There’s much discussion that SaaS growth is down, which is true for the averages. Many private SaaS vendors, though, are maintaining growth in 2024 and we still see plenty of companies between $50M-100M with 25-50%+ growth rates. And at the same time, EBITDA is improving from the “growth at all costs” days of 2021 and before.
SaaS vendors large and small for the most part continue to be more cost conscious and EBITDA improvement across the board is continuing.
Is there any other sector that can respond so quickly to a slow down in growth by reducing costs and improving profitability? That’s why SaaS is still so highly valued. If a company can show the right operating metrics demonstrating a strong growth engine, and that it can manage costs, it will be valued at the top end of the current valuation spectrum.
Improving EBITDA: Increase Revenue and Reduce Spend
The two major levers to improve EBITDA are increasing revenue and reducing spend. If you can improve both, that’s great, but at a minimum, you can make sure that your spend to achieve the growth that you are achieving in the 2024 market is delivering the most bang for your buck (or Euro or Sterling…).
Here are a few of the strategies we’ve seen working for the SaaS companies we’ve been benchmarking this year to fine-tune growth efficiency and cost management.
Strategy 1: Double down on new customer acquisition spend efficiency KPIs
Many SaaS companies got ahead of their skis in the hot market of 2021, hiring more expensive sales (hunters) ahead of expected growth, especially after being too conservative in 2020 when no one expected the market during the pandemic to take off. They have more expensive new customer hunters than is needed for the market today and it is showing when you average out sales productivity.
The following are a few of the KPIs that we’ve found do a good job identifying if sales productivity and efficiency is optimal when compared against peers with the same or better performance. (By the way, we benchmark all of these KPIs and more for B2B SaaS):
- New ARR and New Account Bookings: If your new ARR is less than 10%, you aren’t building up a base of new customers to retain and upsell. This will slow you down in a year or two. It also means that your renewal and upsell resources have to work twice as hard to maintain the same NRR.
- New ARR per Account Rep: It’s worth examining New ARR per Account Rep against companies with similar contract sizes, or ACV. You might have some amazingly productive sellers, but if the average is low, then you might have too many.
- Ratio of Account Reps to BDRs: You don’t want to reduce your killer (and expensive) account execs, but maybe some rebalancing of high cost and low cost sales resources would help overall costs.
Sales Cycle Length: If you can shorten the sales cycle, your sales resources can sell more with the same spend. This is an easy to measure KPI if you use a CRM, and we recommend days from SQL to close and benchmarking against companies selling a similar sized contract.
Strategy 2: Laser focus on Account Management and Customer Success
Do you have the right resource allocations to retain and grow your customer base effectively? Do you have junior, low paid CS managers managing and upselling enterprise CXOs? Do you have expensive CS managers handling too many accounts to do a good job? Here are some KPIs to understand CS efficiency (besides retention rates, see below):
- Average compensation per CS manager: If your average comp is low, and your retention rates are high, no problem. If your average comp is higher than peers, that could be a sign of a mismatch of talent levels and your business model.
- Customers per CS manager: How many customers can your CS account managers handle well? Again, if retention rates are high, no problem. If not, this might be an indicator that they are overworked, or otherwise not as effective as is optimal.
NPS: Net Promoter Score was a hot KPI a few years ago, but companies seem less likely to track it recently, even though most companies are focused on customer retention. There’s no cost to asking your customers what they think of you and it can be a leading indicator of churn. Even if NPS isn’t your methodology of choice, standard quantitative measures of customer satisfaction are critical for benchmarking both across peers and over time.
Strategy 3: Track all three retention rates
Customer or logo retention, Net Revenue Retention and Gross Revenue retention – each one tells you something different, and all three together are required to optimize resource allocation and management. Too many companies are only tracking one or two retention KPIs.
In recent years, industry analysts and investors have placed significant emphasis on Net Revenue Retention (NRR), notably exemplified by Snowflake's impressive NRR performance. But there is a basic fact you can’t get around: if you lose customers, you can’t upsell them. So consequently, the upsell strategy must make up for the customers you lost. Organizations may be allocating high cost resources to upselling efforts in pursuit of favorable NRR metrics, when they could be putting lower cost resources to work on customer retention through foundational support and service improvements.
Also often overlooked in the retention conversation is R&D allocation. Is your R&D heavily focused on new features to chase NRR while your customers are dealing with delays in bug fixes? For further reading, see our paper on R&D ROI.
Here’s a refresher on why all three retention rates work together. All three are required to give you a complete picture of whether you are putting all your investments in the right places to get the optimal results:
- Customer Retention: Also called "logo" retention or the inverse, logo churn. This is a per unit or per customer KPI that can indicate if you are leaking customers, and is necessary to calculate Customer Lifetime Value. And as we mentioned, if your customer retention rate is dropping, you can’t upsell the churned customers, which also affects your NRR. If your customer retention rate is dropping over time, it might point to other issues that are under your control, either in Customer Success or Product, or another part of the organization. Customer retention issues are often masked by NRR.
- Gross Revenue Retention: This is calculated using ARR contract values for a consistent group of customers. This metric can be equal to or somewhat lower or higher than the customer retention rate. GRR only considers renewals of original contract values, not upsells, so it would be lower if you retained customers but reduced their contract values. A GRR less than Customer Retention could be a signal that your sales or CS teams might be offering discounts, parts of your customer base might be reducing their spending, or your product might have issues. A GRR higher than Customer Retention usually indicates that you are churning low value customer contracts and retaining higher value customers. Monitoring GRR helps identify these potential problems early.
- Net Revenue Retention: this is calculated by calculating net contract values for ARR and unlike Gross Revenue Retention, is the net value of contracts with the same cohort of customers for the period being measured, so includes both contractions and additions.
Future Outlook
While overall growth rates may have slowed, companies that focus on efficient growth strategies and improved profitability can still maintain strong valuations. Successful SaaS companies have right-sized customer acquisition and CS organizations, with a focus on customer acquisition and retention, plus upselling. What’s more, by benchmarking sales, customer success, and all three retention measures, SaaS companies can effectively fine-tune resources and maintain financial health.
In today's market, it's not just about growth at any cost, but rather about smart, sustainable growth that drives long-term value. As we move further into 2024 and start building plans for 2025, we expect SaaS companies to continue balancing growth with profitability. The ability to quickly adjust operational levers will remain a key advantage for SaaS businesses, allowing them to navigate changing market conditions and investor expectations effectively.
