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:
Ready for more? See my next blog post for analysis on Part 2 of the SaaS survey, which compares application delivery methods, operational costs and gross margins, contract terms, churn rates, capital requirements and accounting methods. Also if you are interested in participating in the 2015 survey, or just signing up to receive the results, click the button below: