What are SaaS Metrics and Benchmarks Telling Us? “The Latest B2B SaaS Metrics and Benchmarks”
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After being an operator in subscription software companies, I miss the day to day of being a part of creating company strategy and then being responsible to lead the creation of the organization, processes and measurements to execute the strategy and beat the plan.
At the same time, I now have the opportunity to invest my time in collecting, analyzing, publishing and opining on SaaS metrics, SaaS metrics standards and benchmark trends. Being one step away from operational responsibilities eliminates the biases created by the day to day reality of focusing primarily on hitting the plan regardless of external, environmental factors, internal obstacles or changing market conditions.
With the above as the prelude - let’s get to the heart of today’s newsletter on the latest B2B SaaS Metric Benchmarks and what they are telling us about the “State of SaaS”!
Growth Rates:? 2023 Actuals versus 2024 Plans
Growth rates were expected to be lower in 2023 and the data does reflect those predictions. Growth rates for the 936 companies that participated in the Benchmarkit 2024 SaaS Performance Metrics Benchmarking Research experienced the unfortunate reality of lower growth. See the below growth rate charts.
2023 Company Growth Rate: 2021 - 2023
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2023 Company Growth Rate: By Annual Revenue
One of the attributes of the entrepreneurs who are the foundation to the SaaS industry success over the past 20 years is “optimism”! That optimism may have been tempered by the past 18 months, but was evident again when looking at the 2024 planned growth rates versus the 2023 actuals.
‘24 Planned Growth Rates vs ‘23 Actual Growth Rates: 25th - 75th Percentile
Growth optimism for 2024 varies widely based upon the size of companies, with larger companies displaying the most confidence in being able to increase growth rates.
Growth Rates: 2024 Plan vs 2023 Actuals by Company Size
It is interesting to note that companies larger than $50M ARR are projecting growth rates to increase to 21% versus the actual growth rate of 12% in ‘23. The largest companies that participated in the research, those larger than $100M ARR with the aspirations of going public have increased growth rate expectations to 29% in ‘24…and that is after we eliminated statistical outliers!!!
Once I understood the positive outlook on increasing growth, I thought it prudent to take a closer look at the unit economics that I consider the best indicators for determining if it's financially wise to increase investment in new customer acquisition and existing customer expansion ARR.
Revenue Growth Efficiency: CAC Ratio Trends
Revenue growth efficiency was the mantra heading? into and throughout 2023, so I thought it would be valuable to analyze how much Sales and Marketing expense was incurred to generate one dollar of New ARR in 2023.? New ARR is calculated by adding New logo customer ARR and existing customer expansion ARR.? The perfect metric for this analysis is the Blended CAC Ratio - the results are in the below charts.
Blended CAC Ratio:
I was surprised, actually alarmed when I first saw the year over year increase in Blended CAC Ratio from $1.32 in 2022 to $1.61 in 2023 - a 22% YoY increase.
I quickly pivoted to analyze the New CAC Ratio which is how much Sales and Marketing expense was incurred to generate $1 New ARR from new logo customers only. I was confident this would be the primary issue at play for the increasing Blended CAC Ratio - but I was mistaken as can be seen below.
The New CAC Ratio remained flat year over year, so I reached out to several companies to dive deeper into understanding the trends.? What I found was that a decrease in Sales resources and Marketing programs had been made in pursuit of new logo acquisition and had been partially re-allocated to existing customer retention and expansion.??
My next step was to see how the efficiency of growing existing customer ARR had trended,? as measured by the Expansion CAC Ratio.
Expansion CAC Ratio:
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In isolation, having an Expansion CAC Ratio that says it costs one dollar in Sales and Marketing expenses to expand existing customer ARR by one dollar may not seem too bad - but let’s look at the Expansion CAC Ratio trends over the past few years - thanks to Matt Harney (Cloud Ratings) and KeyBanc and the story changes materially:
Expansion CAC Ratio: 2010 - 2023
The below chart highlights that the Expansion CAC Ratio which has hovered in the ~ $.61- $.69 range since 2017 EXPLODED to $1.00 in 2023 - a whopping 42% increase!
What drove this dramatic increase in the Blended CAC Ratio and the corresponding decrease in existing customer revenue growth efficiency?? The majority of SaaS companies increased the allocation of Customer Success, Sales and Marketing resources and programs to existing customer expansion…leading to a material increase in expenses invested in existing customer programs all while Net Revenue Retention Rates decreased to 101%. More investment - lower outcomes…not exactly the picture of growth efficiency!
I believe in the “land and expand” model that has historically been leveraged in SaaS and is even more prominent in a Product-Led Growth motion. Similarly, Usage-Based Pricing models and the early growth trajectory is directly impacted by the on-boarding, activation and engagement phase of the customer lifecycle.
Net Revenue Retention to the Rescue - Not So Fast!
As initially suggested above, Net Revenue Retention (NRR) Rates which measures the amount of ARR from a cohort of customers in the most recent period (current year) versus the previous period (previous year). This measurement includes the impact of all down-sells, churn, up-sells and cross-sells for that specific cohort of customers over the time period.??
During the go-go days from the second half of 2020 through the first half of 2022, companies such as Snowflake, Twilio and DataDog were experiencing NRR of 150% - 170%. Though they were anomalies, the median NRR for public companies was ~ 120% in 2021 - 2022 and was closer to 110% in 2023.? Let’s take a look at how private SaaS companies NRR rates trended over the same period.
Net Revenue Retention Rate: 2021 - 2023
Even with the additional investments made in existing customer retention and expansion, you can see the overall median for NRR has decreased from 105% (‘21) to 101% (‘23). There are several strategies that can be experimented with and used to increase the expansion ARR component of NRR including:
Another short term idea is to treat the “customer expansion process” like the new customer acquisition “sales” process that includes a structured existing customer lead generation program, well defined expansion opportunity qualification criteria, stage by stage exit criteria and opportunity management, oversight and forecasting traditionally used for new customer sales.
Capital Efficiency - The key to weathering the “SaaS Turbulence”
Beyond the mantra of “Efficient Revenue Growth”, many investors were strongly encouraging - OK insisting that their portfolio companies reduce expenses to extend cash and move towards a 24 - 36 month cash runway…to make it through the storm.
The good news is as a result, we have seen an increase in ARR per Employee, as can be seen by company size in the chart below:
ARR per Employee: 2023
One other key capital efficiency metric is Sales and Marketing Expense as a percentage of revenue, which is highlighted in the below chart - segmented by company revenue.
Sales and Marketing Expense as a Percentage of Revenue: 2023 by Company Size
Sales and Marketing for the entire population has been reduced as compared to 2021.? At the same time, the ranges of spend have been compressed with the top quartile of Sales and Marketing expenses beginning at 57% of revenue in 2022.? This top quartile entry point has decreased to 47% of revenue in 2023.
When analyzing Sales and Marketing expense benchmarks as a percentage of revenue, it is a best practice to evaluate against companies of similar size, as you can from the above the benchmarks evolve as a company first moves beyond founder led sales ($1M - $5M) and then continues to expand its customer base and it’s target customer profile beyond the initial ICP which materially increases Sales and Marketing expenses as a percentage of revenue in companies $50M ARR and above which can be seen in the above chart.
Summary and Conclusion:
SO WHAT! That is the question my business partner asked me early on as we were discussing how to make SaaS benchmarks better and more valuable.? I learned a long time ago that there is no single best answer or magic elixir available to address all of the challenges that exist in today’s SaaS market.
However, I do believe there is a different and better approach to fuel the next phase of the SaaS industry evolution beyond doing what worked historically - just doing it faster, better and cheaper. This is the topic I will be covering in the next edition of the SaaS Barometer Newsletter.
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