The global software-as-a-service (SaaS) industry has experienced meteoric growth over the last 12 months. Digital transformation has been driven by the coronavirus pandemic, resulting in an increase in software purchases to enable remote working. To put it into context, the kind of growth the SaaS industry saw over the first nine months of 2020 was equivalent to what we would expect to see in three to five more typical years.
Throughout 2021, we should expect the SaaS industry to continue to evolve and change at pace. After an eventful 2020, things aren’t going to slow down.
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At Paddle, we talk to around 200 new software companies per month, as well as our 2,000 existing customers who we advise on how to sell into more than 200 countries across the world. Based on this first-hand insight, we see the next phase of growth in the industry being driven by an explosion of small and medium-sized software businesses, and the need for these businesses to adopt long-term growth strategies in order to thrive in this new era of SaaS.
The rise of small companies, loved by fewer customers
Software is now easier to build than ever and that has given rise to ever greater specialisation in the types of products being built, often for specific verticals. Whether you’re a hair salon in need of an appointment booking platform or a graphic designer looking for a project management tool, the chances are there is now a B2B SaaS company out there just for you. This level of choice is fantastic for customers and we will see the SaaS industry increasingly populated by smaller software companies that are loved by a select band of incredibly loyal customers as a result.
However, this shift towards software companies and products built for highly specialised audiences does present a challenge for these businesses as they scale. Going after a smaller market means that you can max out on growth potential much earlier. Going after a bigger market will mean competing with more specialised players.
For these companies, it will be more important than ever to plan for long-term growth with sustainable billing models, effective growth metrics and powerful revenue delivery strategies.
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By GlobalDataSo long growth at all costs, hello sustainable growth
For too long, SaaS companies have been fixated on a “growth at all costs” scaling model, especially when trying to capitalise on demand like that seen during the pandemic outbreak, believing that the right product and go-to-market strategy alone will be enough to ensure they come out on top. However, it’s important to remember the unprecedented amount of customer churn in SaaS in March 2020, when the economic effects of the pandemic first hit businesses and many looked to cut unnecessary costs.
For small software businesses looking to provide a specialised product to a particular vertical, maintaining customer loyalty will be essential, and these businesses simply cannot afford the levels of churn seen in March of last year.
The only certainty in 2021 is that pandemic uncertainty is not going away any time soon. At some stage this year, there will inevitably be a moment where customers experience subscription fatigue and ask themselves: “Why do we keep buying this product?”
Thriving in the new era of SaaS
For a software business, what customer loyalty will look like in practice is the number of times these customers renew their subscriptions. Implementing a sustainable billing model will be critical to driving renewals. Price too high and it will damage the trust in your product and brand. Price too low and it will lower the perceived quality of the product. There’s a reason Apple doesn’t sell cheap iPhones.
As SaaS adoption continues to grow, software businesses should find closer alignment between how their products are billed and sold, and the value they provide. A greater focus on aligning the economics of buying a product and its value metric will increase the chances of customer retention.
The key metric to measure customer retention is net revenue retention (NRR), which provides a reliable diagnosis on the health of any business and its potential for growth. It takes into account expansions and contractions in monthly recurring revenue (MRR) and customer churn to calculate how much revenue from customers is retained across a period of time. This is incredibly useful for gauging revenue growth achieved, regardless of how many new customers gained, and how satisfied existing customers are with their subscriptions. Customers staying with a business for longer will result in an NRR of above 100%, indicating that customer spend is growing faster than churn, and the higher the NRR the better.
In fact, a strong NRR is often the common factor in the biggest software successes of the past few years. Snowflake had an NRR of 158% when it went public in September. Twilio has an NRR of 155%, and Elastic 142%. A strong NRR is essential for sustainably growing your SaaS business, however big or small.
Powering NRR through the right revenue delivery strategy
To optimise NRR and drive customer retention, a software business must adopt a robust revenue delivery strategy. Put simply, a revenue delivery strategy is a plan that specifies how a company will manage the systems, processes, and teams – also known as the revenue infrastructure – responsible for optimising acquisition, retention, and expansion to meet and exceed its growth objectives.
For many SaaS companies, revenue delivery infrastructure is nothing more than an ensemble of tools and platforms that have been integrated one by one, without an overarching strategy. However, continuing like this will eventually inhibit a business’ ability to respond quickly and effectively to new customer needs and opportunities, and will impact customer retention. A revenue delivery platform can help to deliver this by integrating checkout, payment, subscription management and tax compliance making it easier to scale, enter new markets and subsequently boost NDR.
The right revenue delivery strategy built on an effective revenue delivery infrastructure gives software businesses the power to retain more customers at renewal, experiment with and activate new business models instantly, enter new markets with ease and begin cross-selling without causing havoc to billing.
2021 presents an incredible opportunity for the SaaS industry, with growth driven by an explosion of small and medium-sized software businesses. However, it’s important to not get complacent with the levels of demand seen over the last year as a result of the pandemic. Whilst it’s unlikely we will experience the same dramatic amounts of churn we saw in one month in March last year, we will see customers continue to assess whether they need to buy the same software products in 2021 that they had in 2020. Getting rid of a growth at all costs mindset and implementing long-term growth strategies based on sustainable billing models, effective growth metrics and powerful revenue delivery strategies will ensure software businesses are ready to swim, not sink, this year.
Christian Owens is CEO and co-founder of Paddle, a revenue delivery platform for B2B SaaS companies.
Read more: Observability has a critical role in digital transformations in 2021
