Last week I shared the results from Part 1 of our survey in which 300+ SaaS companies shared data on their growth and go-to-market strategies. This week we dive into the results from Part 2 of the survey where we compare application delivery methods, operational costs and gross margins, contract terms, churn rates, capital requirements and accounting methods. This being our 3rd annual SaaS survey, we’re able to share this year’s results and look at how key metrics have changed. I look forward to hearing your comments below.
For the third year in a row, we worked together with Pacific Crest Securities, an investment banking firm with a specific focus on SaaS, to survey 306 SaaS companies. This represents nearly double the # of respondents from last year, giving us deeper benchmarking data and insights to share on the growth and operations of the companies in this space.
We also welcome this year the participation of OpenView, an expansion stage venture capital firm specializing in B2B Software, who brought additional support.
I want to extend my personal thanks to the many readers of this blog who participated in the survey. My thanks also go out to David Spitz and his team at Pacific Crest Securities (@dspitz and @PacCrestSec, respectively on Twitter) for their hard work on the survey. Part 1 of the results of the survey, which focuses on growth rates and go-to-market trends, are posted below. Part 2 of the results, which compare application delivery methods, operational costs and gross margins, contract terms, churn rates, capital requirements and accounting methods, can be found in Part 2 of the SaaS Survey.
Info about the Survey Participants
A larger, more diverse group of SaaS companies participated this year:
- $4MM median revenues, but nearly 50 companies with >$25MM and 80 with <$1MM
- 46 median full-time employees
- 284 median customers, with 25% having >1K customers
- $21K median annual contract value (ACV), with 30% below $5K and 20% above $100K
- Good mix of sales channels including field sales, inside sales and mixed distribution models
- Participation from around the world, though primarily U.S.
Survey Participant Geography
Survey Participant Revenue Distribution
While the number of respondents nearly doubled from last year’s survey, the overall distribution of participating companies by revenue and size was very similar.
How Fast Did / Will You Grow GAAP Revenues?
Historical rates for the group were 37% for 2013, while the median projected growth for 2014 is 42%. These rates remain very healthy, but both are lower than the 2013 survey’s results of 41% and 47% for 2012 historical growth and 2013 estimated growth.
How Fast Did / Will You Grow GAAP Revenues? (Excluding companies <$2.5MM in Revenue)
A high concentration of participants with >100% growth comes from the large number of small companies. Excluding companies with <$2.5MM in revenue, we found a more traditional bell curve distribution, with median 2013 growth at 29% and projected growth for 2014 at 33%. These rates were still below last year’s survey results of 32% and 36% for 2012 historical growth and 2013 estimated growth.
Median Growth Rate as a function of Size of Company (Excluding companies <$2.5MM in Revenue)
While less pronounced this year, companies ranging from $5MM – $15MM experienced the highest growth.
Median Growth Rate as a function of Size of Company – Middle Third Group (Excluding companies <$2.5MM in Revenue)
There is a wide range of growth rates across SaaS companies in the survey, especially among smaller companies. This chart shows the ranges among the middle third group (the 33rd-67th percentile), as measured by 2013 GAAP growth.
Median Growth Rate as a function of Contract Size (Excluding companies <$2.5MM in Revenue)
The fastest growers appear to have median average contract sizes between $5K and $100K. Those with median ACVs outside this range are growing about 10 percentage points slower. We’ve consistently seen the $5K-$25K group being among the strongest, but last year we saw more strength in the $1K-$5K group (not seen here) and less strength in the $25K-$100K group than we see here.
Median Growth Rate as a function of Sales Strategy (Excluding companies <$2.5MM in Revenue)
When removing the smallest companies from the distribution, we find growth rates for companies using mainly Internet distribution lagged. Companies with mixed distribution strategies appear to be more agile and reported the highest growth. There was no distinguishable difference between growth rates for field sales vs. inside sales dominated companies. Rates are largely in line with last year’s survey.
Median Growth Rate as a function of Target Customer(1)
Companies focused on enterprise customers experienced somewhat lower growth rates. However, most, if not all, of the difference can be attributed to the fact that these respondents tend to be larger. VSB-focused vendors remain the fastest growers, but their advantage was significantly greater in the 2013. Meanwhile, enterprise-focused vendors have lost ground (from 38% last year to 33% this year).
Primary Mode of Distribution
Field sales remains the most popular way to sell, with 41% of participants employing it as their primary mode of distribution (51% if we exclude companies with <$2.5MM in revenues). Inside sales is 10% points behind at 31% (27% if we exclude the smallest companies). Results were nearly identical to last year.
Primary Mode of Distribution as a Function of Median Initial Contract Size
Over half of the companies with median ACVs below $1K relied primarily on Internet distribution, but once over $1K median ACV, companies shifted heavily towards inside sales. At the $25K ACV breakpoint, companies tended to shift to field sales. These results were largely consistent with prior year results. Given that companies employing a mixed distribution strategy tend to have higher growth rates (shown in the growth section above), it may be worth companies testing additional distribution strategies as their contract size grows to support it.
CAC(1): How Much Do You Spend for $1 of New ACV from a New Customer? (Excluding companies <$2.5MM in Revenue)
Respondents, excluding the smallest companies, spent a median of $1.07 to acquire each dollar of new ACV from a new customer. This drops to $0.90 if we include the companies <$2.5MM in revenues. This result excluding the smallest companies is noticeably higher than the $0.92 and $0.90 we derived in the 2013 and 2012 surveys respectively. (With pressure on growth rates, it’s possible that companies are spending more to stay competitive. In the cost section to come later we see higher sales and marketing spend, particularly for the larger companies whose growth increased.)
Note to regular ForEntrepreneurs readers: the way that CAC is measured in the question above is different to how I normally measure CAC in my other blog posts e.g. “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 the question above, CAC is measured as the cost to acquire a dollar of ACV (annualized contract value). This is very similar to my metric: “Months to recover CAC”. i.e. if it costs you a dollar to acquire a dollar of ACV, then it will take you 12 months to recover that CAC. For the median in the graphic above of $1.07 to acquire a dollar of ACV, that means it will take 12 x 1.07 = 12.84 (or about 13 months to recover.)
CAC on New Customers vs Upsells vs Renewals (Excluding companies <$2.5MM in Revenue)
The median CAC per $1 of upsells is $0.18, or about 17% of CAC to acquire each new customer dollar. The CAC for renewals is $0.12, or 11% of CAC to acquire each new customers dollar. The relative costs of upsells and renewals to new customer CAC both decreased slightly from last year.
CAC Spend by Primary Mode of Distribution
As expected, field sales has the most expensive CAC. And, fields sales has widened the gap as its cost has increased, while inside and internet sales have remained relatively flat. Inside sales is now 17% lower than field sales (vs 10% lower last year) and Internet sales is 47% lower (vs 43% lower last year.) Channels sales at $0.53 CAC are at par with online distribution. (For readers interested in digging deeper into how CAC changes as the method of selling goes from touchless Internet sales to inside sales to field sales, you may enjoy this post: “How sales compexity impacts startup viability“.)
What Percentage of New ACV is from Upsells to Existing Customers?
The median respondent gets 14% of new ACV sales from upsells,whereas larger companies rely more heavily on upsells. The $10MM – $15MM and $15MM – $25MM cohorts have a noticeably lower median % of new ACV from upsells compared to the 25% and 22% in the 2013 survey, respectively.
Are the Fastest Growing Companies Relying More on Upsells?
In this chart, we looked within each size category and split each group between the fastest growers and the slowest growers, to see if they had different patterns of reliance on upsells. We found that, beyond $10MM in revenues, the fastest growers tend to have noticeably more reliance on upsells. Last year’s results showed much wider gaps between the bottom and top 50% growers, also with the faster growers relying more on upsells.
Professional Services Impact on Go-to-Market (Excluding Companies <$2.5MM in Revenue)
Professional services play a minor role for most of the group, with the median company booking P.S. revenues equivalent to 13% of first year contract value. P.S. margins are in the low 20%’s. (Note that we excluded companies with <$2.5MM in revenues, as many do not have significant P.S. revenues). These results are relatively similar to previous years, though last year’s median professional services margin was 29%.
Professional Services (% of 1st Year ACV) as a Function of Target Customer (Excluding Companies <$2.5MM in Revenue)
As expected, companies which are focused mainly on enterprise sales have higher levels of services. However, at just 18% of first year ACV, we were surprised the number wasn’t higher. These are consistent with 2013 survey results.
Subscription Gross Margins: “What is your gross profit margin on just subscription/SaaS revenues?”
Median subscription gross margins are 79% for the group (78% when removing the smallest companies from the group), which are very similar to 2013 and 2012 results.
Freemium / “Try Before You Buy”
Approximately 30% of companies derive some amount of new ACV from “freemium” strategies, though it’s very rare that a company drives their business on it. The “Try Before You Buy” strategy is much more common: 60% of companies derive revenues through this strategy, and one-third derive the majority of their new ACV through “Try Before You Buy”. These findings are very consistent with results from previous years.
The median reported sales commission rate for the group is 9% of ACV.
Sales Commissions by Sales Strategy
The survey results indicate that median sales commission rates are only slightly higher for Field Sales versus Inside Sales, which is consistent with last year’s results.
Sales Commissions as a Function of Median Contract Size
As seen in previous surveys, there was relatively little correlation between sales commission rates and average contract sizes up to ACV of $250K. “Elephant hunters” selling above $250K report a drop in commission rates. “Elephant hunters” experienced the lowest commission rates in 2014, which was not the case in 2013, but was consistent with results from years prior.
Commissions for Renewals, Upsells and Multi-Year Deals
Not surprisingly, commissions on renewals are typically deeply discounted, with a median rate of 2%. Upsells command a median rate of 7%, although more than half of the companies pay full commissions on upsells. Similar results were found last year. The biggest change is in the analyzing commissions on multi-year deals, found above in the third column. In the 2013 survey, only 24% of respondents paid no additional commissions on the additional years; this year, similar to 2012 results, that number was notably higher at 42%.
Effect of Renewal Commission Rates on Churn (Excluding Companies <$2.5MM in Revenue)
One natural question to ask is whether companies who pay higher commissions on renewals experience lower churn. The answer is a qualified “yes”, at the very high end of renewal commission rates (>9%). However, churn rates among the lowest payers (and companies who don’t pay any commissions at all on renewals), are lower than churn rates for middle-of-the-pack payers.
Median Growth Rate as a Function of Commissions on Renewals (Excluding Companies <$2.5MM in Revenue)
Although it’s difficult to draw too many conclusions from this chart comparing renewal commission rates and growth rates – because of small sample sizes – among the very high end of renewal commission payers it is clear that growth rates actually appear lower.
More to come…
If you are interested SaaS metrics and benchmarking your firm, you may also find the following blog post to be of interest:
The second half of our results can be found in Part 2 of the SaaS Survey, as we delve into differences in the operational structure, contracts and pricing of our respondents and how this is impacting retention and growth. Also if you are interested in participating in the 2015 survey, or just signing up to receive the results, click the button below:
As most of my readers know, I am a big fan of Inbound Marketing. However there are times when inbound leads aren’t either enough, or the right kinds of leads needed to reach your best potential customers. In those situations, one tool worth considering is the use of a dedicated sales team to do outbound prospecting (Cold Calling 2.0). I prepared the following presentation for a New York city CRO conference, with the goal of showing how this technique works, and discussing how it can be made to fit in with Inbound Marketing principles, where the customer gets value from the interaction.
This article is part of a series titled “The Art & Science of Growth Hacking” that will be published over time. My thanks to Gail Goodman, the founder and CEO of Constant Contact for introducing me to this concept.
Free trials and freemium products are two of the best ways to sell your product. They help the buyer address key concerns such as:
- Will this actually work in my particular situation?
- Will I get enough value to make the effort of using it worthwhile?
For a buyer, being able to get this level of proof is far better than having to trust what a web site or sales person has told them. Think about how you buy a car. How important is it to you to test drive the car before you part with tens of thousands of dollars?
Free trials (and freemium) also have another huge benefit for SaaS and consumer internet companies: the buyer does most of the work of selling themselves. If you have read any of my previous posts on the importance of CAC (Cost to Acquire a Customer), this can be a very powerful way to reduce CAC.
What is Wow!
Wow! is the moment in a free trial where your buyer suddenly sees the benefit they get from using your product, and says to themselves “Wow! This is great!”. It’s also the moment where you have converted them into a fan who is likely to buy.
If you’re going to use free trial (or freemium) as a key part of sales funnel, it pays to understand exactly where in the free trial experience your buyer says “Wow!”. Then you will want to focus on the following set of questions:
- How long does it takes to get to Wow!? (Time to Wow!)
- Can we shorten the number of steps required to get to Wow!
- What is the drop out rate of trial users on their way to Wow!?
- Which step in the process has the highest drop out rate?
- Why are users failing at that step, and can this be addressed?
- Is the Wow! moment clear and strong enough?
- What is the Wow! to Work Ratio?
- Are different buyers interested in seeing different Wow! moments? (This is often the case in a product that has several modules.)
- Are we providing the buyer with clear guidance on how to get to Wow!? Continued…
It will surprise a lot of entrepreneurs to learn that building an e-commerce business with $10 million to $20 million in revenues is not that hard. It also surprises many to learn that it’s not actually that valuable. This is in stark contrast to, say, a SaaS business, which is very difficult to build to that level but valuable when you do. As I read this week’s board deck for one of our portfolio companies, JustFab, I was struck by one of the reasons this discrepancy exists: marketing leverage. Most retail businesses (traditional or online) have to spend marketing money to acquire a new customer at scale. Small e-commerce companies can be exempt from that – if you fill a niche and you have distinctive product-market fit with a set of customers, you can and should land them virally or cheaply. But as the business grows, you need channels of acquisition that you control beyond sitting around and hoping your customers tell their friends. Having a product that delights the user and drives high levels of customer satisfaction (which leads to high levels of referral) is crucial for building a killer business. It separates the great businesses from the good ones at scale, and in the early years, it is often sufficient to drive growth with no need for paid media. It is an important topic, but one for another day. What demands further inspection is the fact that many companies stall out when it comes time to transition off organic growth and add paid media as the primary growth vector as they scale. Customer acquisition costs money and this is where things get tricky in retail. What is the lifetime value of a retail customer? It’s a non-trivial question. In SaaS, for example, this far more predictable due to the subscription model. Continued…
Three years ago I spent a lot of time looking at SaaS business intelligence companies. I loved what I saw in the demos: easy data connections, slick looking graphs, powerful drill down tools and custom dashboards made the tools look like no-brainers. And then I began my diligence calls. All of these bells and whistles were useful for data analysts I learned, but mostly worthless for regular users. Customers didn’t want to become data analysts, they wanted the software to do the work of the data analyst.
It then dawned on me that there’s a massive mismatch between the areas where vendors focus—namely graphics, dashboards, query and reporting tools—and the reality of customers’ needs. No one has time to dig through dashboards, graphs and reports. And customers don’t want to spend any time in your application unless they absolutely have to. Continued…
The health of a SaaS business is directly tied to its ability to retain its customers and prevent churn. To do this, they have to ensure that their customers are happy. That means making sure they get the promised business benefits they signed up for. This blog post discusses how to measure customer happiness, and how to actively manage your business to achieve it. It also looks at the newly emerging Customer Success function. Continued…
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.
“If you cannot measure it, you cannot improve it” – Lord Kelvin
This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updated rewrite of an older post. For this version, I have co-opted two real experts in the field: Ron Gill, (CFO, NetSuite), and Brad Coffey (VP of Strategy, HubSpot), to add expertise, color and commentary from the viewpoint of a public and private SaaS company. My sincere thanks to both of them for their time and input.
SaaS/subscription businesses are more complex than traditional businesses. Traditional business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results. This post is aimed at helping SaaS executives understand which variables really matter, and how to measure them and act on the results.
The goal of the article is to help you answer the following questions:
- Is my business financially viable?
- What is working well, and what needs to be improved?
- What levers should management focus on to drive the business?
- Should the CEO hit the accelerator, or the brakes?
- What is the impact on cash and profit/loss of hitting the accelerator?
The Bridge Group have recently published a report titled:
Inside Sales for SaaS
Metrics and Compensation Report for B2B technology companies
The report is based on a survey of 197 B2B technology companies, and covers topics such as:
- Ramp and Retention
- Compensation and Quota
- Activity and Infrastructure
- Inside Sales Management
- Management’s top challenges
They kindly offered to provide a link for readers of this blog. If you are interested in downloading a copy, please click here to access the report.
This article describes in detail how to use on-line survey tools to validate your key startup assumptions, and gain actionable insights into topics such as pricing, target demographics, messaging, etc. Continued…
Pacific Crest, an investment banking firm with a strong focus on SaaS, has surveyed a 70 SaaS companies with very interesting results. There is some great data on topics such as growth rates, cost of customer acquisition, churn/retention, expense models, capital efficiency, etc. The full survey, which was put together by David Spitz and his team (follow @dspitz on Twitter), can be found here. In this article, I include many of their slides, and the associated Pacific Crest commentary. In a few cases, I add my own commentary prefaced by my initials DRS. I highly recommend downloading the entire survey, and signing up to contribute your own data for the 2012 survey (which can also be done at the same link). I’d like to thank David Spitz of Pacific Crest for giving me permission to reprint their results below.
Details of the participating companies:
- 70 private SaaS company respondents, participating anonymously and confidentially
- Administered to CEOs and CFOs, May-July 2011
- 69% multi-tenant/single instance
- Diverse mix:
- –$0-$60M+ in revenues (~$13M median)(1)
- –25-250+ employees (~120 median)
- –10-2,000+ customers (~480 median)
- –$100s to $MMs median ACV (~$37.5K median)
- –~50% horizontal apps, ~50% vertical apps, infrastructure, etc.
- –Primarily U.S. headquartered Continued…
Summary: Illustrates graphically why churn is a huge problem a SaaS company gets larger. It also looks at a very surprising factor that can massively accelerate SaaS growth: negative churn. (This article is applicable to any recurring revenue business, not just SaaS.) Continued…
In this article I interview Aaron Ross, co-author of a new book, Predictable Revenue. Aaron discusses his experience at Salesforce.com starting a new group that used an innovative outbound prospecting approach (involving no cold calls) to create new leads. Aaron’s group came up with several important breakthroughs which enabled them add over $100m in incremental recurring revenues over a few short years. This article reviews some of those best practices which provide a recipe for others to make outbound prospecting a repeatable and predictable revenue generator.
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