How Do You Stack Up?
Our team at OpenView, in partnership with Chargebee, launched the 6th annual SaaS Benchmarks Report on Monday. The report includes survey data from a wide cross-section of private software companies—more than 3,000 in aggregate, 600 from this year’s survey—along with the latest market data from publicly traded companies.
Unlike other software benchmarks that cover only public companies or later-stage scaleups, the OpenView report focuses specifically on the expansion stage. Roughly half of participants generated between $1 and $10 million ARR. The remainder were split between companies with less than $1 million ARR (19%) and ones above $10 million ARR (33%).
Today’s piece serves three main purposes:
- To let you know that the report exists (and where to find it);
- To summarize the high-level findings; and
- To explore fascinating data points that you might miss in the summary report.
The TL;DR – financial and operating metrics by ARR
Let me get to the point quickly. Everyone wants to see the key SaaS metrics split by ARR. Below, I’ve included the median along with the range from 25th percentile to 75th percentile.
Quick tip: if you’re outside the range, you’re either in the top or bottom quartile for your size.
Three things might stand out to you (they did to me at least!):
- Averages aren’t super helpful. It’s far better to compare yourself to the exact right peer set, whether that’s based on growth profile, amount raised, or target customer. To help you do just that, we’ve also released a benchmarks calculator to compare your metrics to your preferred peer set.
- Growth rates aren’t as high as you’d expect. Companies with $1 to 2.5M ARR, for example, only grew 79% year-over-year on average. This figure is down significantly from the 2021 growth rate and well below what we usually think of as “good” for a venture-backed startup. This is driven by a couple of factors:
- (a) we’ve surveyed a cross-section of SaaS companies, not only venture-backed companies, and
- (b) expansion stage companies have significantly cut their cash burn relative to their original 2022 plan.
- Companies are actually growing faster at $10 to 20M compared to $2.5 to 10M (?!). Usually there’s a pattern for the average SaaS company (PLG companies are a possible exception): as revenue increases, growth rates decrease. This year, we actually saw growth rates accelerate above $10M. Monthly burn rates similarly skyrocketed for these companies, indicating folks were buying growth to some extent.
This finding has us wondering: is there a “curse” as folks navigate from $2.5 to $10M? That period coincides with the shift from a founder selling to a more formalized go-to-market (GTM) strategy. It’s fraught with hard decisions, such as the right customer profile to pursue, the right messaging to hook folks in, and the right GTM talent to recruit.
In the weeds: fascinating insights you don’t want to miss
Still with me? You better be, because we’re now getting to the good stuff 😉. Here are the five most fascinating insights from the 2022 SaaS benchmarks report.
Insight #1: A new era for PLG
As a reader, you’re no stranger to product-led growth (PLG). We’ve seen an explosion of interest in PLG this year:
- >60% of the 2022 Cloud 100 have adopted PLG
- >90% of companies adopting PLG plan to increase their PLG investments according to a recent Gainsight study
This leaves me pondering: if your competitors are all adopting PLG, how do you stand out and win?
We’ve identified 11 principles of the best performing PLG companies. This year’s survey proved which principles are becoming table stakes versus which are still differentiators in the market.
- Building for the end user and delivering instant value are at least partially a focus for the large majority of companies (80%+).
- Folks have more work to do around delivering an instant customer experience and building to be discovered by users. While many folks aspire to adopt these principles, only ~20% say they’re core to the go-to-market strategy.
- Usage-based pricing remains popular, but the trend is toward hybrid and more complex pricing models (ex: subscription + usage hybrids) rather than a purely usage-based or traditional subscription approach.
- Community-led growth is all the rage, yet only 16% of software companies say it’s core to their go-to-market strategy. Watch this space.
- Monetizing beyond software is still in its infancy. This is a trend we’ll be following closely in 2023.
👉 The takeaway: shift from table stakes activities to PLG differentiators in order to stand out from the competition.
Insight #2: The Rule of 40 is back in style
This time last year, public SaaS company valuations could be predicted based on one variable: next twelve month (NTM) growth. 57% of a company’s valuation was explained by the rate at which they could grow their ARR.
To put that in perspective, only 21% of valuations was explained by the Rule of 40 in September 2021. You might recall that the Rule of 40 only takes into account two things: growth and profitability. In other words, profitability metrics on their own were entirely uncorrelated with public SaaS company valuations and made the Rule of 40 less predictive than growth on its own.
Things have certainly changed and the Rule of 40 is back in style. As of June 2022, the Rule of 40 explained 39% of valuation differences while growth rates alone only explained 27%.
👉 The takeaway: efficient growth—not growth at all costs—is now the name of the game.
Insight #3: To improve Rule of 40, look to NDR and CAC payback
Telling someone to focus on efficient growth sounds a bit… ivory tower VC-ish. It’s too simplistic of advice and not particularly action-oriented.
We peeled back the onion to uncover which indicators predict efficient growth (Rule of 40) across our data set of private SaaS companies. The top two factors: customer acquisition cost (CAC) payback and net dollar retention (NDR). The companies with top-quartile CAC payback and NDR had an average Rule of 40 of 63% (🤯)—well above benchmark. Meanwhile those with below-average CAC payback and NDR saw an average Rule of 40 of 0%.
Of course, if you have a best-in-class CAC payback, you can get away with below-average NDR relatively unscathed. The same holds true for folks with a best-in-class NDR.
👉 The takeaway: focus on two drivers of efficient growth, CAC payback and NDR. Look at these two metrics together rather than separately.
Insight #4: Bring back that pricing initiative
There aren’t many things you can do to grow faster and more efficiently. There are even fewer that don’t require incremental headcount.
You’re left with one initiative: pricing and packaging.
The benchmarks found that 61% of SaaS companies adjusted pricing in the last year. Folks who did adjust their pricing reported that they either realized or expected to realize a 27% improvement in ARR as a result.
If you’re not in the 61%, it’s time to put pricing on your 2023 roadmap. If you are, well it’s also time to put pricing on your roadmap. Innovative expansion stage SaaS companies revisit their pricing and packaging every six to 12 months.
👉 The takeaway: put pricing & packaging on your 2023 roadmap. This doesn’t need to require hiring expensive outside consultants. We’ve assembled our best resources on how to run a pricing project.
Insight #5: Inclusivity needs to go beyond Marketing and HR
We all know by now that diverse and inclusive teams make better decisions. Yet it’s no secret that SaaS companies—and, I’ll be the first to admit, VC firms—aren’t great at building diverse teams that are representative of their constituencies. What’s worse is that commitments to DEI can get sidelined in challenging economic environments, like the one we’re in now.
Our 2022 benchmarks report focused on women in leadership. Of course, women make up roughly half of the population and that holds true across all of the regions we surveyed including the U.S., Europe, Canada, and APAC. But do women hold half of all leadership positions?
The answer is a resounding no, particularly in roles outside of HR and marketing. For the average $2.5 to $10M ARR software company:
- 46% of HR or Marketing leaders were women
- 22% of other leaders were women
- 10% of Board members were women
The silver lining on this dark cloud: the research showed that
- (a) larger companies, especially above $50M ARR, are much better at building diverse teams, and
- (b) SaaS companies with at least one-third women in leadership saw substantially faster growth rates than their less diverse peers.
👉 The takeaway: commit to building a diverse leadership team—and not only in HR and marketing—in order to support continued growth at scale.