Hubspot drove up their LTV:CAC ratio by zeroing in on MRR Churn rate. 12% on Cost of Goods Sold (excl. SaaS Capital is the leading provider of long-term Credit Facilities to SaaS companies. Its not difficult to benchmark your SaaS companys performance against that of public SaaS companies, but its also only slightly useful. In other words, higher gross margin companies naturally get free higher growth, or at least have extra cents per every dollar of revenue to spend elsewhere (i.e., sales, marketing, or R&D). As the customer base matures and the company reaches scale, most SaaS companies should achieve gross margins in the 75%80% range, depending on the level of professional services required to deploy the solutions. The data suggests that if you want to grow at 40% or greater, NRR needs to be 100% or higher. Read more on growth rates. Even if you couldnt care less what others do, you might want to determine if you are investing enough in the long-term success of your presumably tech-focused company.
Remote or hybrid work is likely here to stay. SaaS companies that sell hardware along with their software are seeing delays and cost increases, and many SaaS companies were indirectly impacted by the supply chain issues through their customers. All products/services and industries differ. Venture capital-backed companies continue to show higher growth than bootstrapped companies but the gap narrowed considerably in 2020, driven by far larger decreases in growth from equity-backed companies than their bootstrapped peers. One possible explanation for why equity-backed companies spend more is the need for a robust administrative and finance team to support reporting requirements to investors, including regular board meetings and audits. Support/Success). The obvious takeaway is that bootstrapped companies are spending less (and are profitable), while equity-backed companies are operating at a loss to support a goal such as growth. Choose which measurement works best for the style of subscription service you provide for your customers. SaaS company growth rates slowed from 40% in 2019 to 29.6% in 2020. Here, we summarize the findings relating to retention in our 2021 survey of private SaaS company owners and execs. Too little quality or too expensive a product might mean too few customers. Predicting Churn w/ Customer Engagement Score: create a Customer Engagement Score, based on allocating points for the particular features used. SaaS Capital has been conducting the industry's top benchmarking survey in Q1 of each year for nearly a decade. Private equity is much more common in companies with $10 million in ARR and above. The median percent of annual recurring revenue spent on general and administrative costs is 20%, up 18% from the previous year. In 2011 and early 2012 we used this chart to guide many of our business decisions at HubSpot. The broader stock market may soften slightly after a very heated 18 months, and we would not be surprised to see valuations slide further, but as this entire post has tried to highlight, the economy and capital markets are a) not the same thing! This is another extremely important variable that can be tweaked in the SaaS model. The way information work gets done has undergone a sea change. MRR is computed by multiplying the total number of paying customers by the average amount that they pay you each month (ARPU). In the numbers that follow, churn is usually best described as (1 gross retention), meaning, if you have 95% gross retention, that equals 5% churn. Medium ACV products ($5,000 to $150,000) appear to be the most expensive overall to deliver and support. As we have noted for several years, revenue retention is one of the most important metrics for ensuring medium- to long-term business health due to its compounding effect on growth. Diligent, disciplined accounting and goal-oriented financial planning. Only 2% of the companies in the survey reported shrinking revenue year-over-year, and 87% reported annual revenue growth of greater than 10%.
benchmarks saas explorer introducing In our 9th annual survey of private B2B SaaS companies, we asked several questions on funding sources and amounts raised to learn more about capital efficiency and cash balances to better understand runway.
As we have noted for several years, revenue retention is one of the most important metrics for ensuring medium- to long-term business health due to its compounding effect on growth. Marketing (converting non-consumers into consumers or through creative positioning), new products/services, dedicated growth person or team, https://married2growth.com/2018/08/14/saas-maturity-vs-saas-scale/, https://medium.com/point-nine-news/what-does-it-take-to-raise-capital-in-saas-in-2018-204d0a46cb23, https://www.saastr.com/benchmarks-in-saas-for-seed-and-series-a-rounds/, https://www.saas-capital.com/blog/cogs-for-saas-business/, https://saasholic.com/the-rule-of-40-for-saas-and-subscription-business-4bc2d7bcd868, https://www.clientsuccess.com/blog/4-ways-to-measure-churn-retention-part-1/, https://blog.chartmogul.com/wp-content/uploads/2015/04/ChartMogul-Ultimate-Guide-to-SaaS-Customer-LTV.pdf, https://www.forentrepreneurs.com/ltv-cac/, https://www.profitwell.com/blog/the-complete-saas-guide-to-calculating-and-reducing-cac, https://www.investopedia.com/terms/a/averagesellingprice.asp. ASP/customer/year is a ratio that examines the average price of product or services offered to all customers in a given year, Determine the Average Sale Price per Customer per Year, ASP/Customer/Year is calculated by taking all selling price points and dividing by the total number of customers sold to in a given year, =([SalesPrice1]*[#sales@SalesPrice1])+([SalesPrice2]*[#sales@SalesPrice2])+..([SalesPriceN]*[#sales@SalesPriceN]), Divide Calculated Average Sales Price (ASP) by number of customers sold this year. Overall, bootstrapped companies report growing at 28% per year, whereas companies that have raised venture capital financing were growing at 55% annually. The median percent of annual recurring revenue spent on research and development is 25%, unchanged from the previous year. This is a reversal from the historical trend. For benchmarking purposes, another metric by which to compare your business to your peers is by revenue scale. This Research Brief provides growth rate data from our survey of more than 1,500 private, B2B, SaaS companies. Expenses represent the cost of activities undertaken by your business. SaaS Capital is the leading provider of long-term Credit Facilities to SaaS companies. This increases with new additions coming out the bottom of the sales funnel, and decreases by the number of customers that churn. Net retention, in turn, adds to gross retention the positive effect of upsells, so net retention is always higher than gross retention. Thirteen percent of companies were flat or shrank, versus only 2% in 2019.
Consumer prices are up 7% from a year ago, which would be the highest inflation rate since the early 1980s except prices are only up 8% from. Google Adwords, Social Media). Higher-ACV products show higher net and gross retention. This research helps answer that question based on our survey of over 700 private SaaS companies. The gross operating margins, cost structures, and revenue volatility of these companies do not fit the traditional SaaS model.
saas ipo startup tell ready growth See below for more detail with examples using the US market for coffee: There are no benchmarks for TAM. SaaS customer retention is broken down by: This brief also explores the relationship between growth and retention, the false positive retention rates of young SaaS businesses, and the impact of Customer Success programs on overall retention. Through the largest single relief package in history (at $2.3 trillion), the US money supply jumped 4.5x in 6 weeks from March to May 2020. Subsequent programs like the American Rescue Plan have continued to push the money supply to 5x its pre-pandemic level. NOTE: Current SaaS retention benchmarking data can be found here 2022 SaaS Retention Benchmarks for B2B Companies. The median growth rate for VC-backed companies with between $1 in ARR and $20 million in ARR is double that of similarly sized bootstrapped companies. Or vice versa, you undercharge for on-boarding and configuration which drags down your overall margin, but you dont get credit for great recurring margins. (Total Revenue Cost of Goods Sold COGS)/ Total Revenue = Gross Margin %, Important costs to include in COGS: Hosting Costs, employee costs to maintain production environment, employee costs for customer support, cost of any third-party software included in delivered product, any other direct employee costs required to deliver ongoing service. COGS is necessary to calculate Gross Margin, which in turn is necessary to calculate Customer Lifetime Value, Sales & Marketing is necessary to calculate Customer Acquisition Cost. The broader market will continue to re-open and loosen supply chains should normalize by summer 2022, barring any additional global supply or demand shocks. The median percent of annual recurring revenue spent on Cost of Goods Sold (excluding Customer Support/Success) is 15%, unchanged from the previous year. Boards and management teams need to use the data above to set informed growth plans and not simply base assumptions on prior-year performance. ARR primarily annual contracts, with some contracts for multiple years. How much do SaaS companies spend on customer support or marketing? If not, and inflation worsens, and the Fed is forced to raise interest rates, it could be a choppy macro-economic environment. Contracting length does not appear to impact net revenue retention but does show a relationship with gross retention. We can make quick decisions.
saas retention benchmarks revenue metrics noted For example, equity-backed companies with ARR greater than $5 million grew at 29% in 2020 (down from 42% in 2019) while their bootstrapped peers grew at 25% (flat versus 2019). The blend between services, recurring, and any other revenue streams is important. For one thing, you might want to benchmark your Engineering spend as a percentage of your total expenses to compare yourself to other SaaS companies. Retention is, of course, the glass-half-full cousin of churn, the enemy of all subscription businesses. Thirteen percent of surveyed companies saw flat or shrinking revenue in 2020, versus just 2% in 2019. The median valuation multiple of the 65 public B2B SaaS companies in the SaaS Capital Index was about 16 times run-rate ARR for the previous 12 months until a November 2021 pull-back, when it dropped to 13.3x ARR. How fast your SaaS business is growing is only relevant when compared to a group of similarly sized businesses. One way to explain this is that part of a SaaS companys journey to $20 million involves shifting from an explore mode where all customers are sought-after, to a more focused exploit mode where only the best-fitting customers make sense to attract and retain. MRR primarily monthly contracts with some longer term contracts. The typical time from first hello to funding is just 5 weeks. One macro-economic area that has impacted SaaS companies, and likely will continue to be a challenge well into 2022, is the labor market. In addition to net retention and gross retention benchmarks across all SaaS companies, the research brief explores retention in the context of annual contract value (ACV), growth, size, funding, and more. Examples of excluded SaaS companies in this category include Box, Dropbox, Carbonite, and 2U.
Overall, growth in the SaaS industry in 2019 was pervasive. SaaS Capital is the leading provider of long-term Credit Facilities to SaaS companies. As discussed in 2021 Private SaaS Company Growth Rate Benchmarks, equity-backed funding is generally correlated with growth. Key findings include: Form fields marked with an asterisk are required. Included is an Excel workbook of the raw data we compiled from SEC filings and used for this analysis. And, the means of calculation should follow a cohort over time for consistency. A working knowledge of how to calculate, interpret, and drive improvements in the following metrics is critical to the success of todays SaaS founder.
saas growth private company benchmarking rates capital benchmarks rate note found updated data With the third quarter of 2020 now closed, below are our observations of the SaaS industry and an update to the SaaS Capital Index, which tracks public company valuation multiples. In the SMB market for instance we had the right sales process in place but had an opportunity to improve LTV by improving the product to lower churn and increasing our average price in the segment. Gross Margin represents the percentage of total sales revenue that the company retains after incurring direct cost associated with producing the goods and services it sells. Gross revenue retention is not correlated with growth. Drive for negative churn: expansion revenue from existing customers > lost revenue from churning customers, Expansion: variable pricing scheme that increases as the volume in the system increase (licenses used, leads tracked, etc.) What percentage of revenue do SaaS companies spend on research and development? 24% of companies surveyed are bootstrapped. As you acquire more customers, it becomes cheaper to support each one. In this conversation, Andre Lavoie, co-founder and CEO of ClearCompany, discusses the different stages of scaling a SaaS company from $1 million in annual recurring software revenue (ARR) up past $30 million and his lessons and best practices learned along the way. Allocate more points for the features you believe are most sticky. Looking ahead, what do we predict for the SaaS market in 2022? No one knew what to expect going into 2021. Sure enough, the year delivered an unpredictable potpourri of economic extremes and indicators. But most have avoided any direct issues. Form fields marked with an asterisk are required. Higher growth is generally associated with higher retention and vice versa. Its difficult to predict how the next year will unfold. What percentage of revenue do SaaS companies spend on sales? What percentage of revenue do SaaS companies spend on marketing? SaaS Capital pioneered alternative lending to SaaS.
Since 2007 we have spoken to thousands of companies, reviewed hundreds of financials, and funded 80+ companies. Thats balance you really shouldnt force to work because the support load wouldnt cover itself.
Applying the historical private company discount of 28%, the median valuation multiple for private SaaS companies is currently 8.2x ARR. This allows you to predict churn and act on it (Customer Service), as well as tweak onboarding or focus on driving particular behaviors early on, In SaaS businesses, cohort analysis is used to observe what happens to the group of customers that joined in a particular month (both as a percentage of original customers and percentage of original revenue). The increased spending by equity-backed companies on sales, marketing, and R&D is somewhat expected. We provide a data-driven, statistically backed methodology for determining a baseline valuation multiple from a companys ARR growth rate and net revenue retention, and the current level of the SaaS Capital IndexTM, which is published as a free service by SaaS Capital. Lastly, high growth (over 40% annualized) almost requires a greater than 100% net retention. It takes approximately 5 years for companies to reach $1 million in ARR. Key findings include: Form fields marked with an asterisk are required. This research brief examines the quarterly revenue and operating expense data from public SaaS companies to learn how software-as-a-service companies performed through the previous recession. What percentage of revenue do SaaS companies spend on customer support and customer success? Both of these are key metrics, and we will drill down into them later. It is worth noting, however, that some investors use TAM as an investment criteria (i.e. Cohort analysis can help you answer key questions about your customer that you can then turn into actionable insight: These answers help you develop plans to address key areas in the customer lifecycle, try things (i.e. Growth rate is positively and exponentially correlated with net revenue retention, with a target benchmark of 110% NRR to align with the sample-wide median growth rate of 40%. Consistently retaining customers is an important characteristic of any successful SaaS business, and an entire industry, Customer Success, has sprouted up to help SaaS executives do just that. Example: Business A has an MRR of $10K/month and total revenue of $20K/month. It can be tempting to continue cutting costs and increasing prices to grow your gross margin. Global lock-downs forced production and shipping to cease, followed abruptly by the biggest demand surge in 50 years. If you practice diligent accounting, you should be tracking your expenses closely. (You can join the SaaS Capital community here and receive new research as soon as it is published.). COVID was the major headline story of 2020, but surprisingly had a low effect on retention for private SaaS companies. SaaS Capital pioneered alternative lending to SaaS. Companies are doing whatever they can to retain employees, and the most recent (December 9, 2021) unemployment report showed new jobless claims at the lowest level since 1969 no one is daring to lay anyone off in this market. ) Here are the top-line results for companies with at least $1 million in annual recurring revenue (ARR). SaaS Capital pioneered alternative lending to SaaS. Companies up to $10 million in ARR need to be growing by at least 20% annually to avoid being in the bottom quartile. We cant fully explain this with the data, but we speculate that SaaS, among all industries, was particularly vital to continuity in a shift to remote work. The flip side of the stimulus coin is inflation, perhaps the most controversial macroeconomic topic of 2021 largely because annual measures are eye-popping when based on the largely deflationary environment during 2020. SaaS Capital pioneered alternative lending to SaaS. TAM can be calculated using known inputs and/or industry research reports. 2022 will again be a great year for building a SaaS company, as our economy continues its secular shift toward on-demand software as the operating system of our complex modern life. Cloud software is tailor-made for remote work, and since many companies already were at least partially remote, they could move to fully remote in days, if not hours. Throughout 2021 we saw growth improving from 2020, but sales cycles were longer than pre-pandemic, and companies that relied on trade shows and other in-person lead generation struggled to fill the top of the funnel. 2022 SaaS Retention Benchmarks for B2B Companies. Since 2007 we have spoken to thousands of companies, reviewed hundreds of financials, and funded 80+ companies. Without picking sides, we can observe that if inflation doesnt subside on its own, continued high inflation would ultimately prompt the Fed to raise rates, in turn slowing investment and growth. TAM can be calculated from top-down, bottom-up, or by looking at value creation. Weve heard employees leaving for new jobs paying 30-40% more. The economy in 2021 remained red hot and it was a good year to be in business. Below is a chart of labor force participation, where you can clearly see we remain well-below pre-pandemic levels (the broader downward trend over the last 20 years is a result of Baby Boomer retirements). High ACV products (annual contract value over $150,000) have higher cost of goods than lower priced products. Company age and growth rates are inversely correlated up until about 12 years of age. We added 10 new portfolio companies so far in 2021 and have signed term sheets with 4 other companies that are in the final stages of closing. When youre just starting out, your gross margin is likely to be lower because youre not benefiting from economies of scale. 2020 Private SaaS Company Growth Rate Benchmarks. Private SaaS valuation multiples were higher than historic trends, as they were pulled up by the public comparables, though private multiples trailed the public multiples increase. ARPU average monthly revenue per customer: (The term ARPU comes from the wireless carriers where U stands for user.) Additionally, Rob Belcher joined You Mon Tsang, CEO & Founder of ChurnZero, earlier this year for a webinar on retention. Inflation, and the Feds reaction to it, if any, is the biggest question mark for 2022. Runway considerations, in particular, became very relevant with the arrival of the novel Coronavirus COVID-19 and the resulting economic shutdowns. This post summarizes benchmarking data around the topic of spending. You can access the webinar here. In the VSB (Very Small Business) segment, by contrast, there wasnt as much upside left on the LTV (VSB customers have less money and naturally higher churn) so we focused on lowering CAC by removing friction from our sales process and moving more of our sales to the channel. Brad Coffey, HubSpot. However, knowing what is a good retention rate for your individual SaaS company remains difficult to pin down. Higher growth equity-backed companies spend approximately 30% more on sales and approximately 55% as much on marketing vs. lower growth equity-backed companies. Through 2020 and 2021 supply chains were whipsawed. A $2 million SaaS company needs to be growing at more than 90% year-over-year to be in the top 25% of its peers. The chart below shows median spend benchmarks, as a percent of ARR, for equity-backed companies and bootstrapped companies with at least $1 million in ARR. But overall, 2021 was generally a great year to be running a SaaS company.Myriad factors pulled and pushed the broad economy, and individual industries specifically, in different ways sometimes from one historic extreme to another! Its worth zooming (way) out here, because these last two years really are unprecedented. According to Mixpanels 2017 Product Benchmarks report, for most industries, the average customer retention rate was below 20%. Public company data is the best starting point when valuing a private SaaS business, so we created the SaaS Capital Index to be the most accurate, up-to-date valuation tool for pure-play, B2B, SaaS businesses. Bootstrapped companies outperformed VC-backed companies on retention for the first time ever. The index excludes SaaS companies serving B2C customers and very small B2B companies with annual revenue per customer of less than $500.
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