2016 Pacific Crest SaaS Survey – Part 2

We recently released Part 1 results of our annual SaaS Survey, which shares data and insights on growth rates, go-to-market trends and cost structure. A new highlight in Part 1 of this year’s results includes data on balancing growth and profitability in SaaS companies, commonly known as The Rule of 40%.

Part 2 of the survey results dives into:

  1. A comparison of application delivery methods
  2. Operational costs and gross margins
  3. Contract terms
  4. Retention and churn
  5. Capital requirements
  6. 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.

This year marks the fifth annual SaaS survey in partnership with Pacific Crest Securities. Thanks again to my partners in this effort, David Spitz and his team at Pacific Crest Securities (@dspitz and @PacCrestSec) and to forEntrepreneurs readers who completed the survey!

Operational Aspects

How is Your SaaS Application Delivered?

2016-saas-survey-application-delivery

67% of participants use third parties predominantly (3/4 of which was AWS). Expectations for the future show little change as third party application delivery continues to gain popularity. The trend toward using third party public cloud is huge (mostly AWS). Self managed is down from 37% last year to 33% this year and the percentage planning to use AWS three years from now increased from 44% last year to 64% this year.

SaaS Application Delivery Method as a Function of Size of Company

2016-saas-survey-delivery-method-function-size-of-company

When filtered by company size, smaller respondents reported more frequent use of third-party providers as their primary application delivery method, while the largest companies were more likely to use self-managed servers.

Subscription Gross Margin as a Function of SaaS Application Delivery Method

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-gross-margin-function-of-delivery-method

Median subscription gross margins did not appear to vary much when filtered by SaaS application delivery method (note that Salesforce data is sparse).

Operational Costs as a Function of SaaS Application Delivery, Grouped by Size Tiers

2016-saas-survey-operational-costs-function-of-delivery-size-tiers

This year’s results appear somewhat counterintuitive. Larger companies’ accounting shows operating costs as a greater percentage of revenue.

For data on cost structure and “The Rule of 40%”, see Part 1 of the survey results.

Contracting & Pricing

Median Annual Contract Value (ACV) of a Customer

2016-saas-survey-median-acv-of-a-customer

The median annual contract size (subscription component only) for the group was $25K per year. These results are somewhat above the previous survey medians of $21K, $21K, $20K in 2015, 2014 and 2013, respectively.

Median / Typical Contract Terms for the Group

2016-saas-survey-contract-terms-for-groups

The median average contract length is 1.3 years. The median billing term is seven months in advance. These results are very comparable to 2015, with average contract length shortening from 1.5 to 1.3 years and average billing period increasing one month over 2015 to seven months.

Contract Length as a Function of Contract Size

2016-saas-survey-contract-length-as-function-of-contract-size

The phenomenon of longer contract terms for larger contracts is pretty clear. Companies in the “elephant hunter” group are less aggressively booking super long-term contracts. Respondents with >$250K median ACV book nearly 25% of their contracts at 3 years or longer (down from 35% in the 2015 group).

What is Your Primary Pricing Metric?

2016-saas-survey-primary-pricing-metric

These results are largely in-line with 2015, 2014 and 2013 results. For those interested in reading about why having a variable pricing axis is so important in a SaaS business, please refer to this post: Scalable Pricing: A Key Tool for SaaS Success.

Retention & Churn

Annual Unit Churn(1)

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-annual-unit-churn

Reported median annual unit churn (by customer count) is 10% for the group. This median has remained relatively consistent with 2015 findings.

Annual Unit Churn as a Function of Contract Length

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-unit-churn-function-of-contract-length

Not surprisingly, companies with longer contracts (2+ years) reported the lowest annual unit churn.

Annual Gross Dollar Churn(1)

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-annual-gross-dollar-churn

Median annual gross dollar churn (without the benefit of upsells) is ~8%. This result is comparable to past survey results (7% in 2015, 6% in 2014, 8% in 2013).

Annual Gross Dollar Churn as a Function of Contract Length

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-gross-dollar-churn-function-of-contract-length

As with unit churn, companies with longer contracts (2+ years) tend to report lower annual dollar churn. Companies with shorter contracts (under 2 years) saw increased dollar churn compared to last year; contracts 2 years or longer were relatively consistent with prior survey results.

Annual Non-Renewal Rates(1) vs. Gross Dollar Churn for Companies with Long-Term Contracts

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-non-renewal-rates-vs-gross-dollar-churn

By definition, non-renewal rates are higher than gross dollar churn rates. However, it is interesting to see that the non-renewal rates are also higher for shorter duration contracts.

Annual Gross Dollar Churn as a Function of Median Contract Size

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-gross-dollar-churn-function-of-contract-size

As contract sizes increase, gross dollar churn consistently trends downwards (presumably related to longer contract terms). This year’s results were largely consistent with last year’s. However, churn trended up markedly for the smaller size contract groups (<$5K median ACV).

Annual Gross Dollar Churn as a Function of Primary Distribution Mode

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-gross-dollar-churn-distribution-mode

Those companies employing primarily field sales had lower gross dollar churn rates than those employing primarily inside sales or mixed distribution. Gross dollar churn among companies with an internet go-to-market strategy saw a meaningful increase, up from 8% in 2015, though this could be due to a small sample size for this group.

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?”(1)

2016-saas-survey-net-dollar-retention

The median annual net dollar retention rate, including churn and the benefit of upsells, is 102%. The result does not change materially when removing the smallest companies (<$2.5MM in revenue) from the group. These results are largely consistent with the past two years’ results (2015: 104% and 2014: 103%).

In other posts on forEntrepreneurs, I have referred to the situation where you have a greater 100% net dollar retention as “negative churn”. For those interested in learning how to achieve negative churn, this slide deck may be of interest: The Key Drivers for SaaS Success.

Capital Requirements

Analysis of Companies by Equity Capital Raised

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-equity-capital-raised

The 2016 respondents have less revenue traction per dollars raised than previous years’ groups.

Capital Efficiency

2016-saas-survey-capital-efficiency

Use of Debt Capital Among Private SaaS Companies

2016-saas-survey-use-of-debt-capital

Accounting Policies

Subscription Revenue Recognition Policies

(Excluding Companies <$2.5MM in Revenue)

“When do you typically begin recognizing subscription revenues on a new contract with a new customer?”

2016-saas-survey-subscription-revenue-policies

Approximately 53% of respondents indicated they begin recognition very soon (within a week or two) after signing new contracts. It’s interesting to see that many companies with significant services were still able to start subscription revenue recognition quickly. A greater percentage of companies are recognizing subscription revenue “a few months or more after signing”; 25% this year vs. 17% last year.

Professional Services Revenue Recognition Policies

“What is the predominant mode for recognizing professional services revenues?”

2016-saas-survey-professional-services-recongition

The clear majority of respondents offering professional services indicated that they recognize that revenue as the services are provided.

Sales Commission Cost Recognition Policies

(Excluding Companies <$2.5MM in Revenue)

“How do you recognize sales commission costs (deferred or recognized up-front)?”

2016-saas-survey-sales-commission-cost-recognition

We also inquired as to the recognition of sales commission costs. We found ~3/4 of respondents indicate that they recognize costs up-front. Compared to previous surveys, there is a slight shift toward up-front recognition vs. 72% last year.

The benefit of recognizing revenue in a deferred manner is that you avoid missing your expense and profitability goals when you have a large bookings quarter. The downside is that it’s more complex to maintain the commission tracking system. For more details, you may find this post to be of interest: SaaS Sales Compensation: How to Design the Right Plan.

Accounting Policies Across Selected Accounting Firms

(Excluding Companies <$2.5MM in Revenue)

2016-saas-survey-accounting-policies-across-selected-firms

 

We’d love to hear your comments below about the 2016 SaaS survey results and what data would be useful to see included in future surveys.

You may also be interested in the forEntrepreneurs SaaS Survey Infographic for takeaways and advice relevant to the metrics included in this year’s survey results.

For more benchmarks and insights on growth trends, go-to-market strategy and cost structure, see SaaS Survey Results – Part 1.

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

If you enjoyed reading the 2016 SaaS Survey results, you may also be interested in:

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David Skok

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  • Hi David, thanks for the unbelievably thorough work on this. I find the primary pricing metrics to be especially interesting. It seems with usage/transactions on the rise (especially after 2015’s numbers) that we’re due to see a lot of change in the next year in the ways SaaS price their subscriptions — and perhaps open themselves to greater business opportunities from gig economy demographics.

    As of now, I’m really curious to see if Trello’s acquisition will mean they finally do away with their per-user model and adopt a usage-based subscription that better speaks to the needs of small businesses: http://nation1099.com/trello-acquisition-atlassian/ (your research was a huge help in putting this together!)

  • Happy to have helped. You raise an excellent point in your post that is a wasted opportunity by companies not thinking of that particular customer type when doing their pricing. I would think it is worth talking to companies like Trello to see if they are willing to be flexible.

  • At iLiv we gave up per user pricing 8 years ago when we found that it worked against one of the core objectives of our product: cross-enterprise collaboration. What we looked at for a replacement was: How does the money flow around the value that we are helping our customers create? As one of the players in that value creation, we position ourselves to share in the bounty. This not unlike old-school installed enterprise software pricing, brought up-to-date for the SaaS delivery model.

  • Cross-enterprise collaboration . . . that’s a much better way to put it that Ben and I were trying to put our fingers on when we were discussing this topic. It seems that most SaaS products are priced to inhibit that.

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