4 Traits of Fast-growing SaaS Companies
Editor’s Note: This article first appeared on VentureBeat here.
You can find fast-growing software companies in almost any vertical, but there are certain characteristics they all share. To find out which of these features are most key, my investment firm combed through our 2017 SaaS Benchmarks data, which covers 300 SaaS companies ranging from pre-revenue to more than $20 million in ARR. Here’s what we found.
1. Fast growers are extremely efficient at acquiring new customers
As investors, we keep a close eye on customer acquisition cost (CAC) payback. This metric represents how long it takes, in months, to pay off the costs of acquiring a given customer on a gross margin basis. We use it as an indicator that a company has the right fundamentals in place to effectively ramp up customer acquisition.
Despite how important it is to properly understand CAC payback, our data shows that companies consistently underestimate this number. All too often, companies omit certain acquisition costs, over-inflate recurring revenue by failing to strip out one-time revenue, and/or leave out some of the ongoing costs of serving a customer.
Despite disparities in reporting, self-reported data on CAC payback does reveal a clear trend: The fastest growing SaaS companies report a CAC payback period of only 7.4 months. That’s less than half that of slower growing SaaS companies (15.4 months).
Clearly, getting this number down is crucial for your bottom line. OpenView’s Liz Cain shares some phenomenal advice on how to improve your number here.
2. Fast growers acquire new customers mostly through inside sales
Slack, with their hyper-efficient self-service sales model and incredible virality, is the epitome of a fast-growing SaaS company – and for good reason. It took them only two-and-a-half years to hit the coveted $100 million annual recurring revenue (ARR) milestone.
But most fast-growing SaaS companies don’t look like Slack. Instead, they take from the tried and true templates of software giants like Salesforce and NetSuite.
On average, the fastest growing companies derive 51 percent of their ARR through inside sales, compared to 26% from field sales and only 16% from no touch or self-service sales. On the flip side, slow growers tend to rely more on field sales (43%) and actually see 19% of their ARR from no touch or self-service sales.
Inside sales offers a compelling balance between attractive deal size and high deal velocity, allowing companies that follow this model to invest in sales and marketing efforts to reach the right customers. Sales cycles are also shorter than with field sales, which makes it easier to find talent and ramp up new hires.
3. Fast growers retain and expand new customers, resulting in net negative churn
Understanding customer and revenue retention is an extremely attractive growth signal for a SaaS company. These metrics are an indicator of product-market fit. Low churn shows the product is sticky, hard to replace, and truly generating value for customers. In our experience, most SaaS companies spend far more time on acquiring new logos than they do on the less sexy task of retaining existing customers.
But our data shows that the fastest growing companies can walk and chew gum at the same time. In other words, they don’t just efficiently acquire new customers, they also retain and expand those customers at far higher rates than slower growers.
Fast growers see on average 109 percent net dollar retention, which means that every $100 in ARR they acquire from new cohorts actually turns into $109 in ARR the next year (and likely even more the year following). By comparison, slow growers see only 90 percent net dollar retention and consequently have to keep adding more and more new customers just to maintain their run rate, let alone grow year-over-year.
To improve net dollar retention, examine just how you’ve designed your product packages, pricing model, customer onboarding, and sales compensation. In the near-term, help your customer success team focus it time and attention where it can actually make a difference to the lifetime value of an account, rather than just where it has good relationships. This should include both customers that show leading signs of potential churn (i.e. low usage, no relationship with decision makers) as well as potential growth in spend (i.e. high usage, growing usage month-to-month).
4. Fast growers pour cash into their sales and marketing engines (because they can afford to)
If it’s efficient to acquire a new customer, and that revenue from new customers compounds over time, it becomes a no brainer to pour more money into sales and marketing. Going all-in helps you reach scale quickly and become a market leader in your category, able to fend off threats from new entrants that might try to copy your success. The only potential limitation is cash.
And our data backs this up. The fastest growing companies spend an average of 58 percent of their ARR on sales and marketing, versus only 34 percent for slower growers. If you’re in the fastest growing bucket, evaluate whether you’re actually spending enough money on sales and marketing. You may want to pull forward your next fundraise so you have the cash to fully capitalize on your market opportunity.
“Land and expand” is a cliché for a reason – it works! To improve your growth rate, you need to hone both the efficiency of your customer acquisition and the ongoing health of your existing customer relationships. Then, and only then, you’re ready to invest more resources to truly become a market leader.
Looking for the full results of our 2017 Benchmarks Report? Access the data here.
The bottom line: Expansion-stage SaaS companies are well positioned to thrive in 2021.
Using data from this year’s Expansion SaaS Benchmarks Report, OpenView’s Dan Knight breaks down the three distinct components to fundraising.