAC in some businesses is more efficient than in others. (Note that the smallest companies skew results due to more inflated growth and were thus removed from this analysis). Comparison with Previous Surveys: In the 2012 and 2011 surveys we saw the conventionally expected correlation, with higher S&M spend leading to higher growth rates.

Contracting & Pricing

Median Annual Contract Size (ACV) per Customer

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The median annual contract size (subscription component only) for the group was $20k per year. Comparison with Previous Surveys: As expected, with the increase in smaller-sized participants, this was lower, with the 2012 survey at $24k and the 2011 survey at $37.5k.

Median / Typical Contracts for the Group

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The average contract length is 1.5 years; and the average billing terms are quarterly (three months in advance). Comparison with Previous Surveys: Virtually the same median contract length as in the 2012 survey; however the median billing in the 2012 survey results was much longer at just under a year.

Contract Length as a Function of Contract Size

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The phenomenon of longer contract terms for larger contracts is pretty clear. Comparison with Previous Surveys: We did see more use of shorter contract lengths than in previous surveys – e.g., roughly 30% of companies in the $5-$25k group used month-to-month or less than one year contracts (vs. none in 2012). Even some companies in the “elephant hunter” groups had shorter contracts.

What is Your Primary Pricing Metric?

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Comparison with Previous Surveys: These results are virtually identical to 2012 and 2011.

Churn

Annual Gross Dollar Churn

(Excludes Companies <$2MM in Revenue)

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Annual gross dollar churn (without the benefit of upsells) is 9%. Note that although we excluded companies <$2MM in revenues, the result was similar when including these companies. Comparison with Previous Surveys: This result is a lot higher (and more conventionally sized) compared with results from 2012 and 2011, which both had very low median gross dollar churn rates of 5%.

Annual Unit Churn (Customer Churn)

(Percentage churn of # of paid customers at year-end 2011 that were still customers at year-end 2012)

(Excludes Companies <$2MM in Revenue)

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We introduced unit churn (by customer count) for the first time in this survey, and derived a median annual unit churn of 9% – the same as gross dollar churn. (This is somewhat surprising as conventional wisdom is that unit churn is generally higher than gross dollar churn, as smaller customers tend to churn more often).

Annual Gross Dollar Churn as a Function of Contract Length

(Excludes Companies <$2MM in Revenue)

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Not surprisingly, companies with very long-term contracts (2+ years) have the lowest churn. It is surprising, however, that month to month contractors do not churn higher than the median. Comparison with Previous Surveys: Fairly consistent with previous years.

Annual Gross Dollar Churn as a Function of Contract Size

(Excludes Companies <$2MM in Revenue)

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Companies with the largest deal sizes (>$250K) have the lowest churn, and those with the smallest deal sizes have the highest churn. However, churn rates in the broad middle range, for companies with average deal sizes between $1k and $250k, don’t show much of an explainable pattern. Comparison with Previous Surveys: Lack of correlation in the broad middle ranges was not the case in 2012 or 2011.

Annual Gross Dollar Churn as a Function of Primary Distribution Mode

(Excludes Companies <$2MM in Revenue)

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Those companies employing primarily field sales have lower churn rates than those employing primarily inside sales or online distribution. Comparison with Previous Surveys: Consistent with 2012 and 2011 survey results.

Annual Net Dollar Retention From Existing Customers

“How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”. We define this as the “net retention rate”

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The median annual net retention rates, including churn but also including the benefit of upsells, is 110%. Comparison with Previous Surveys: Very similar (slightly higher) than 2012 and 2011.

Capital Requirements

Capital Raised So Far

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Companies in the survey group have raised a median of roughly $9MM in capital so far. Comparison with Previous Surveys: Well below the $23MM and $22MM in capital raised by participants in the 2012 and 2011 surveys, respectively.

Analysis of Companies by Capital Raised

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Comparison with Previous Surveys: The 2013 group has generally received more investment relative to their size than the 2012 or 2011 groups (e.g., those receiving $5-$15M in investment so far had median revenues of $4MM, versus the same group in the 2012 survey having $8MM in revenues).

Capital Efficiency Expectations – Median Levels for the Group

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Comparison with Previous Surveys: Identical median historical growth vs. last year (40%). More conservative outlook (38% vs. 44% last year).

Conclusion

The survey contained some incredibly valuable data, as well as some surprising results. I look forward to seeing your comments on what you found to be surprising.

My strong thanks to David Spitz and Pacific Crest for allowing me to reprint the survey here. To sign up to contribute your data to the 2012 survey, click here. I also recommend following David Spitz on Twitter (@dspitz) to stay in touch with their other findings on SaaS businesses.

Important Disclosures from Pacific Crest:

Analysis of these survey results have been prepared by Pacific Crest Securities. Pacific Crest cannot verify accuracy of responses.

Observations and commentary contained herein relate solely to the survey results and cannot necessarily be applied elsewhere.  Certain other information contained herein has been obtained from sources believed to be reliable, but the accuracy and completeness of the information, and that of the opinions based thereon, are not guaranteed. This analysis is for information purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned.

Pacific Crest Securities and entities and persons associated with it, including its analysts, may have long or short positions or effect transactions in the securities of companies mentioned in this report, and may increase or decrease such holdings without notice. Pacific Crest Securities may make a market in the shares of any such company. These markets may be changed at anytime without notice. Pacific Crest Securities may have acted as lead or co-managing underwriter in one or more of such company’s U.S. equity offerings, and it may perform or seek to perform other investment banking services for any company referenced in this document.

Pacific Crest’s specific disclosures can be seen here:

http://www.pacific-crest.com/disclosures/

Pacific Crest’s privacy policy can be seen here:

http://www.pacific-crest.com/privacy-policy/

Survey respondents participated anonymously and confidentially.

About the Author

David Skok

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  • toddspitz

    Helpful info, as always!

    The graph titled “Are the Fastest Growing Companies Relying More on Upsells?” seems to be missing a key to differentiate between the green & red columns. What exactly are we looking at here? Otherwise, great insights!

    http://www.forentrepreneurs.com/wp-content/uploads/2013/08/2013PacificCrestSaaSSurvey_75E6/image_30.png

  • Dmitry

    Great summary! How’s ACV calculated? (e.g in CAC: How Much Do You Spend for $1 of New ACV from a New Customer?) Is this the annual revenue from the customer? E.g my acquisition cost is $500, my average annual revenue is ~$720, divided is 0.70 – is this right?

  • Jack Holt

    Thank you so much for this. I see all the backup tables in my deck….

  • coop1234

    Fantastic article / wonderful data. Thanks!

  • Toke Kruse

    Great post David. Much appreciated! Especially the part about churn.

  • Michael S

    Excellent report! One question – What percentage of CAC is marketing expense vs sales expense at various stage of SaaS?

  • Jason R. Wells

    Great Post…question on your CAC per ACV…This is not a months-to-break-even analysis, correct? Because I don’t see any accounting for Gross Margin. Just want to confirm I am reading this right.

  • That question was not asked, so we don’t have the answer. Sorry we can’t help there.

  • Yes – that is right.

  • You are correct. Thanks for pointing that out.

  • This is incredibly helpful. Thanks for publishing this David!

  • Dada

    didn’t quite get that unfortunately. could u explain this a little further? would be greatly appreciated!!

  • For the calculation “CAC: How Much Do You Spend for $1 of New ACV from a New Customer?)” – the $1 of new ACV refers to $1 of Annual Contract Value (i.e. the amount of money you would expect to make from that customer over a full year.) E.g if your customer acquisition cost is $500, and your average annual revenue per customer is ~$720, you would compute “how much you spend for $1 of new ACV” as $500 divided by $720, which gives the result 0.70.

  • trcull

    This is fantastically detailed, thanks! Just to confirm, spending $0.92 to get $1 of ACV means (if you ignore operating expenses) that your CAC is paid back in 0.92 of a year, right?

  • Correct.

  • Tomtuch

    The thing that is surprising is S&M spend as % of revenue of companies in the survey – I find that number to be very low relative to listed companies that you pointed out. I am also not sure how you back that %, as it seems to be in contradiction with the surveyed CAC calculations. If it costs a company $0.92 for $1 of new business ACV, then that means that with a renewal CAC of 0.14, that a company has to do 7x as much renewals business as new business to reach a S&M expense of 25% of revenue… I am not sure that this is realistic for the size of companies in the survey. Am I misreading the data?

  • Miro

    awesome results, very insightful! did you ask for an average customer life time (value)? would be interesting to see that as a function of ACV!

  • You can work that out by doing a calculation of 1/churn rate. Since approx. 9% was the average churn, this works out to be a very long 11 years. My sense is that the churn rate of 9% is lower than I have seen with anything other than SaaS companies selling to enterprises, so I am not sure I trust the 9% annual churn number.

  • Hi Todd, I will correct the graphic, but the Red are the bottom 50% growers and the Green is the top 50% growers. Thanks for pointing out the issue.

  • Good one for next year, no?

  • This is becoming a gold standard/seminal report on the state of SaaS. Thank you.

    It would great if they keep expanding the size of the survey base, and add some qualitative parts to it via additional interviews, to top off the excellent data.

    – btw- your link to the SaaS Metrics 2.0 post doesn’t have the right url. It should be:
    http://www.forentrepreneurs.com/saas-metrics-2/

  • Thanks for the input. What kinds of questions would you like to see in the qualitative interviews?
    Also thanks for the note about the broken link. It should be fixed now.

  • Unfortunately it is not always easy to get the answer to this, as most people categorize their expenses (particularly public companies) into three buckets: Sales & Marketing; R&D; and G&A. They will have the data elsewhere, but it might be harder for them to get at.

  • You’re welcome. Let me think further about that and email you. But off the top of my head, open-ended questions like: a) what were the lessons of the past year in terms of what worked really well vs. what didn’t, b) what are their top 3 priorities for the upcoming year, c) what are their top 3 hurdles/issues.

  • It’s a challenge indeed, but would be insightful, potentially. Thanks.

  • Thanks!

  • Please see your email (or junk folder, from me or Startup Management). I have included this in my weekly round-up. I hope you like it. (or go straight to http://startupmanagement.org)

  • You may well be right. There is no checking of how each company answers the questions. What these results show is simply how they have answered the questions. So hard to tell where the issue lies.

  • steve johnson

    Really found this information helpful David – thanks. Good for us to help benchmark.

  • justinmares

    I would love to see this broken out only for companies doing less than $2mm/year. That’s a bucket many small startups would be interested in as they look to scale, and it’d be good to benchmark against some of the other guys. Breaking this data out by industry would also be fascinating.

    Regardless, amazing data and survey. Thanks David for pulling this together.

  • Thanks for the suggestion. It makes a lot of sense. We are taking a look to see how hard that would be to do.

  • Wow, killer data. I’m especially surprised to see so much put into field sales. That’s the conclusion we had come to on our own, but we weren’t getting a warm fuzzy about it from our advisers…

  • That may be because so many of the survey respondents are at the larger end of the enterprise sale. Watch out for the use of field sales versus inside sales. In today’s world, only the largest deals with very complex products need a field sales organization. It is SIGNIFICANTLY more expensive than inside sales. Here is a good blog post of mine to read on this topic:
    http://www.forentrepreneurs.com/sales-complexity/

    It discusses how CAC (Cost to Acquire a Customer) rises exponentially as you add human touch to the sales process. SaaS has a major advantage over other types of sales, as your customer can try out the product easily.

  • Nanette Stavis

    What were the most popular applications? Is there any evidence on Customer ROI?

  • Those questions were not asked, so unfortunately we can’t answer that question. Sorry!

  • Biziby

    Very helpful information David. Thank you! We could definitely use the AVC calculation at http://www.biziby.com.

  • Peter

    Really would be of great benefit for us as well.

  • Dan Callahan

    Fantastic stuff here. Can you confirm one thing? When I see (xx%) listed for EBITDA and related margins, does that mean the average company is losing money?

    Thanks

    Dan

  • Yes that is correct.

  • Arnon Avi

    This is realy great, thank you!
    in this buisness model, where do you allocate delivery managment cost? COGS or R&D ?
    Thank you,
    Avi

  • Delivery management would come out of COGS.

  • Really excellent analysis, David. I’m guessing many of your readers have specific (self-motivated) interests and would love to take a crack and uncovering other micro-trends in the data and report back. Is the raw (anonymized) data available anywhere to allow for more detailed analysis of specific market segments, etc?

  • Unfortunately not. But we are looking into analyzing the data for sub $2m revenue companies.
    Best, David

  • Thank you for the link!

    Can you think of any businesses that employ a hybrid “light touch” inside sales process initiated by an actual field presence? I’m thinking of customers like mom-and-pop small businesses getting pitched relatively simple SaaS products by an in-person, local townie, sales rep…

  • How did revenue per employee vary by company?

  • David

    Realistically, how much can $1.5m upfront be converted to over 5 years, from startup?

  • There is no single answer to this question. Some companies are able to get to breakeven and good revenue on that amount, while others would hardly have a fraction of their product developed. The reason is that each company has very different investment needs to build their product and get it to market. Also sometimes when you go to market, the market is not ready, and you can spend several years educating the market at high cost before they will buy in any decent quantity.

  • Oh gosh, I forgot about educating the market…..I hope this isnt the case, in my case, David.

    I have 100 other questions but a forum thread is not the appropriate place to ask unfortunately!

  • gray chynoweth

    I’d like to double down on the comment about this being the ‘gold standard’ for this type of thing. This is a very, very helpful run down for anyone running or investing in a SaaS company. Kudos to you and PCS!

  • Thank you for taking the time to write that.