Software as a Service, or SaaS, is an industry that is gaining all sorts of media attention. Essentially, it is a new, streamlined way to deliver software to organizations both large and small.
A third-party provider makes a variety of apps available to businesses that can be accessed over the Internet. SaaS basically is one of the major categories of cloud computing along with Platform as a Service and Infrastructure as a Service.
SaaS is akin to having software on demand. Permitted users may request access to the software anytime, anywhere and using any Internet-enabled device. This makes it possible for employees to get more done in a more efficient manner even if they rarely or never go into the office.
Across industries, apps and businesses are switching to SaaS because it means that they no longer have to be responsible for installing and running software applications. SaaS also makes it possible for someone else to handle major security concerns. The more decision makers know about SaaS, the more likely they are to make the switch.
Of course, if you’re already in the SaaS industry, then you’re aware of its advantages. However, how sure are you that your business is optimized? The more you understand about SaaS statistics, the better prepared you’ll be to compete.
What Kind of Growth Do SaaS Companies Need?
Tech companies have to be incredibly competitive to succeed. While a business in any other industry would be considered thriving if it showed an annual growth rate of 20 percent, software companies growing at that rate have a 92 percent chance of failing within a few years according to McKinsey & Company. This makes it imperative to understand what rate of growth is necessary for SaaS companies, and what measures should be taken to ensure that growth.
- The fastest growing SaaS application in the world is TikTok, with 33 million downloads in a single quarter.
- The top growth activity for SaaS businesses is the acquisition of new customers at 89 percent, with renewals by customers in second place at 59 percent and upselling and add-on sales in third place at 46 percent.
- The foremost customer acquisition metrics that are tracked by successful SaaS businesses include unique visitors to the website at 84 percent, the number of new trials or free signups at 66 percent, conversion rates for free to paying customers at 56 percent and the cost of customer acquisition at 56 percent.
- An SaaS company that permits customers to sign up without entering credit card information for a free trial are twice as likely to convert a free-trial customer into a paying customer.
- Studies suggest that a personal touch makes a big difference. SaaS companies that have a sales rep contact their free-trial customers see a 70 percent increase in the likelihood that a free customer will become a paying customer.
- 44 percent of SaaS providers offer a free trial to potential customers.
- Of the 44 percent of SaaS providers that offer a free trial, 41 percent of these use a 30-day trial format.
- In recent years, 52 percent of SaaS providers have increased their spending on customer retention.
- 56 percent of SaaS companies treat renewals by existing customers as a high priority.
- 54 percent of companies providing SaaS regard add-on sales and upselling as a high priority.
- This may be because it is approximately nine times less expensive to keep existing customers than it is to get new customers.
- It costs just $0.13 for an SaaS company to acquire an additional dollar of earnings from an existing customer.
- Additionally, it is four times cheaper to upsell to an existing client than it is to get a new one.
- On average, an SaaS operation runs into costs of only $0.28 to get an additional dollar from an existing client.
- If an SaaS company is trying to acquire a new client, their median cost to generate one dollar of revenue from a new customer is $1.18.
- An SaaS provider that is growing also must grow their team. Surveys suggest increasing team size by 56 percent each year.
- Startup SaaS companies should not expect to pocket the lion’s share of their revenue from their first year of operations. Surveys say that 92 percent of first-year revenue is spent on the acquisition of new customers.
- More than ever, SaaS businesses are investing in content marketing. Why? A recent study done by DDD showed that companies who take the lead in their industry get as many as 8 times more visitors than do fast followers.
Why Do Companies Switch to SaaS?
Organizations that are transitioning to SaaS or have already completed the transition have several reasons for doing so. In a survey, the top reasons given for making the switch include the following:
- SaaS is less expensive
- Operational costs are lowered by switching to SaaS
- SaaS enhances collaboration between large teams in diverse geographic locations
- Easy access to data is enabled across the board
- Working processes are more consistent
- SaaS can be accessed by any device, including mobile devices
- The organization is no longer responsible for maintaining, upgrading or protecting data
- It keeps the organization up-to-date with cutting-edge technology, thereby improving competitiveness
Are Organizations Really Making the Switch to SaaS?
Many organizations are slow to adopt new technology. After all, it costs money and there is a learning curve involved. This does not mean that companies are not seeing the advantages of SaaS. In fact, an increasing number of them is making the switch to SaaS.
- SaaS usage is expected to grow in leaps and bounds. Just 38 percent of companies were relying on SaaS for at least 80 percent of their software needs in 2016. That number increased to 43 percent in 2017 and to 51 percent in 2018. However, 86 percent of the surveyed organizations said that they expected at least 80 percent of their software needs to be met by SaaS after 2022.
- In 2017, 33 percent more companies said that they were using more SaaS applications than they did in the prior year.
- Also in 2017, 38 percent of businesses in the U.S. stated that they were working toward the exclusive use of SaaS in their workplace. That number was more than twice the 17 percent of companies that were aiming for SaaS exclusivity in 2016.
- Workers are noticing the SaaS difference as well. Approximately 80 percent of end users said that they actually preferred SaaS apps to other software in 2017. That number was just 51 percent in 2016.
- As more companies adopt SaaS apps, the market is expected to grow to a value of $76 billion by 2020.
- A 2017 Cisco survey found that 83 percent of successful American businesses were planning an SaaS strategy and considering a collaboration with a cloud service vendor. A full 70 percent of those respondents had no such plans in the prior year, demonstrating the explosive growth of this industry.
- The Cisco survey also revealed that organizations were seeking to make the switch to SaaS because of data security concerns.
- Many organizations are making a switch to CaaS, or Content as a Service, using platforms like eZ and Contentful. This SaaS-like model is changing the way CMS’s deliver content across multiple devices.
The Connection Between Bring Your Own Device and SaaS
With the increasing reliance on SaaS, more workplaces are moving toward more flexible working schedules and requiring fewer employees to show up at the office on a regular basis.
Along with this trend, an increasing number of employees is using their own PC, laptop, tablet or smartphone to get work done. The bring your own device, or BYOD, movement is entirely supportive of the SaaS revolution.
- A report from Microsoft concluded that 67 percent of workers in the U.S. recognize the benefits of being able to access work data from their personal devices.
- Research suggests that while the BYOD market was valued at just $30 billion in 2014, it is on track to hit $367 billion before 2022.
- Approximately 59 percent of businesses enable employees to use personal devices for work
- One study reported that 81 percent of organizations either offer BYOD or plan to make their workplace BYOD friendly.
- Organizations that say they have no plans to implement a BYOD policy cite security concerns. However, these problems can be resolved by taking a strict approach to access and permissions as well as choosing the right SaaS service that has robust security protocols in place.
- The median annual contract value, or ACV, in 2013 was $20,000.
- The median ACV in 2014 and 2015 was $21,000.
- The median ACV in 2016 was $25,000.
- The majority of successful SaaS companies produce 16 percent of ACV by upselling to their existing customers.
- According to For Entrepreneurs, SaaS companies with ACVs of greater than $250,000 book almost 25 percent of their customer contracts at a minimum term of three years or longer.
- SaaS companies that generally write longer contracts with customers report the lowest rate of churn per year.
- SaaS companies that charge customers $500 per month for their services are able to spend as much as 12 times that amount, equal to $6,000, when acquiring a new account.
Marketing and Sales for SaaS Companies
- Companies with more than $2.5 MM in revenue tend to favor field sales.
- Companies with less than $2.5 MM in revenue favor inside sales.
- In their first five years of existence, SaaS companies tend to invest somewhere between 80 percent and 120 percent of their revenue in marketing and sales.
- If your SaaS business wants to focus on enterprise sales, that is, long-term business relationships rather than just transactional sales, then it is imperative that the company offers premiere levels of professional digital PR services.
- An SaaS company whose business is mainly driven by Internet sales needs to rely on great marketing. Successful SaaS businesses using an Internet sales model typically devote 65 percent of their CAC budget directly to marketing.
- By contrast, SaaS organizations that rely mainly on field sales tend to allocate just 30 percent of their CAC budget to marketing.
- Less than 20 percent of revenue for most SaaS companies is derived from up-selling and expansion sales to existing customers.
- It is essential for SaaS companies to track the number of website visitors they receive, how many trials are undertaken and how many deals are closed. Also vital is keeping track of conversion rates. It is only with tracking all of these metrics that it is possible to improve performance.
- Studies suggest that software-as-a-service companies that spend more on their SaaS marketing and sales efforts grow at a faster rate.
Web Hosting SaaS Growth Metrics
- In 2019, the global web hosting market was valued at $56.7 billion
- 900,000 new domains are registered on a weekly basis
- In the US, 33% of the customers are using GoDaddy making it the most popular option
- The top 10 web hosting companies currently hold 25% of the entire market
- In 2020, the European web hosting market amounted to approximately 30% of the global web hosting market share
- The most popular web host in Europe is IONOS by 1&1 with more than 8 million customers
- Despite initially lagging indicators a report by Hosting Data shows the UK web hosting industry growing a CAGR of 13.25% with over 171,200 active websites. This is 2-3X the growth rates for European countries of equivalent size including France, Spain, and Germany.
Customer Churn and SaaS Companies
The term “customer churn,” which may be shortened to simply “churn,” refers to the loss of a customer. Essentially, a paying client stops generating transactions and breaks off their relationship with the SaaS company.
Customer churn is a reality of doing business in any industry, but it is a particularly critical metric for SaaS companies. This is because there is a direct correlation between customer success and the success of the SaaS venture.
Accordingly, the executives of an SaaS organization must know and understand their churn rate and actively seek ways to address problems indicated by these numbers.
- In 2016, the average annual unit churn was 10 percent for SaaS businesses.
- In excess of two-thirds of SaaS organizations typically experience churn rates of at least five percent or more.
- A major source of churn in recent years has been the ongoing and upward trend of cyberattacks that lead to data breaches. SaaS companies which respond slowly to breaches lost 3-6% of GMV, compared to those who respond quickly (less than 1 week).
- A net revenue churn that is calculated at greater than two percent per month is considered high. This is an indicator that the business may not be healthy, and it will translate to a serious damper on growth.
- SaaS companies that have larger Average Contract Values tend to put up better net revenue churn numbers. This may be a result of increased structural churn with SMB customers as well as the higher switching costs that often come with bigger contracts.
- The most highly performing SaaS companies hold monthly revenue churn at approximately 0.58 percent. This translates to seven percent of revenue churn on an annual basis.
- A level of five to seven percent of annual churn is equal to a monthly loss of one dollar out of every $200 earned.
- Premiere SaaS businesses are able to achieve negative churn rates, giving them a dollar retention rate of better than 100 percent.
- SaaS companies that sign their clients to longer contract terms tend to have lower dollar churn on an annual basis.