I recently read with great interest David Skok's summary of the 2014 Pacific Crest Survey (Part 1) in which 306 SaaS companies of various sizes participated in answering questions about their company growth and go-to-market strategies. The spectrum of companies includes revenues from $1 million up to >$25 million and contract sizes from $5,000 up to >$100,000. In between are mid-market SaaS companies in the range of $5 million to $15 million annual revenues. Surprisingly (to me, at least), these mid-market companies are doing substantially better than their smaller and larger counterparts in 2014. Let's take a look at the data and figure out what's going on.
In the chart below, you can see mid-market companies ($5-15m) outperformed both larger and smaller companies, beating the survey median growth rate (29%) by a pretty wide margin.
In the next chart, you can also see the mid-range contracts also pulled in the largest growth rates, the highest rate being for contracts in the $25-100K annual contract value (ACV) range. This may or may not be consistent with the types of contracts normally won by mid-market companies, but I think it does show the fastest growing SaaS sector is not at the low end where personal services with small contracts are more typical or at the high end with more complex contracts suitable for enterprises.
Putting these observations together, who is buying these contracts from mid-market SaaS companies? The next chart shows the fastest growing companies are selling to SMBs and mixed SMB/Enterprise level companies. We're talking about enterprise level CRM products, collaboration tools and productivity enhancement solutions across multiple devices and communicating with existing business systems both for mid-size and enterprise customers.
I believe what's driving the growth of mid-market SaaS companies goes beyond simple demand or technology advances. They are crushing it because they use an effective mix of sales and distribution models including online marketing, channel partners, inside sales and field sales to get the job done. This mix is especially evident in the $5-15m contract size range, where growth is strongest.
As you can see from the next chart, customer acquisition cost (CAC) is lowest for Internet sales and channel sales, and field sales is twice as expensive. Companies that focus on high-dollar contracts at the enterprise level alone tend to rely more heavily on field sales, so it's harder for them to grow revenues without sacrificing profitability.
By focusing on mid-size customers with mid-size contracts and by using a blend of online, inside and channel sales, mid-market SaaS companies are able to grow faster than their larger or smaller counterparts. But what catapults them into profitability is maintaining a low CAC while increasing customer lifetime value (LTV) with upsells, cross-sells and an emphasis on retention through customer service. Smaller SaaS companies often have trouble with churn and LTV because they don't have adequate inside sales or a network of channel partners. Larger companies also fail to grow in this respect because they place too much emphasis on field sales and not enough on customer service.
"Gartner forecasts the SaaS market will grow at 20% through at least 2020, almost 3 times as fast as software overall, and there remains ample opportunity for greater global penetration over time. Salesforce represents the shining star of possibility, consistently growing at more than 30%... At the same time, at just 17 billion dollars, the SaaS pool is still relatively small and the field is very crowded. While Compass data indicates that half of SaaS companies are profitable, the statistic also measures a push for profitability over growth, often limiting size. Of all SaaS companies in Compass, only 7% achieve even 10,000 users."
Yes! Across the board, SaaS companies could further reduce CAC and increase LTV using inbound marketing. By leveraging lower CAC methodology like content marketing, SEO and social media, you can effectively increase profitability and growth at the same time. Inbound marketing does both. It attracts new customers and helps reduce the sales cycle by educating customers and allowing you to better qualify them pre-sale. It also enables you to communicate with them during free trials and post-sale to enhance the user experience and achieve ROI faster.
As Peter Cohen puts it in his article Acquiring Customers Ain't Cheap, "Companies should take advantage of newer sales and marketing tactics, like social media and inbound marketing. These can get them in front of prospective customers much less expensively and more effectively than they could have done several years ago."
What's holding many companies back is the fear of investing in sales and marketing when operating margins are small or, as is usually the case, CAC exceeds revenues in the early going. This is simply missing the point of SaaS as a business model.
As Cohen goes on to say, "If a SaaS business wisely invests $100 million in customer acquisition costs, they’ll earn nearly all of it back from customer revenue in the first year. And if they can hold onto those customers for a second year, they’ll earn another $100 million in revenue, and in the third year, another $100 million." Add into that equation revenues from renewals, upsells and cross-sells, and you're looking at a highly profitable and fast growing business model.
So don't be that SaaS company that fails to invest in CAC—embrace inbound marketing.
Charts courtesy of For Entrepreneurs (David Skok). Thanks David!