SaaS growth has been shown to be industry-wide, but how can the average SaaS business that’s just starting out take advantage of this high-growth time?
The SaaS industry is growing fast, but if you want to be one of the companies contributing to that trend, you'll need to know the secrets of successful SaaS businesses. While there's no magic button that'll make your company an instant success, there are some tried and true steps you can take to give yourself the best chance. In this post, we'll lay out a SaaS growth blueprint.
SaaS growth is looking strong
It's hard to find growth in an industry that is shrinking. Thankfully, SaaS is still in its early days and there is plenty of growth left in the sector. By almost all key metrics, now is a great time to get into the SaaS business model.
The market is growing at 30% per year
A study carried out by Synergy Research Group showed that the SaaS sector is continuing to show sustained growth. The top growth in the industry comes from Microsoft and Salesforce, followed by Adobe, SAP, and Oracle.
SaaS revenue is expected to reach $143.7 billion by 2022
Gartner is estimating that the cloud services industry as a whole will outpace the growth of overall IT services by a factor of three, with SaaS making up $143.7 billion of that.
28% of IT spending will shift to the cloud by 2022
Gartner is also predicting that nearly a third of IT spending will shift to the cloud by that same year.
SaaS trends that are on the rise
The relative youth of SaaS means that most companies are still figuring out what works best. Although businesses in all sectors evolve over time, it's worth paying especially close attention to what successful companies are doing in the SaaS space. Here are some of the biggest trends in the industry right now:
Running your own server to handle your customer's valuable data requires a huge investment to match the same level of security and reliability that comes baked into services like Amazon AWS and Microsoft Azure cloud. As such, many SaaS businesses are opting for the latter.
Big data can take over the workload in an increasing number of areas. From customer support and management to marketing, SaaS companies are learning that embracing AI can free their staff up to spend more time with customers. This, in turn, helps reduce churn.
Figuring out optimal pricing is always a challenge, but in young industries like SaaS, even the pricing strategies are often experimented with frequently. There is currently a surge in usage-based pricing and other creative pricing strategies.
Although vertical SaaS is highly specific and only suitable for certain categories or types of products, it is a strategy that can be very successful.
How to track your SaaS growth
Many new companies across all industries make the mistake of not paying close enough attention to the data. This has always been a bad idea, but in the days of machine learning and massive data, it can kill a business. Tracking your growth in as fine of detail as possible will help ensure that you are making the right moves to keep your bottom line moving in the right direction. Luckily, tracking SaaS growth is easy:
Step 1. Get ProfitWell Metrics
ProfitWell Metrics is a free analytics tool that was designed specifically for the SaaS market. It will provide you with all the tools you need to track the most important KPIs for SaaS in general, and for your business specifically.
Step 2. Track the metrics below
ProfitWell Metrics will provide you with tons of data to make day-to-day management of your SaaS business easier, but here are four of the most important KPIs to monitor when you want to track your growth:
Churn rate is how many customers are leaving your service in a given period. If your churn rate is high, then adding new customers is only replacing the old ones. This means that growth can stagnate even with large acquisition numbers.
The purpose of tracking monthly active users is similar to the above. If your MAU is continually rising, then you know you are gaining more customers than you are losing.
MRR / ARR
In the early days of a business, MRR (monthly recurring revenue) is all you will have to work with. Later, you'll be able to track ARR (annual recurring revenue) as well. These are important metrics to track as they will help you gauge the momentum of your business. If these metrics are climbing or falling, so too is the health of your company. Keep in mind that seasonal fluctuations may be expected in MRR. In those cases, they are most beneficial when comparing them to the same month in previous years.
This measures the lifetime value of a customer. From the moment they sign up with your service to the time they leave the service, how much have they paid you? Knowing this is an important part of estimating not only what a customer is worth now, but what they'll be worth in the future.
Finally, we have customer acquisition cost. This is how much it costs you in sales and marketing to acquire a new customer. You want this number to be much lower than your LTV, otherwise bringing in loads of new customers doesn't necessarily equal bringing in loads of growth.
4 strategies to grow your SaaS business
Now that you know how to track your growth and how to tell whether the numbers you are looking at actually represent real growth, it's time to learn a few strategies to get those important KPIs going upward.
Double down on retention
A big part of tracking real growth was knowing when your new customers actually represent increased income. It is far easier, and more profitable, to keep old customers than to continually attract new ones. Yet, many SaaS businesses do not spend enough time focusing on retention.
Not every customer has the same needs. Dividing your SaaS offering into different tiers and allowing people to purchase what they need encourages more people to take the plunge than expecting them to pay for things they don't want.
Optimize your pricing
This is very important. If your pricing isn't optimal, you'll be wasting money on your marketing efforts due to the reduced chances that leads will turn into subscribers.
Balance paid vs non-paid customer acquisition
As discussed in the last point, spending more than what you need on marketing is not good. Having organic sales from things like excellent SEO and a successful content marketing strategy will keep your CAC low and increase the working capital you have for other aspects of the business.
3 SaaS businesses experiencing record growth
As the market explodes with new competitors, there are a lot of companies out there experiencing significant growth. We've picked just a few to give you an idea what type of growth some of the top performers are seeing.
The maker of CRM software and the verbLIVE webinar platform, Verb Technology, raised nearly $14 million in an IPO last year. They beat their revenue forecast for the second quarter of 2020, hitting 21% growth over the previous quarter. That represents 49% growth over the previous year.
With year-over-year growth of over 150%, payment authorization company PAAY has certainly had an impressive start to 2020. The company also launched a new platform making it easier for other SaaS companies to make PAAY payment authorization available to merchants who use their services.
This accounting and client on-boarding provider topped SaaS magazine's list of fastest growing companies in 2020. To get there, they made an incredible 86% growth in six months.
Is your pricing standing in the way of growth?
Pricing is tricky to get right. Many companies will just set their prices similar to what other SaaS business in the same space are charging, but that is a mistake. Nearly every business has a different value proposition and is valued differently by its customers. Optimizing your pricing around your unique value proposition at a price as close as possible to what customers are willing to pay will provide you with maximum revenue and allow you to grow faster. ProfitWell's Price Intelligently service uses the power of machine learning and our years of experience in the industry to help you find the price point that is best for your products. With your pricing optimized, you'll find that all the metrics important to growth will begin to improve.
Common SaaS growth FAQs
There are two questions we get asked a lot regarding SaaS growth. We'll answer them here in case anything in the article was unclear as these are important concepts to understand when trying to grow a business.
How can I calculate SaaS growth?
We've shown you many metrics that will allow you to understand your growth; what drives it, what is holding it back, and which areas you are growing in. It is important that all of those metrics are moving in the direction that they should be. You want to always be adding more customers, increasing retention, and lowering your costs of acquisition. The ultimate purpose of moving all of those numbers is to increase revenue. Throughout the business world, revenue is how a company's growth is measured. While measuring change in revenue over a given period of time is how you measure growth, just keep in mind that it isn't the measurement that drives growth.
What factors most impact SaaS growth?
The biggest factors that will hurt or help your SaaS growth are retention, pricing, and CAC. These are important factors because they are the ones that contribute to all the other metrics that we use in the SaaS industry to measure the success of a company. In order to maximize growth, you need to be getting customers as affordably as possible, at the optimal price point, and keeping them around for as long a possible.