2016 Pacific Crest SaaS Survey – Part 1

For the fifth year in a row, we’re proud to work with Pacific Crest Securities, a SaaS-focused investment banking firm, to share results from a survey of 336 SaaS companies. The survey represents deep benchmarking data and insights on growth and operation of SaaS companies.

Many thanks to the readers of forEntrepreneurs who participated in the survey. Thank you also to David Spitz and the team at Pacific Crest Securities (@dspitz and @PacCrestSec) for their hard work on the survey.

To learn more about Pacific Crest Securities or download the full report, click here.

Part 1 of the survey results focuses on growth rates, go-to-market trends and cost structure. A new highlight in this year’s survey is data on balancing growth and profitability in SaaS companies, commonly known as The Rule of 40%.

You can find Part 2 results here. Part 2 compares application delivery methods, covers more on operational costs, and offers data on gross margins, contract terms, churn rates, capital requirements and accounting methods.

We’ve also created the forEntrepreneurs 2016 SaaS Infographic. The infographic pulls together major takeaways from the SaaS Survey and ties in advice and insights on key metrics.

If you’d like to participate in or receive results from the next SaaS survey, sign up now:

Intro

Survey Participants

  • 336 senior executives from a broad diversity of SaaS companies
  • $5MM median revenues with over 60 companies >425MM
  • ~50 median FTEs
  • Median customer count: ~250; 28% with >1,000 customers
  • 75% of companies were headquartered in the US
  • ~$25K median annual contract value (ACV)
  • 44% of companies use field sales as their predominant mode of distribution, while 23% of companies use predominantly inside sales

Survey Participant Geography (HQ)

2016-saas-survey-geography

Survey Participant Size Distribution

2016-saas-survey-participants

Revenue per FTE Efficiency

2016-saas-survey-revenue-per-fte-efficiencyResults were somewhat lower than last year’s overall median of ~$112K and a median of $142K for companies >$2.5MM in revenue.

Growth Rates

How Fast Did / Will You Grow GAAP Revenues?

2016-saas-survey-participants-gaap-revenue-growth-rate

The 2015 median revenue growth rate was 44%, while the median projected growth rate for 2016 is 48%. These results are largely consistent with last year.

How Fast Did / Will You Grow GAAP Revenues?

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-participants-gaap-revenue-growth-rate-2

As expected, many of the fastest growing companies are among the smallest. Eliminating them brings median growth rates down ~10 percentage points. Median growth rates are consistent with last year’s results. However, this year’s respondent pool was more evenly distributed.

Median Growth Rate as a Function of Size of Company

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-geography-growth-rate-company-size

Survey results indicate that companies in the $7.5MM-$15MM range are among the fastest growers. The median growth in this range is much greater than the median of companies half their size. Interestingly, there was a similar bump-up last year, but for companies between $5MM-$7.5MM.

Median Growth Rate as a Function of Size of Company – Middle Third Group

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-growth-rate-middle-third

Looking at the middle third of respondents in each size group suggests that in addition to companies in the $7.5MM-$15MM range, smaller companies are also among the fastest growers.

Median Growth Rate as a Function of Contract Size

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-growth-rate-contract-size

There doesn’t appear to be any relationship between median contract size and growth other than a bump-up for the <$1K and $15K-$25K groups (though this could be skewed by sparse data in those groups). Last year, the bump-up occurred for companies in the $100K-$250K AVC range.

Median Growth Rate as a Function of Sales Strategy

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-growth-rate-sales-strategy

Median growth rate among field-dominated companies lagged behind inside-sales dominated companies by 7 percentage points. This years results mirrored field vs. inside sales results from 2015.

Median Growth Rate as a Function of Target Customer Size

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-growth-rate-target-customer-size

For companies >$2.5MM in revenues, target customer size was not a major indicator of growth, though companies targeting SMBs reported modestly higher revenue growth. Compared to last year’s survey, there was a big change for the “mixed” group. The 2015 survey showed a distinct advantage for mixed/balanced target customer companies. However, this year’s results were in-line with the survey’s historical norms.

Sales and Marketing Spend vs. Growth Rate

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-sales-marketing-spend-growth-rate

Not surprisingly, companies that spend more on sales and marketing (as a % of revenue) generally grew at a faster rate than those that spent less. This year’s results were in-line with previous surveys.

Go-To-Market

Primary Mode of Distribution (1)

2016-saas-survey-primary-distribution-mode

While field sales remains the most popular way to sell for companies >$2.5MM revenue, companies with <$2.5MM revenue tended to use inside sales as their primary mode of distribution. In comparison with previous surveys, companies $2.5MM+ have shifted to greater use of field sales (+12 percentage points from 2015).

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

2016-saas-survey-primary-distribution-mode-median-contract-size

Analyzed by contract value, field sales dominates for companies with median deals over $25K. Inside sales strategies are most popular for companies with $1K-$25K median deal sizes. In comparison to previous surveys, it appears there is more confidence in inside sales in the $1K-$25K range.

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

(Excluding Companies <$2.5MM in Revenue)

“How much do you spend on fully-loaded sales & marketing cost basis to acquire $1 of new ACV from a new customer?”

2016-saas-survey-spend-for-new-acv

Respondents (excluding the smallest companies) spent a median $1.13 to acquire each dollar of new ACV from a new customer. The result drops to $1.00 if we include companies with <$2.5MM in revenues. The median spend to acquire each dollar of new ACV from a new customer this year is similar to last year’s result of $1.18.

Note to regular ForEntrepreneurs readers: The way CAC is measured here is different than how I normally measure CAC (see SaaS Metrics 2.0 –  A Guide to Measuring and Improving What Matters). In those posts CAC is the average amount that it costs to acquire a single customer. In this survey, CAC is measured as the cost to acquire a dollar of ACV (annualized contract value).

CAC Ratio on New Customers vs. Upsells vs. Expansions vs. Renewals

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-cac-ratio

The median CAC ratio per $1 of upsells is $0.27, or 24% of the CAC to acquire each new customer dollar. The CAC ratio number for expansions is $0.20, or 18% of the CAC to acquire each new customer dollar. For renewals, it is $0.13, or 12%. These results are substantially similar to previous years. If you want to read more on CAC, you may find this post to be of interest – Startup Killer: The Cost of Customer Acquisition.

CAC Ratio on New Customers as a Function of Size of Company

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-cac-ratio-size-of-company

Larger companies tended to report increasing CAC ratios for new ACV from new customers.

CAC Ratio Spend by Primary Mode of Distribution

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-cac-ratio-distribution-mode

Other than internet, where CAC appears significantly lower (but data is sparse), there is no significant correlation between go-to-market approach and median CAC, nor is there a meaningful difference between the distribution of responses.

CAC Composition: Sales vs. Marketing Cost % of CAC

2016-saas-survey-cac-composition

Overall, the median company devotes 30% of their CAC to marketing expenses, with the remainder allocated to sales. However, internet sales-driven companies have a much greater reliance on marketing, with 65% of the median company’s CAC budget devoted to marketing. Besides a slight shift towards greater marketing spend by field sales companies, the results are largely consistent with last year’s results.

CAC Payback Period (Gross Margin Basis)

We used answers on CAC ratio and subscription gross margin questions to determine an implied CAC payback period.

2016-saas-survey-implied-cac-payback

Respondents reported an implied median CAC payback period of ~18 months, though there was a wide distribution of responses.

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

2016-saas-survey-acv-from-upsells-expansions

The median respondent gets 15% of new ACV sales from upsells and expansions; larger companies rely more heavily on upsells and expansions. This year’s results are consistent with last year’s median of 16%, though companies with revenue between $10MM-$40MM are relying more heavily on upsells and expansions.

Professional Services’ Impact on Go-To-Market

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-professional-services-impact

Professional services play a minor role for most companies, with the median company booking P.S. revenues on new deals equivalent to 16% of first year subscription contract value. Median P.S. margins are approximately 22%. These results are consistent with last year’s results.

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

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-professional-services-target-customer

As expected, companies that are focused mainly on enterprise sales have higher levels of professional services. In comparison with last year’s survey, attach rates ticked down for Enterprise and SMB (2015: Enterprise 26%, SMB 18%).

Subscription Gross Margin

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

2016-saas-survey-subscription-gross-margin

Median subscription gross margins are 78% (nearly identical when removing the smallest companies from the group). These results are virtually unchanged from 2015, 2014, and 2013 results.

Direct Sales Commissions by Sales Strategy

2016-saas-survey-sales-commission-by-strategy

Survey results did not point to a significant difference in direct commissions between companies that predominantly use a field go-to-market strategy vs. inside sales. However, the median fully-loaded commission for field sales (12%) was higher than that for inside (10%).

Sales Commissions as a Function of Median Contract Size

2016-saas-survey-sales-commissions-contract-size

Median direct sales commission rates did not vary across contract sizes. However, fully-loaded sales commission rates did increase modestly with larger contract sizes. Last year’s survey also saw a higher degree of consistency in direct sales commissions.

Commissions for Renewals, Upsells and Multi-Year Deals

2016-saas-survey-commissions-renewals-upsells

Commissions on renewals are either non-existent or very low, with 40% paying no commission and a median rate of 3% among those paying one. Upsells command a median rate of 7% and more than half of companies pay full commissions on upsells. The most significant changes compared to last year include: 1) Upsells: 59% paid full commission rates on upsells vs. 45% in last year’s group; comparable to 58% in 2013 results. 2) This year, only 11% paid full commission on TCV for multiple year contracts vs. 20% in last year’s group.

Cost Structure

Cost Structure

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-cost-structure

Results are largely in-line with previous results, but EBITDA and FCF margin were much more negative than respondents predicted (1% EBITDA margin and 3% FCF margin for 2015).

Median Cost Structure by Size

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-cost-structure-by-size

This year’s results are largely in line with last year’s survey. A few anormalities from last year have been eliminated.

For Comparison: Historical Results of Selected Public SaaS Companies

2016-saas-survey-select-public-companies

Measuring Performance Based On an Index of Growth Plus Profits

(Including Companies $15MM+ in Revenue)

2016-saas-survey-index-of-growth-plus-profits

In this year’s survey, we sought to evaluate how SaaS companies of scale (at least $15MM of 2015 GAAP revenue) trade off growth and profitability (as measured by EBITDA margin). This has become a hot topic for management and investors as attitudes have shifted away from “growth at any cost”. The median growth plus profit margin in the group was 20%.

Measuring Survey Participants Against “The Rule of 40%”

(Including Companies $15MM+ in Revenue)

2016-saas-survey-rule-of-40

~26% of respondents with at least $15MM in 2015 GAAP revenue had a revenue growth rate + EBITDA margin of 40% or higher – “The Rule of 40%”, a popular benchmark for top SaaS company performance.

Comparison of “The Rule of 40%”: Leaders vs. Others

(Including Companies $15MM+ in Revenue)

2016-saas-survey-comparison-of-40-leaders-vs-others

The median results of those respondents meeting or exceeding “The Rule of 40%” showed that they tended to report lower churn and lower CAC ratios, be more enterprise-focused with larger contracts, rely more heavily on field sales and more often report a vertical focus.

For Comparison: Growth and Profitability of Public SaaS Companies

2016-saas-survey-growth-and-profitability-public-saas

The median TTM revenue growth rate + adj. EBITDA margin for publicly traded SaaS companies was ~37%, implying that just under one half met or exceed “The Rule of 40%”.

Part 2 Results & forEntrepreneurs 2016 SaaS Survey Infographic

You can find Part 2 results here. Part 2 compares application delivery methods, covers more on operational costs, and offers data on gross margins, contract terms, churn rates, capital requirements and accounting methods.

We’ve also created the forEntrepreneurs 2016 SaaS Infographic. The infographic pulls together major takeaways from the SaaS Survey and ties in advice and insights on key metrics.

If you are interested in SaaS metrics and benchmarking your company, you may find the following blog post to be of interest:

SaaS Metrics 2.0 –  A Guide to Measuring and Improving What Matters

I’d love to hear your thoughts and feedback on Part 1 of the results. Please leave a comment below!

If you’d like to participate in or receive results from the next SaaS survey, sign up now:

About the Author

David Skok

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  • Dennis Von Ferenczy

    Thank you, David, for these great insights – helps a lot as benchmark/comparison for our SaaS companies.

  • David, that Revenue per FTE Efficiency number is troubling. Why do you suspect it’s so low?

  • Brooke Goodbary

    I’ve come to look forward to the release of this report and this year was no exception. I wrote a summary of some key take aways for SaaS Customer Success teams here: http://bit.ly/2fFQxLY Highlights include the increasing importance of upsells and expansions, and knowing which customers are churning and why. Thanks for sharing these great insights!

  • Thanks Brooke!

  • petereilly

    David,

    What’s the difference between direct and fully loaded commissions?

  • Fully loaded include all sales managers, and Sales VP’s.

  • Lisa James

    David,

    Thanks so much for this well put together information. I’ve never been great with math but your matrix (laugh-out-loud) well put together graphs and charts has sparked a new love for math understanding.

    I’m pursuing a Masters from Full Sail University in Innovation & Entrepreneurship, and your article ‘The Power of Free’ was a read for this month’s course in Business Model Development. After reading that article, I must say I went on to read five more articles that you’ve written.

    Thank you again for all the value you’ve shared.

    Best to you,
    ~Lisa

  • Hi Lisa, thanks for leaving the nice comment. I am glad to have stimulated your curiosity about using math, as it really is amazing how much of the core of business is governed by very simple math. See this recent presentation for the key math behind bookings here: http://www.forentrepreneurs.com/saastr-2017/
    Best of luck with your Masters!
    David

  • Lisa James

    Hi David,

    Thanks for your reply and the link…..and best to you too! Now time for me to take a break from homework and check out this link! (smiley face)

    ~Lisa

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