2018 Expansion SaaS Benchmarks: It Ain’t Peak SaaS Yet

Adam Marcus by

According to Gartner, global revenue from SaaS companies topped $58 billion in 2017 and the firm estimates they’ll grow to $99.7 billion by 2020. We now have two SaaS companies worth more than a $100 billion – Adobe and Salesforce – with Workday and ServiceNow quickly on their heels. In 2018, we’ve seen several successful IPOs, including Zuora, Pluralsight, Smartsheet, Avalara, DocuSign and Dropbox with a few more on tap. If you take a step back, it’s staggering to think how far we’ve come – can you believe Salesforce.com turns 20 in February?

I know The Economist recently called Peak Valley, but we’ve yet to hit peak SaaS. Need evidence? Just look at the results of our 2018 Expansion SaaS Benchmarks to see why. We surveyed 400+ enterprise SaaS companies on topics ranging from competition in the space to pricing, the global growth of SaaS, diversity and more. Here are five key learnings you should take away from this data:

Product led growth is the next evolution of software.

In the early days of software, deals were closed over steaks or golf by suit-clad (mostly and unfortunately) men. Ten years ago, that model transitioned and software was no longer a face to face sport. Deals could be cut over the phone and with the newly arrived SaaS model, the product could be implemented via this thing everyone now knows as the cloud.

We’re now quickly headed into a third transition – it’s called product led growth (PLG).  Given the consumerization of software and the ease of delivering product via the cloud, companies are re-tooling the way they work and no longer need to rely on a sales rep to sell and implement software. Customers are piggybacking on this trend and aren’t waiting to be told a product exists; they’re going out and finding it for themselves.

This consumer-led search has spawned the PLG go-to-market approach, which relies on product features, usage and raw demand to drive customer acquisition, retention and expansion. Some of the most successful IPOs over the past two years have come from companies leveraging this model – Atlassian, Twilio, Dropbox and Shopify, just to name a few. And OpenView has been lucky to back a few of the emerging category leaders in PLG including Expensify, Datadog and Deputy. A look at public product led growth companies even shows they trade for higher revenue multiples than their non-PLG peers. (You can view the Product Led Growth Index here.) This is mostly driven by better and more efficient economic models.

(This guidebook offers a more expansive plan for implementing PLG  in your own business.)

Pricing is an important driver for growth.

According to our survey, some two thirds of SaaS companies changed their pricing over the past year. This is an indication that for many startups their products are delivering real value and that they are underpricing the impact. But it is also predicated on customers understanding the value they’re getting versus the value they’re paying. We believe that there’s still an enormous opportunity for companies to reevaluate or reconsider their pricing, which in turn can drive material growth and, most likely, better margins. In fact, our research proves this out. Two out of five companies that altered prices had a 25 percent or higher increase in annual recurring revenue. And in almost every case companies did not experience an increase in churn.

The lesson you should take away from this? Pricing is a lever that can greatly drive growth and profitability. In a maturing SaaS market, customers are adept at understanding the value they are getting and are willing to pay for it. HubSpot Chief Strategy Officer Brad Coffey recently discussed how the company decided to raise its prices. For HubSpot, the decision was broken down into three parts — looking closely at customer usage data, soliciting input and assembling a team that implemented and tracked the effect of those price increases.

So how should you actually go about implementing a pricing change? My colleague, Kyle Poyar, has built out a framework here, and I’ve included the most important guidelines below:

  1. Designate a clear owner for the initiative.
  2. Set up weekly, cross functional meetings.
  3. Pay special attention to communication, internally and externally.
  4. Track objective metrics/KPIs to de-risk and instill confidence.

Great SaaS Companies are built EVERYWHERE.

As the SaaS market has matured, and buyers have become accustomed to putting their data in the cloud, we are seeing exciting companies built all around the globe  (43% of survey participants came from outside of the US).

You no longer need to be in a tech hub or financial center to build a great company. Your customers can find you online, the sale can be done via a credit card and the product can be deployed remotely. Plus the associated cost of scaling a team has really become untenable in certain geographies. In some areas it’s literally unprofitable to hire sales reps. Did I mention Peak Valley? This trend is playing out not only across the US but also globally. We have been lucky to back great teams recently in Chicago, Indianapolis, Durango, Sao Paolo, Syndey and Tel Aviv.

Welcome Private Equity to the dance.

We’ve seen a real shift in the market over the past 24 months. Private Equity has not only stepped in as a more active buyer, but these shops have shown that they’re willing to pay strategic multiples. They understand the value of the SaaS business model and the impact its having on end markets. Firms like Vista, Thoma Bravo, Bain and others are not only potential suitors, but in many cases they provide more attractive alternatives to an IPO or a strategic sale (for both management and shareholders). Just look at many of the recent transactions like Cvent, Marketo, Apptus, Spredfast, TravelClick and Ping Identity.

We recently sat down with Darren Abrahamson from Bain Capital Private Equity to learn more on the benefits of working with PE. Darren’s feedback? PE buyers can facilitate more transformative M&A and help companies expand into new areas without the quarterly earnings noise or the watchful eye of corporate parents. And, as we’ve previously mentioned, PE investors may have more interest in slower-growth, profitable companies compared to their VC peers.

The industry is finally making SOME progress on diversity.

We still have a long way to go, but more companies are embracing the fact that they simply cannot thrive without a diverse team. This year we saw an uptick in a variety of metrics around the number of diverse team members. In particular, some 37 percent of board members are female. That’s up from 29 percent last year.

Such change didn’t happen on its own and we’re not likely to achieve full parity overnight. But organizations like the Athena Alliance, which are committed to helping qualified women gain board seats, are making these efforts possible. We also hold out hope that AI will help make the candidate screening process fairer and minimize biases that have kept out women and minorities. If you’re ready to commit to making a change in your own hiring practices, start with our guide to gain an understanding of how to better attract diverse candidates here.

This year’s Expansion SaaS Benchmarks showed us that we’ve yet to hit peak SaaS. New strategies are certainly emerging, but the market is healthy and for companies that can find product-market fit, business is booming.