Rediscovering Growth Post-IPO: How to Unlock “Efficient Growth” in a Challenging Economy for SaaS Businesses

In the SaaS industry today, reaching the "Rule of 40" is crucial. A company is considered healthy if its revenue growth rate and cash flow margin together total at least 40%. All the way up-to 2021, we experienced a tailwind in SaaS where companies were growing between 30-50% and there was no focus on cash flow margins or profitability. As we stepped into 2023, the growth rates plummeted and in 2024 now, there are barely any public SaaS company that?is growing?over 30%. Companies of all sizes and stages have no choice but to create a balance between growth and improvement in their cash flow margins and drive what I call “efficient growth.” This is now the new mantra or let us say has been the age-old mantra for businesses.

A gauntlet of challenges exists for SaaS businesses beyond just “The IPO hangover” of overzealous spend and celebrations. In addition to a grow-at-all-costs mentality, increasing customer acquisition costs, churn driven by lack of usage, and relentless competitive pressures all hinder growth. These issues?are amplified?by a lack of discipline in capital allocation and minimal product differentiation.

Reigniting efficient growth requires more than a pivot. It requires a growth mindset and investing in transformative strategies that ignite revenue and sustainable growth.

The SaaS Growth Equation is simple: New Business + Expansion - Churn = Net New ARR

As business leaders, we are all familiar with the three levers of revenue growth: New Business from prospective customers, Expansion from existing customers, and reduction in Churn. But achieving all of them is easier said than done. While all these levers are important, one can argue growing New Business is the lifeline of revenue growth and if that machine breaks this equation is set to fail.?

Company valuations today are closely tied to ending ARR growth rates but growing Net New ARR is expensive. On an average, SaaS businesses spend significantly ($1 to $4) in Sales & Marketing to generate $1 of Net New ARR. The most efficient companies spend between $1 and $1.5, while many others spend between $2 and $4,?according to?David Spitz,?CEO and Founder of?BenchSights.

As?Meritech Capital?explains, the growth multiple on valuations are two or three times compared to a % point of efficiency in free cash flow margins. In short, the capital markets will be quick to punish any weakness if a company is unable to demonstrate revenue growth.

Freshworks: A Case Study in “Efficient Growth”

At Freshworks, a multi-product SaaS company with over $650M in annual revenues, my team and I encountered these challenges firsthand. Freshworks builds products for IT Helpdesk, Customer Service, and CRM, serving over 60,000 customers globally. The business is complex, selling products to three different market segments (SMB, Mid-Market, & Enterprise), three buyer personas (IT, Customer Service, & Sales and Marketing) and three sales motions (Inbound/PLG, Field, & Partner) in three distinct geos (Americas, Europe, & Asia Pacific).

The Growth Challenge

Up until its 2021 IPO, Freshworks enjoyed a remarkable 40%+ YoY growth. Post-IPO, growth slowed to around 20% by 2023. One of the strategic imperatives for the company was to go upmarket and increase ACV (Average Contract Value) from customers. Despite a substantial increase in field sales investments to target mid-market and enterprise customers, New Business declined from 2021 to 2022.

When growth stalls, the popular view within companies is that GTM (Go-To-Market) is broken, field sales folks are not performing, or marketing/demand generation is not working. The sales perspective is that the dog (product) is not hunting, and the macro environment is unfavorable for New Business. The answer is always a bit of everything. It is never just a GTM problem but often a structural problem that also includes product, competitive dynamics, pricing, and packaging. Product market fit should never?be taken?for granted and is always evolving as we have seen with AI where customer expectations have changed.

Aiming to revive New Business growth while cutting costs, I took on the revenue transformation role as the CRO. A small team and I employed some of the learnings from a book by David Cichelli ’s "Revenue Growth Model” to build a strategy and execute in record time.?

Analyzing the Business

Every SaaS business leadership team is analytical by design but there’s an art and a science to analyzing data. When you look at data, one must look beyond the obvious quarterly and half yearly metrics. We went deep into the economics and the mechanics of the entire business and not just GTM. We also used tribal insights to make sense of trends. We looked at data for the past twelve quarters and conducted a detailed revenue segment analysis across product lines, sales motions & segments, and regional views to understand trends in New Business, Expansion, and Churn.

Next, we scrutinized how efficiently capital was deployed, including spending on R&D (Research & Development), marketing, sales, and other functions by product line, revealing core metrics such as CAC and LTV, as well as the cost to acquire and retain customers.

We delved into the mechanics of the sales motions, such as average deal size by segment, average sales cycle, rep attainment, conversions, and win rates. Understanding the efficacy and efficiency of our customer acquisition engine was crucial to making it predictable. Additionally, we tapped into expert knowledge within the company, examining past best practices and trends in customer acquisition. While most companies hypothesize the inefficiencies, this helped us use a data driven approach to identifying inefficiencies.?

Key Insights

Several critical insights emerged. The Customer Service product line had slowed significantly, with poor conversion rates and shifting market dynamics due to AI. Conversely, the IT Helpdesk product showed a promising growth rate of close to 50%, challenging competitors like ServiceNow in the mid-market space. Over-investing across marketing and R&D in the slowing Customer Service product line was a strategic misstep.

We also identified fundamental challenges. We were using an outbound sales engine for sub-500 employees sales segment where ARPA was low, but transaction volumes were high. Sales teams, tasked with selling all products to all buying units were stretched too thin trying to sell to all potential customers. Over 50% of field team deals were under $10K ARR, skewing unit economics. Hybrid sellers (hunters and farmers) relied too much on farming, resulting in lesser focus on New Business, and consequently a decline in New Business in 2022. Recruitment lacked clarity, with misaligned sales compensation and rep quotas. The average sales enablement time was over five months while the average sales rep tenure was less than a year.

Implementing Strategic Changes

To address these challenges, we implemented several key changes:

·?Focus on the Core: We focused on IT Helpdesk as the core product for the field. Winning in IT and increasing the ACV was the goal. We established a $30K ARR as the threshold for minimum deal size in the field. This was still a smaller ACV for a field organization but a massive step up from the past. We removed sub-500 employee accounts from the field sales focus and moved the 250-500 employee segment to the inbound motion based out of India.?

·Redefine the ICP (Ideal Customer Profile) and Win Metric- $30K -$100K deals is where we were winning against ServiceNow, Ivanti, and other competitors. We prioritized win rates in this ICP as our core metric. All other products were sold through overlay sales teams.

·Fuel the Fire: We redirected 70% of our marketing budget towards IT, doubling down on our most promising segment. This allowed us to amplify our efforts where we were already seeing strong traction. We separated the?hunting and farming roles?within our sales team. This brought a renewed focus and intensity to New Business development, ensuring that our hunters were laser-focused with an aggressive incentive plan for acquiring new customers while farmers concentrated on expanding existing relationships.

·Narrow the growth markets: We amped up our investments in North America, concentrating our resources in the region that was showing the highest growth. This focused approach helped us achieve significant gains in market share and revenue.

·People Transformation: We focused on first line sales managers as the change agents, training them and hiring new leaders. We brought people along and had them assess if they were pure hunters or wanted to be farmers. We changed the recruitment and enablement functions to align to the strategy.

Transformational Results

In 2023, we were able to execute the changes in our sales org within approximately 45 days. The?successful execution?of this focused?strategy resulted in field New?Business returning to growth after a decline in 2022.?Sales & Marketing spend as a % of revenue showed a decline in 2023 demonstrating efficient growth. Q4 2023 was the strongest for the field business, with North America having its biggest quarter to date.?Our win rates in $30K-$100K ARR deals were great and helped us revive our New Business growth.

Key Learnings and Growth Strategies:

Growth Lies Within

Often, the best growth opportunities are already inside your organization. While bringing in new leadership or consultants can be beneficial, it's crucial to first examine internal trends to identify causation and correlations.

Don’t Push Uphill

Focus on where you're already succeeding instead of trying to force growth in less promising areas. When there is a structural challenge with a product whether its market acceptance, fit, etc. it will take time, often 12-18 months, for things to turnaround and revenue teams can't and shouldn’t wait for that bet in the fiscal year to pay off.

Align Marketing Leadership

Lead generation and pipeline are perpetual challenges that often grow too slowly. Marketing leaders and demand generation teams must be aligned with sales, including having compensation plans similar to sales teams on a quarterly basis. Quarterly revenue is what matters to the business, the Board, and the market. Marketing incentives should also reflect this urgency.?

Focus on One Metric

While businesses track numerous metrics, often only one truly drives growth. For our team, it was the win rate for our ICP, specifically deals over $30K in our IT Helpdesk product. Focusing on this metric provided a clear path to growth and defined the transformation to increasing our ACV in the field.

People Drive Transformation

No growth strategy can succeed without the right people. We had to uplevel leadership in key areas and promote internally to ensure we had the expertise and institutional knowledge needed to execute effectively.

Last but not the least, create a buzz and energy with your teams with positive intent to enjoy the journey, celebrate wins, and learn from losses. The only thing you will remember eventually are the memories and good times you spent with people.

I want to give credit and thank the small team Sethu Chidambaram & Kaitlyn Bate that drove the analysis and my GTM leadership team that helped drive the changes. Also thankful to Dennis Woodside , Girish Mathrubootham , and the Board for this opportunity.