The SaaS industry is different from other industries such as those involving physical goods. That’s why the recipe for sustained growth is also different. A study by McKinsey [1] pointed out that software companies that grow at even a 20% annual growth rate have a 92% chance of ceasing to exist in just a few years. When you think of other ‘traditional’ industries, 20% growth rate is a big thing, but it does not work well for the software industry in general and SaaS in particular.
SaaS businesses need rapid growth in order to survive, so they need a lot of fuel to grow. Raising money has become more expensive and difficult for startups, while hiring, building capacity and retaining talent are other challenges the software industry has to face. Although SaaS has revolutionized computing and has become part of our daily lives, there are still many myths and facts surrounding it that aren’t actually true. Let’s start with some interesting facts followed by some common misconceptions that surround the SaaS industry.
1. SaaS Companies Need Solid Growth Rate
SaaS companies need to grow at a rapid pace to merely survive, so much so that a company has a very high probability of vanishing from the horizon if the growth rate stays around 20% for a few years. In the SaaS industry, stealth and secrecy is considered to be a competitive advantage, especially when it comes to big players.
2. Biggest Players are Often the Fastest Growing
The biggest players in the SaaS industry also tend to be the fastest growing in terms of team size and revenues. That’s mainly because these big companies have the ability and financial resources to scale and grow their teams very rapidly.
3. Customer Acquisition Cost is High
According to a survey[2] that included SaaS businesses generating more than $2.5m revenue, the median cost to acquire $1 of a new customer revenue turned out to be $1.18. This means it will take a SaaS business more than 12 months just to recover its cost involved in acquiring a dollar of the Annual Contract Value (ACV).
4. Upselling is Much Cheaper
Considering such high customer acquisition costs (ACV), it makes sense to retain existing customers and upsell. It’s up to 9 times cheaper to retain a customer than acquiring a new customer and it costs $0.13 for additional $1 revenue from an existing customer. It’s four times cheaper to upsell than acquire a new customer.
5. Pricing and Churn
Many SaaS providers run a/b testing on subscription plans and pricing because of which some plans might include more features/functionality for the same or even lower price. It might be a good idea to check pricing plans after turning on a VPN before making a commitment. The best-in-class and top performing SaaS providers can achieve a 5 to 7 percent annual revenue churn, which is roughly equivalent to losing $1 per $200 every month. Large SaaS providers can achieve 10%, while small SaaS providers can achieve around 20% annual churn rate.
6. Visitor to Long-term Customer Conversion
Only 0.6% visitors turn into long-term customers if a free trial requires them to enter their credit card details, which doubles if no credit card is required, while the best-in-class SaaS vendors can manage up to 2% visitor-to-retained customer conversation rate. On average, almost 50 percent SaaS users login to their subscription once a month, while only 17 percent login on a daily basis [3]
7. More than 40 percent SaaS providers use value-based pricing
More than 40 percent SaaS providers use value-based pricing, 25 percent copy their competitors’ pricing while 38 percent use usage-based pricing and 10 percent use cost-plus approach. A 50GB Dropbox subscription used to cost $9/month in 2009, which is almost $12 in today’s dollars. Add another 6¢ to it and you can now get 2TB storage for the same price!
8. Financial Standing and Top Countries
Global spending on cloud services and SaaS is expected to reach $363 Billion by 2022, up from $257 Billion in 2020[4], while by 2020, the Indian SaaS market is expected to grow by 20 times to $50 to 70 Bn[5]. Around 80 percent businesses are using at least one SaaS app[6]. The SaaS industry was among the few that experienced growth during the COVID-19 pandemic. The top 15 countries by the number of SaaS companies include the US, United Kingdom, Canada, Germany, France, India, China, Brazil, Australia, Spain, Israel, Netherlands, Singapore, Sweden and Ireland.
9. The Future of SaaS
Artificial Intelligence and Machine Learning are the most impactful trends in the SaaS industry with significant developments in the recent past. Centralized analytics is considered to be the next big trend in the SaaS market with investment in the sector expected to rise over 23 percent by 2022[7]. It’s already on its way to becoming a central component of service-based software solutions. In the future, SaaS is expected to further migrate towards Platform as a Service (PaaS), which refers to building custom business apps on top of established platforms.
10. Marketing and Sales
Budding SaaS companies have to spend between 80-120 percent of their revenue during the first five years on marketing and sales. Around 40% SaaS vendors do not offer freemium or free trials, while the 30-day trial remains the most popular option. From 2007 to 2021, the number of SaaS marketing tools have skyrocketed from 500 to 10,000.
Common Misconceptions and Myths Surrounding SaaS
Building a successful SaaS company is hard work and keeps businesses under constant pressure to outperform the competition. Many people believe the recurring business model is a magic pill to revenues, growth and success, but there is another side of the story too. Here are some of the most common misconceptions surrounding SaaS that many take as a fact.
1. It’s a One-time Job to Develop a Product
Building and marketing a SaaS product itself is costly and time consuming, but the hard work does not end after product launch. SaaS companies have to keep innovating and improving their product in order to stay competitive while taking care of disgruntled customers at the same time.
2. Free Trails Means Easy Conversions
Free trials are meant to allow customers to get an idea of how the software works. However, free-user to paid user conversion can be costly. SaaS providers have to optimize free trails keeping in view conversions and by experimenting with pricing models. The 30-day free trial strategy does not work well anymore for all SaaS companies.
3. User Communities are Dead
With the emergence of popular platforms like social media, many believe that user communities are not relevant anymore. However, maintaining user communities is still a great way to increase adoption, reduce support costs and establish a channel for forecasting, real-time testing and user feedback.
4. Branding Efforts Can Wait
Sure, the product itself is important, but content and branding efforts are also important. Quality content should be created even before product launch to build a brand and acquire customers organically. This reduces CAC (Customer Acquisition Cost) and enables customers to follow your brand throughout its journey.
5. Subscribers Last Forever
Subscribers are not life-long customers and SaaS companies have to deal with many dynamics to stay competitive. They have to work hard to offer a better product and support than the competition and prevent customers from outgrowing your solution. These two factors can make or break a SaaS business.
6. SaaS is Less Reliable and Secure
SaaS apps are no longer a niche product and the industry has come a long way since the 2000s. Service disruptions are now extremely rare and the apps have become incredibly secure, even more secure than most of the company’s own apps.
7. SaaS is All About Cost Control
Although cost cutting, especially low upfront costs, is one of the main considerations for most business users, the real value of embracing SaaS is the competitive advantage it offers. Speed, agility and time-to-value are the primary sources of competitive advantage and the benefits of SaaS go well beyond economics.
8. SaaS Means By-passing IT
While SaaS apps are a lot easier than on-premise software to set up and run, they are not meant to bypass IT. SaaS IT apps are designed to help businesses focus their IT resources on strategic business objectives, including security, integration and privacy and make collaboration easier between business and IT needs.
9. SaaS is a Big Treat to IT Jobs
Many people fear that SaaS and automation will make IT jobs redundant. Although that’s true to some extent, it also creates new roles and helps businesses focus more on their core operations instead of spending a lot of time on managing mundane IT tasks.
10. Lack of Control
It’s a common misconception that users lose control over their data once they migrate to the cloud. It’s like putting your money in the bank and fearing that you’ll lose control over it. The right SLA (Service Level Agreement) defines and protects your rights and data and keeps you in control.
Conclusion
A lot of data specific to SaaS is locked-up in complicated studies, so interesting and insightful information can get overlooked. This information can provide valuable insights and a good starting point to understand the technology and how it impacts our daily lives. Many people think that SaaS is all about metrics, but the reality is that only a few really matter such as churn, recurring revenue and cost of customer acquisition. What’s more important is how a SaaS company improves business processes and makes life a little easier for them.
References
1. https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/grow-fast-or-die-slow
2. https://www.forentrepreneurs.com/2015-saas-survey-part-1/
3. https://www.slideshare.net/totango/2012-saa-s-customer-engagement-benchmark
4. https://www.gartner.com/en/newsroom/press-releases/2020-11-17-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-grow-18-percent-in-2021
5. https://economictimes.indiatimes.com/tech/information-tech/indian-saas-market-to-grow-20x-to-50-70-billion-by-2030-report/articleshow/89968958.cms
6. https://virayo.com/saas/statistics/
7. https://www.forbes.com/sites/louiscolumbus/2019/04/07/public-cloud-soaring-to-331b-by-2022-according-to-gartner/
