As a SaaS company, you’re always looking for ways to expand your business. And one of the most important factors in determining your growth rate is your customer acquisition strategy. But what’s the best way to acquire new customers? There are a lot of different options out there, but one thing is for sure: you need to be constantly testing and iterating on your strategy. What works today might not work tomorrow, so it’s important to stay flexible and adaptable. Let’s look at the average growth rate of SaaS companies.
The Growth Rate of Saas Companies
The growth rate of SaaS companies is determined by the amount of revenue generated through subscriptions. This revenue can be divided into two categories: new subscriptions and renewals.
New subscriptions are generated when a customer signs up for a service, while renewals occur when an existing customer pays for another term of service.
What is SaaS?
SaaS, or software as a service, is a type of subscription software that allows users to access and use the software from a remote location. This model emerged during the 70s and 80s but gained popularity in the 90s as businesses needed a way to manage multiple tasks and applications more efficiently.
Today, SaaS provides businesses with the ability to automate various processes, such as lead generation and customer communication.
SaaS products give businesses the ability to manage an ever-growing variety of tasks with speed, accuracy, and convenience. Software has made our lives as business owners much easier and allowed us to accomplish more than we ever thought possible.
There are over 11,000 SaaS companies in the world, and that number is expected to continue to grow into 2022.
For those looking to get into this field, they’ll likely find stiff competition and endless opportunities.
Customers today want greater convenience and lower costs, and companies are filling these needs with software-as-a-service (SaaS).
But, what about the potential market—and, eventually, the revenue growth—for companies looking to expand their software as a service (SaaS) business?
What is SaaS Growth?
SaaS growth is the process of understanding what stage of growth your company is currently at. You can do this by calculating metrics that are specific to each stage of the user journey. This will give you a clear picture of what areas need improvement and where your company is succeeding.
SaaS growth is a key metric that potential investors look at when considering investing in a company. A high growth rate indicates that the company is expanding rapidly and has a large potential market.
The company’s ability to scale is important to potential investors as it is an indicator of how well their money is being spent or if it’s a great idea to invest further.
Keep an Eye on Your KPIs
It’s important to calculate key performance metrics, but it’s even more crucial to make sure those calculations are completed consistently and correctly.
We’ve seen a lot of SaaS companies, both new and established, make the mistake of trying to manage their metrics manually. This often leads to sacrificing accuracy and consistency in the process.
Some companies change their metrics for one reason or the other, but they often do so without a defined process and, as a result, lose the ability to compare results over time.
How Fast Should You Grow?
Growth matters for SaaS companies no matter your size. But the importance of growing faster becomes more significant as the company matures.
A survey of 1,400 B2B businesses reveals that only 10% of SaaS companies grow by more than 95% per year. While 87% of these companies report more than 10% annual growth in sales, the rate of growth decreases as the revenue increases.
Many SaaS companies experience rapid growth early on, but they often hit a ceiling if they fail to grow further.
And that’s why rapid and sustainable growth is so important. It’s your competitive advantage because:
- More growth means more revenue. Stock prices for fast-growing companies have outperformed their slower-growing counterparts by 5 to 1. Companies such as CrowdStrike, WorkDay, and Zoom saw their stock prices increase by 100 percent or more after going public.
- Businesses that grow quickly before hitting $100 million in annual revenue have a higher chance of reaching the $1 billion in revenue mark.
- While high margins are important, high-growth companies drive double the market capitalization as companies that improve profit margins.
So, how fast should your SaaS company grow?
Imagine you’re an F1 racer about to start the next Grand Prix. What’s going through your mind?
Your attention would be focused on getting around the first corner before your 19 other competitors. You would charge into the first turn as fast as possible when the red lights go out, so you don’t end up in last place.
Being a startup founder and a CEO of a fast-growing company can be like being an F1 racer. However, there are more than just 19 other racers.
The SaaS market is booming. According to Gartner, it’s expected to reach $117.7 billion by 2021.
The cloud adoption rate across industries is increasing at an irrefutable rate, with only a portion of this growth being attributed to the pandemic. In fact, enterprise SaaS continued to thrive even when GDPs were shrinking, proving that it is recession-proof.
How do you stand out from the competition in the highly competitive software market?
The simple answer is that you must grow your sales faster than your competitors.
What is SaaS Revenue Growth Rate?
The growth rate of your SaaS company is important to monitor. This tells you the rate at which your company is generating revenue and how fast it is growing.
For investors, the revenue growth rate is an important factor to consider when valuing a startup. A company that is growing its revenue is more likely to be sustainable and profitable, making it a more attractive investment.
“If there is one metric that every startup should track, it’s their growth rate. This is the measure of a startup. If you don’t know that number, you don’t know if you’re doing well or badly. The best way to measure growth rate is revenue.” — venture capitalist and founder of Y-combinator Paul Graham
Understanding the SaaS growth rate can help you:
- Get funding from investors who evaluate your potential based on this metric
- Develop and adjust strategies based on growth rate trends
- Determine how to allocate resources wisely
Let’s take a closer look at how to calculate your growth percentage.
You have no doubt that your startup will be successful.
You want to know how quickly your company is growing, but what does “growing” really mean? And how can you tell if your business is on track to meet your goals?
SaaS Growth Benchmarks
The growth rate of a SaaS business depends on its stage of development.
According to research, the average increase in sales is 15% to 45% year on year.
Businesses that earn under $2 million a year have a much higher growth rate than those that make more than $2 million per year.
The chart below displays the results of a survey of 300+ SaaS companies.
This chart shows the ARR growth for private companies in different revenue brackets.
To understand how your company compares to others in your industry, it’s important to compare your growth to other companies of similar size. An 80% rate of growth for a $3 million company is below average (on the chart, the $1M – $3M group has an average growth rate of 93%).
A business that sees 80% growth when they are already making $20 million is doing twice as well as the average company in their size range. The average growth rate for companies that make between $10 and $20 million is only 43%.
Some other interesting findings are:
- The relationship between company growth and age is inverse until a business is 12 years old. After Year 13, typical growth is about 20% year-over-year.
- Customer retention is positively correlated with revenue growth.
- The companies that reach the $1 million in revenue mark do so in about 5 years of business.
Early-stage startups growth specifics
The studies above looked at revenue growth for companies.
The MRR growth rate for early-stage companies can be deceiving. You may think that the early exponential rate will continue or grow, but as a company grows, the rate of growth often slows down.
For instance, a new startup company may see a 150% or more increase in sales over the first few months. However, as that business grows, the rate of growth will slow down.
Some experts say that to accurately calculate the SaaS growth curve, you should look at a 12-18 month period.
But according to Paul Graham of YC, 10% weekly growth is a reasonable goal for the early stages of a startup.
As we can see from the growth rate of SaaS companies, what works today might not work tomorrow, so it’s important to stay flexible and adaptable. By doing so, you’ll be able to find the best way to acquire new customers and keep your growth rate up.