Pacific Crest’s 2011 SaaS Survey

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

(ACV = Annual Contract Value)

2010 Growth Rates Vary by Company Size

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As expected, the “law of large numbers” generally applies, with smaller companies generally achieving and expecting higher growth.

2010 Growth as a Function of Median Annual Contract Value

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Although companies with smaller average contract sizes appear to be growing faster, there weren’t enough companies surveyed in those groups to make the results conclusive. Contrary to last year’s results, the mid-sized, $5K-$25K group, does not appear to have a significant advantage

2010 Growth as a Function of Sales Strategy

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Respondents used either predominantly field or insides sales as their main mode of distribution (very few participants used primarily Internet or channel sales). Companies with predominantly inside sales seem to be growing more rapidly, mirroring last year’s results.

Comparison of Fast Growers vs. Slower Growers

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Just under half of the “fast growers” sell to primarily enterprises, while two-thirds of the “slower growers” do.

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There aren’t major differences between the average contract size for the “fast growers” vs. the “slower growers”.

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Churn rates aren’t that different between the two groups.

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But customer acquisition costs are distinctly lower for the “fast growers”.

Primary Mode of Distribution

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Most participants use Field Sales or Inside Sales as their dominant mode of distribution; a small handful focus primarily on Internet or Channel; and less than 10% have a more even mix. Nonetheless, 31% use Internet for some of their sales and 84% use Channel.

DRS: the fact that more of the respondents are using Field Sales than Inside Sales indicates that there are less of the Sales 2.0 SaaS companies in the mix. I hope to see that change in 2012 as more of the new generation companies that use Inside Sales predominantly contribute their results.

Dominant Mode of Selling as a Function of Median ACV

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As expected, companies making larger sales tend to rely more heavily on Field Sales. Nonetheless, Field Sales is still actively used even by companies in the $5K-$25K ACV group.

DRS: See my comment on the slide above. It surprises me that companies with ACV in the $5-25k are using Field Sales. To my mind one of the key benefits of the SaaS model is that it can be tried out so easily by the customer. This eliminates a lot of the complexity in the sales cycle, such as the need for on-site proof-of-concept trials. At this contract size, it is my belief that an Inside Sales team can close these deals as effectively as a Field Sales team. the very nature of Inside Sales teams means they can handle many more calls in a day, and they also cost significantly less.  The net result is a far lower Cost of Customer Acquisition (CAC).

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

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CAC registered at an impressive $0.93. While up from last year’s $0.73, we believe that the question was more clearly framed this year, and the results more reliable.

CAC on New / New vs. Upsells vs. Renewals

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Information on CAC for renewals and upsells is new this year, and the relative cost trends are as expected.

CAC Spend by Mode of Distribution(1)

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Internet Sales CAC looks extremely attractive. The differential between Field and Inside is distinct, but unclear if statistically significant.

DRS: Not at all surprising that the CAC for Internet Sales is far lower than companies using Field and Inside Sales. However I am very surprised that the CAC for Inside Sales is not significantly lower than for Field Sales. this does not tally with my own research conducted with many visits to SaaS companies. I have written a blog post on this topic here: How Sales Complexity impacts the CAC.

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

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The ability for SaaS companies to upsell to existing customers has been posited by many as an important criterion for success. With only 19% of new ACV from upsells, the opportunity is still a relatively small portion of most companies’ growth. Interestingly, size and maturity do not seem to influence the analysis.

DRS: for readers that missed it, I covered the importance of upsell in my prior blog post: Why Churn is SO critical to success in SaaS companies.

Professional Services Impact on Go-To-Market

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Professional Services is a surprisingly small portion of respondents’ solutions, and many companies seem to have P.S. margins well above industry averages.

Freemium / “Try Before You Buy”

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Freemium is still relatively rare among the respondents, while “Try Before You Buy” is starting to gain traction.

Median Cost Structure

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The median cost structure registered this year was almost identical to last year’s analysis.

Anticipated Cost Structure at Scale

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(1)Note: Survey describes scale as “e.g.”, $50 million in revenues or higher.”
57 respondents

Comparison: Historical Results of Selected Public Companies

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Note that compared to the historical cost structures of now-public SaaS companies, respondents’ expectations are significantly more optimistic.

Sales & Marketing Spend vs. Projected Growth Rate

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Trade-offs between growth and margins (in the form of increased sales and marketing spend) are as expected, with a slight aberration at the low end.

Median Annual Contract Value per Customer

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As this data suggest, our sample group was a little light on lower cost, SaaS solutions and $1M+ enterprise SaaS.

Median/Typical Contracts for the Group

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The median contract length is approximately 1.5 years and roughly 60% bill a year or more in advance.

Contract Length as a Function of Contract Size

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The phenomenon of longer contract terms for larger contracts is clear. Interestingly, all respondents with greater than $100K contracts are already into mostly 2-year+ contracts.

Payment Terms as a Function of Contract Size

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Results on payment terms are very similar to last year’s, despite expectations that we would see more companies achieving 1-year+ advance payments.

What is Your Primary Pricing Metric?

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10% fewer respondents than last year indicated seats as the primary pricing metric, with more respondents now indicating usage, transaction and other variable components as drivers.

DRS: for those interested in this topic, I have written about it here: Multi-axis Pricing: a key tool for increasing SaaS revenue.

Annual Renewal Rates

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87% annual renewal rates on deals up for renewal should not be mistaken for 13% churn, since many companies have longer term contracts.

Gross Churn

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In fact, median churn rates among respondents appear to be very low (again). Only 19 of the 57 respondents had annual gross churn rates over 10% and only 10 had churn rates over 15%.

Gross Churn as a Function of Contract Length

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Not surprisingly, shorter-term contracts are more vulnerable to churn. Nonetheless, the effect is greater than we expected.

Gross Churn as a Function of Contract Size

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Larger ACV deal sizes typically have longer contracts and lower churn.

Gross Churn as a Function of Primary Distribution Mode

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Respondents deploying primarily Field Sales sign larger deals with longer terms, and thus have lower gross churn.

Net Churn

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Accounting for the benefit of upsells, respondents expect the existing base to grow a median rate of 6% annually.

What Else is in the Survey

Not included in this article are interesting slides covering:

  • 2010′s growth rates & 2011′s projected growth rates
  • Capital efficiency
  • Capital raised so far
  • Revenue and growth rates of companies tabulated against capital raised
  • Expected investment levels to reach various revenue levels
  • Additional funding required compared to current ACV
  • Exit expectations
  • Acquisition plans

Summary

As you can tell from the slides I included in this article, the survey covers some really interesting topics. I strongly recommend that you contribute your own data to the next survey so that it will continue to become even more valuable.

Once again, my thanks to David Spitz and Pacific Crest for generously allowing me to reprint the survey here. To download the full survey, or 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.

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  • Martin Thomas

    Do I understand it correctly that the “primary mode of distribution” chart suggests that SaaS companies primarily use field/inside sales to grow? Internet and channel marketing I take it have simply not been effective. Am I reading this right?

  • http://twitter.com/bobapollo Bob Apollo

    David, some really excellent discussion points here, not least in the comparison between inside and outside sales models. I wonder if there’s a case for structuring an initial offering that simple enough to evaluate and buy with internal sales support, but with an up-sell path to a more sophisticated offering that would benefit from field sales involvement (and be profitable). Might allow vendors to knock the negative churn value out of the park as well…

  • http://www.forentrepreneurs.com David Skok

    I would put this a different way: those companies that have simple enough products that can be sold through the Internet only with no need for sales have done spectacularly well. Examples would be things like SurveyMonkey and Dropbox. They have far higher profit margins than companies that use sales organizations because of the highly scalable nature of the how they acquire customers: costs don’t increase as you scale the business. Unfortunately a lot of SaaS products are too complex or too expensive to be sold in this way, and so SaaS companies are forced to also use a salesforce to sell their products.
    Regarding the use of a channel, I think that many SaaS companies would like to use a channel, but it is often hard to find the right resellers. Unlike traditional software, SaaS is actually more like a Service than a product, and many resellers are not set up well to sell a service. However companies like Salesforce.com, NetSuite, HubSpot are having great success with their channels, so when you find the right partners, it can work really well. And after it takes off, it can lower the cost of customer acquisition significantly.
    I hope this helps.

  • http://www.cosential.com Dan Cornish

    We have come to the conclusion that field sales is by far the most effective means of selling/marketing.  

  • Lennon Shane

    A surprise here is the low level of inbound marketing that seems to be adopted across the SaaS companies in the survey, considering some of the great examples elsewhere on your blog and other companies out there. There seems to be some difference between companies with ACV of under $5k and those above $25K to $100k – should we be reading more into some of this data on the type of mixed models SaaS companies need based on ACV and target customer (SMB & Enterprises)?

  • http://www.forentrepreneurs.com David Skok

    Shane, I agree with you – this was surprising. However I think it had more to do with who responded to the survey than anything else. My hope is to get many more of the Sales 2.0 / Inbound Marketing type SaaS companies to respond to the new 2012 survey so we get better data next time around.

  • http://www.forentrepreneurs.com David Skok

    Bob, you and I are in strong agreement on this. My belief is that some careful thought in the product area can lead to an offering that can be sold using Inside Sales for most SaaS products. There will always be exceptions, where the offering is complex, and the price point is high. But even with those, it can be smart to look at getting a subset of the product configured into a simpler offering that can be used with a “land and expand” strategy.

  • http://www.asoftwarestartupguy.com David Miller

    The Cost Structure, Anticipated Cost Structure, and the Public Company Comparison slides confirms two huge lessons:  that entrepreneurs are by nature overly optimistic and that it always takes longer and costs more than you think it will.

    These numbers square with my experience and, though my company didn’t take the survey, our results would probably fall within the expected range of the answers provided.

    Is there a way to see the answers to the “What Else is in the Survey” bullet points related to capital?  Are there any material differences based on the amount of capital raised?

  • http://www.forentrepreneurs.com David Skok

    Hi David, you can use the link at the top or the bottom to get to the full survey which does have some more data.

  • http://www.forentrepreneurs.com David Skok

    Dan, would love to hear more about what led to that conclusion. I think this is a topic of great interest to the readers of this blog.

  • http://twitter.com/sandman_va Dave Sandrowitz

    Bit of a typo under the CAC pie charts.  You reference AVC again and I think that there is some difference in the two charts that warrants comment.  Seems that slow growers have higher CAC, although the reasons are unclear.  My guess is slow grower CAC #s are heavily impacted by enterprise sales.

  • http://www.cosential.com Dan Cornish

    We have been trying a number of different things. I keep reading everywhere how inside sales works the best and keeps costs down. I look at companies like Solar Winds who have built a very large self-service app and we keep trying to emulate. So we have been doing a lot of traditional online marketing, SEO, Google Adwords and Linkedin advertising. We have built a steady pipeline and we can effectively measure how well this is working for us. 

    As an aside, our product is Cosential, a CRM and marketing platform designed for project based businesses. We use our own product and have carefully tuned it to make it work well to put instrumentation on the entire SaaS pipeline process.

    I have a few field sales reps who manage large deals and do in-person demos for large customers. We decided that our field reps try a few  road shows as an experiment. 

    So, we have done a few road shows in mid-sized cities. I liken this to football. Inside sales is a passing game and road shows are  a ground game. The interesting thing about these is the results. The first roadshow we did, we managed to get 8 people to show up for breakfast and a two hour presentation. After four months we closed 12 deals. So our hit rate was 150%. Our cost for the road show was about $3k and our first year ARR was over $100K. The comment I am now getting from customers and potential customers is that we are part of the local community, even though we do not have a local rep or office. We have gone back and put on a one day mini trade/show user conference and our results for new business are similar.  So I am asking myself, where else can I make the kind of return on investment that we are doing with road shows. It is but far the most effective and repeatable marketing we do.  We are now tuning our product Cosential to support and measure roadshows very carefully so we can measure everything. 

    So my take-away is for our market segment, complex SaaS business automation in a B2B market, in-person education and presentations with follow up in person sales works the best. We are redeploying our marketing and sales resources.  I hope our experience can help other folks.

  • Lennon Shane

    Hello Don, 
    Would you say the vertical segments you target by nature are more used to hard touch interaction with other suppliers in their value chain and you are getting the benefit of not trying to change existing habits, and mimicking the same touch point process. Though I see you use some level of online marketing too.

  • http://www.cosential.com Dan Cornish

    Yes, our customers value personal relationships more than other businesses. I am not saying  online marketing and inside sales do not work, they are a very important part of the mix. What we have found that traditional in person education and a handshake are very effective.

  • http://www.forentrepreneurs.com David Skok

    Hi Dave, I couldn’t quite tell where the typo was that you were referring to. Can you help me by telling me what the typo is, and where exactly to find it?
    Regarding why the growth is slower for those with higher CAC, I personally believe your guess is right. Not knowing the companies involved makes it hard for me to know the exact reason. But what I have been observing with most companies involved with enterprise sales processes is a longer sales cycle and a harder sales process to scale rapidly.

  • Irving Fain

    Very interesting to see the U-shaped distribution of Monthly Payment terms when compared to Median ACV. Why do you think there’s a dip then that number comes back up? I was also surprised at the number of companies achieving yearly payments across all sizes of ACV. 

  • John McAuliffe

    In contrast to Dan, our experience is using the sales force
    for prospecting rather than focusing them solely on selling impedes the ability
    to scale and achieve predictable levels of revenue growth. We have found that
    the ability to automate demand creation, qualify prospects and then focus sales
    on why our product vs. competitors (rather than educating on why the product in
    the first place) has allowed us to achieve high levels of growth with an “inside”
    sales team. This has lowered our CAC – which allows us to plough more money
    back into demand generation and grow more. My experience is all but the most
    complex relationship driven sales do not require in field sales teams if you
    have a strong demand driven marketing machine acquiring, nurturing, triaging
    and qualifying prospects for sales readiness.

  • http://www.forentrepreneurs.com David Skok

    John, my own experiences mirror yours. Thanks for adding to the conversation.

  • http://www.facebook.com/people/Bala-Janakiraman-Iyer/631679377 Bala Janakiraman Iyer

    David -

    Thanks for sharing the charts and your insights.

     Would you know what costs went into the CAC for upsells and renewals? Did it include the costs to serve the customer?

    Regards
    -Bala

  • http://twitter.com/sandman_va Dave Sandrowitz

    David,

    Sure, no problem.  Under the four pairs of pie charts, labeled “Comparison of Fast Growers vs. Slow Growers”.  Shouldn’t the short summary underneath the last set be different?  The charts are illustrating average CAC, yet the sentence talks about average contract size.  You see what I mean?

    Thanks,
    Dave

  • http://www.forentrepreneurs.com David Skok

    Bala, the cost to serve the customers should only belong in cost to acquire if it is a part of the sales process. If it is part of post sales customer service, it should be in COGS.

  • http://www.forentrepreneurs.com David Skok

    Good catch! Thank you. I have corrected it now. It should have read: But customer acquisition costs are distinctly lower for the “fast growers”.

  • http://www.forentrepreneurs.com David Skok

    Hi Irving, I agree that it is quite surprising to see the U-shape to the curve for monthly. I would have expected more of the larger deal size players to be charging a year in advance. I suspect that looking at how the rightmost column breaks at exactly 50% that only on company is at the >$1m level that is charging monthly, so it is a bit of an anomaly.
    The one other interesting thing to note is how many of the companies in the $5-25k bracket have managed to bill a year in advance. That’s a great sign, but not exactly what I have seen in the market.
    Otherwise, the rest of the data is roughly what I’d expect.

  • http://www.facebook.com/timbertrand Tim Bertrand

    David, Bob, et al – this is the very model we are using at Acquia. We use a high volume inbound lead generation machine to surface qualified leads for our inside sales team – and one of two things happen once we find a qualified opportunity: 1) the prospect is well suited for a particular version of our offering that can be sold over the phone, quickly provisioned, etc. or 2) the prospect qualifies for one of our custom or elite offerings that often need a greater level of pre-sales assistance & field sales presence. With this model – we have been able to carefully control our investment in field sales personnel (currently at a 3 to 1 model – inside sales to field sales), and keep the expensive resources focused on the *most* qualified, *largest* deals (>100K ACV). We also utilize our field sales team to capitalize on key accounts (F1000), where we may have sold smaller deals to start – and need to work the organizational hierarchy to land & expand within the organization.

  • http://twitter.com/JJMcAuliffe John McAuliffe

    Tim – how do you comp the inside sales team when the prospect qualifies as #2 and they have to pass it on to field sales?

  • http://twitter.com/CurtFinch Curt Finch

    David, this is awesome. I love it. Will you marry me?

  • NickDaney

    David – This is great.
    Quick question – Have you done a differential LTV based on the different customer segments. This would be great with strategic positioning and resource allocation across the different segments or industry verticals. Obviously, every segment then would have different target levels (churn, conversion rates, ACV, incentives, etc) which is of interest to me.

  • Shawn McCance

    Just what I was looking for…awesome…Thanks!

  • gwin scott

    great report. is there an updated 2012 version that you have seen? thx