2019 SaaS Benchmarks: Actionable Advice to Accelerate Your Growth
This week we released our third annual Expansion SaaS Benchmarks report. More than 500 SaaS companies participated in this year’s survey, which covered topics like financial performance, product led growth adoption, founder priorities and much more.
But benchmarks alone are not enough. We’ve got to make the leap from benchmarks to action. Here’s our advice on how to use the benchmark data to grow even faster in 2020.
Nailing both product and go-to-market execution
We learned that only two things really keep founders up at night: product execution (56% of founders) and go-to-market execution (50% of founders). These were the top concerns for founders of all types of companies, from seed stage to IPO. This finding doesn’t come as a major surprise. SaaS companies now report having more competitors than ever and higher customer acquisition costs compared to previous years.
Difficulty executing on product and go-to-market tend to boil down to one thing: lack of segmentation. Most SaaS startups have a nearly limitless market opportunity, but don’t have the product, engineering, sales or marketing resources to gain traction in the entire market all at once. It is critical to focus, honing your product-market fit in a sub-segment and gradually expanding from a position of strength. You might have a segmentation problem if you’re continually hearing things like:
- “Our product can work for everyone.”
- “If we just build this one feature, we could sign up this major account.”
- “We’re all about new logos – we can’t turn away deals.”
- “Each sales rep has their own way of finding new leads.”
Lack of segmentation leads to weak product-market fit. This, in turn, signals potential churn, difficulties getting new sales reps productive, below-average win rates, weak pricing power and never-ending product roadmap discussions.
Conducting a segmentation project could feel daunting or unattainable, but it doesn’t have to be. A simple starting point is to analyze your sales pipeline activity from the last year to identify patterns in which you have high customer concentration, above-average win rates, fast sales cycles and/or large deal sizes. One simple metric I use is the expected ARR per opportunity in a segment. From there, you should have clear hypotheses about which industry verticals, buyer types, use cases and company sizes perform best. Make it a priority to align the organization and track your progress on an ongoing basis.
To state the obvious, good data hygiene is critical to both product and GTM execution. On the product side, set up robust product analytics to measure user activation, which features people are using and user journeys in the product. Ideally, your product data should sync with your CRM system so you can tailor sales and marketing engagement based on an account’s product usage (may we suggest using PQLs?).
Adopting product led growth means embracing the End User Era
It has become clear that many of the best performing SaaS companies are embracing a product led growth strategy (for evidence, check out how they describe their business model in their S-1s). There are 19 large public PLG companies and all of the top IPOs in 2019 have been PLG companies, including Zoom, Slack, Fastly and Pagerduty. This trend is likely to continue, too, given Cloudflare and Datadog’s S-1s.
- “Bottom up adoption within organizations has been critical to our success as users increasingly choose their own tools at work.” – Dropbox S-1
- “We grow through viral demand driven by individual users.” – Zoom S-1
- “We recognize that users drive the adoption and proliferation of our products.” – Atlassian S-1
While select PLG companies have broken through, the PLG model is not yet mainstream. Only 33% of respondents said that product led growth is fundamental to their business. Most companies are still testing the waters.
Embracing PLG starts with recognizing that we’re in the End User Era of software buying. Having a well-designed user experience is imperative. It isn’t sufficient, though. Your product needs to solve for end user pain rather than just the executive’s pain. In the mind of the end user, pain is about annoyance (“I hate expense reports”) rather than pure ROI (“I need to manage my sales pipeline”). Solving for end user annoyance gives you the permission to expand in an account: reaching more users, addressing executive pain points and eventually getting buy-in from the CIO.
Distribution needs to then adapt to the end user as well. Paywalls should come after the user has seen value and activated in the product. PLG businesses almost always allow customers to try before they buy; a free trial offering and self-service buying experience are the norm. Some – but not all – have a freemium offering. When you do have a free offering, it is imperative that you optimize the in-product onboarding experience. Users want to grok the product quickly (ideally in hours or minutes). If your product is complex and requires configuration, why not test a product tour with pre-configured data so that users can see what’s in store? Or try an activation checklist that gives users step-by-step instructions on how to be successful.
There is still a role for sales in product-led companies. Studies consistently show that salespeople increase free to paid conversion rates. But sales looks more like customer success in a PLG business. They help customers discover new use cases, implement deeper integrations and perhaps switch to a team account with an invoice. A product-led approach to sales should be more consultative, targeted and contextual than a traditional sales motion. You should leverage product data to supercharge sales reps by helping them identify which targets are most likely to convert and when to engage with them.
Remote work is no longer the future – it’s already here
Despite receiving the lion’s share of VC investment, software companies in high cost tech meccas appear to perform worse than their peers. Software companies in lower cost regions are growing 20% faster and burning half as much compared to those in the big seven tech hubs (Bay Area, Seattle, Boston, NYC, Austin, DC and Denver-Boulder). The benefits of lower cost regions are numerous: more affordable space, less competitive salaries, better employee retention.
Regardless of where your company is headquartered, you can capture some of these benefits by going remote-first. A remote-first company has the added benefit of being able to access a wider talent pool with more diverse perspectives. There’s a lot to like about going remote, but it’s not always easy to pull off. There can be real concerns about employee engagement, professional development and effectively managing remote employees. This is especially true if remote employees are early in their career.
Overcoming these challenges starts with employee onboarding. When possible, bring remote employees on-site or to a central location to standardize the onboarding process and establish a personal connection. Remote companies also often bring employees together on a more regular basis for an annual offsite or company retreat. This allows employees to continue fostering relationships and to connect more deeply than video calls and emails usually allow.
Once remote employees are onboarded, pay special attention to communication. Set clear expectations about communication channels, working hours and office norms. For example, is it OK to respond to a Slack message a couple of hours late? How do we make sure remote employees feel included in Zoom meetings when their counterparts are in the same room? Having a modern and remote-friendly tech stack is critical to this effort and should at a bare minimum include cloud-based file sharing, video conferencing and internal chat applications.
Make profitability a 2020 priority
Having at least a path to profitability is an insurance policy against future funding uncertainty and it provides founders with optionality to pursue a potential exit on their own timeline, if at all. It’s clear that public SaaS companies have picked up on this. The latest data shows that only one-in-ten public SaaS companies support their growth with high burn rates. The average public SaaS company has a 2019E EBITDA margin of +8.4%.
We’re not advocating that you aim to put the brakes on your growth. But it is important to have a handle on the unit economics of your business that tell you the marginal impact of additional spend. Specifically, that includes:
- Sales efficiency: How much incremental revenue do you generate from your spend on marketing and sales?
- Ramp time: How long does it take for new sales reps to get productive? What’s the length of time to first deal and to reaching quota? Is ramp time increasing or decreasing as you scale?
- Average quota attainment: How much of your sales team reaches quota in a given quarter? Is this slipping over time?
- Return on R&D spend: How much additional revenue (and margin dollars) do you realistically expect to generate from increased product and engineering spend?
- Net dollar retention: What happens to every dollar of new MRR you acquire? Does the value of a cohort grow over time as customers buy more from you (giving your validation to spend more on sales & marketing) or do cohorts shrink over time?
Start by making efficient growth an executive-level priority. We know that most founders are worried about product execution and GTM execution, not that they might be burning too much cash (26%). Then make sure to hold the team accountable if and when metrics slip. Too often we see a company miss a growth target and revise down a sales forecast without making changes to their cost structure, causing burn to creep up and up.
Product led growth can support you in this effort by automating tasks that would otherwise be done by a human. Do you need a dedicated onboarding team or could you invest in better self-service onboarding? Do you need a sales rep to spend their time working deals below $100 per month or could those prospects convert via self-service? If Zoom’s S-1 is any indication, leaning on the product as the primary driver of acquisition and conversion can allow you to reach profitability without actually sacrificing growth.
Your action items for 2020
- Get smart about segmentation. It is the lynchpin of both product and go-to-market execution.
- Solve for the end user. End users are increasingly empowered to choose their own tools at work. Will yours be one of them?
- Create a strategy for remote hiring. This is especially urgent if you’re in a high-cost tech hub like the Bay Area. Why not start with your development team (Stack Overflow found that remote developers had higher job satisfaction than their peers)?
- Manage efficiency as closely as you manage growth. And take action when teams, channels and products start under-performing.
Companyon Ventures enhanced our Expansion SaaS Benchmarks Data Explorer by building the accompanying SaaS Benchmarks Modeling Tool to measure the current and projected performance of their portfolio against other high-performing SaaS startups. Check out the tool here.
Our 2019 Expansion SaaS Benchmarks Data Explorer allows you to find your exact peer benchmarks around the metrics that matter most: YoY growth, gross margin, cash burn rate, CAC payback, net dollar retention and logo retention. Check it out!