Developing the ability to upsell existing customers into longer-term, higher value contracts that are multi-year in duration is one of the most critically important skill sets any SaaS business needs to attain.
These and other insights were gained from analyzing the 2013 Pacific Crest SaaS Survey, published earlier this month by David Skok. The survey is based on responses from 155 SaaS companies, compiled by Pacific Crest Securities. David’s blog For Entrepreneurs provides excellent content on SaaS metrics, start-up advice and a wealth on insight in the areas of sales and marketing, business models and the specifics of how to manage a SaaS business model profitability.
Key take-aways from the 2013 Pacific Crest SaaS Survey include the following:
Median GAAP revenue growth increased by 41% in 2012, projected to reach 47% in 2013 across all 155 SaaS companies included in the analysis. When smaller companies whose revenue growth projections are excluded, median revenue growth for 2012 was 32%, projected to increase to 36% this year. The following two figures illustrate distribution of revenue growth by number of companies.
The fastest growing SaaS companies have median contract sizes that are between $1K to $25K. Companies’ with less than $2M in revenue were excluded from this analysis given the smaller deal sizes they generate.
The larger the median ACV (Annual Contract Value) the greater the reliance on field sales. In results from previous surveys Pacific Crest found that mid-tier companies were more reliant on inside sales. 54% of respondents in the $5K to $25K ACV segment of companies this year are reliant on insider sales, up from 33% in 2012.
13% of new ACV is generated from upsells across all SaaS companies, with the largest capable of expanding into other departments and divisions of existing customers. SaaS companies with sales over $60M are generating 32% of new ACV from upsell strategies. It’s interesting to note that upsell is a more effective strategy at gaining market share versus marketing spending, and this hold true across sizes of SaaS companies. The following graphic illustrates percentage of new ACV by size of SaaS company and an analysis showing the fastest-growth SaaS companies generate a higher proportion of new ACV from upsells compared to their peers.
76% gross margins are being achieved across all respondents. This does not change significantly when smaller companies are removed from the analysis.
Try-Before-You-Buy is used far more often than Freemium because it generates additional sales. The following graphic shows the expected contribution of each to ACV in 2013:
Professional Services are 12% of 1rst year ACV across all customer segments. Selling professional services into the enterprise generates 23% of first year ACV according to the study. A graphic showing the distribution of first year ACV as a percentage of professional services by customer segment is shown below:
SaaS companies who primarily rely on Internet-based distribution methods are attaining the highest growth rates. When companies with less than $2M in revenue were taken out of the analysis, those companies primarily based on inside sales grew 10% more than field sales. The following graphic presents this analysis, excluding companies with less than $2M in revenue.
37% of respondent companies rely on field sales as their primary means of distribution followed by inside sales (29%) and Internet sales (17%). When smaller companies with sales less than $2M are excluded, field sales jumps to 50% of all respondents using this method as a primary means of distribution. Inside sales (29%) and Internet sales (8%) are second and third. While Internet sales is the cheapest form of distribution, it also leads to the highest churn rates (9%) recorded in the survey.
From conservative, single digit adoption rates to hockey-stick projections of exceptional growth, analyst firms, venture capitalists and government ministries are weighing in on how they see cloud adoption progressing.
While each of the adoption rate predictions vary significantly in terms of their methodologies and results, all rely on the assumption that SaaS applications including CRM will continue to gain momentum. The user adoption rates vary on how fast the momentum is, yet all share this assumption. Speed, increased user adoption rates, and the ability to more closely align software to business goals are cited most often as the biggest benefits.
Where the projections vary most is whether enterprises will eventually migrate the majority of their applications to the cloud or not. Forrester, Gartner and others see a hybrid cloud architecture emerging in the enterprise and forcing the issue of legacy systems migration by 2015. As would be expected, vendor-driven research sees an “all or nothing” world in the near future.
Wanting to see how reliable the figures were showing rapid cloud adoption in the enterprise, I did a quick sanity check. Taking the distribution of sales by segment for Salesforce.com and their annual revenue growth rate, then normalizing it across all segments, enterprise emerges as their strongest segment by a wide margin in 2015. It had a 15%+ compound annual growth rate (CAGR) from 2011 – 2015 just taking their current sales by segment distribution of sales and extrapolating forward. Data points like this and the market factors behind them is why SaaS is often used in these studies as a leading indicator of broader cloud adoption.
Forrester found that SaaS will outgrow all other cloud services, achieving 37% adoption in 2011 growing to 50% by 2012. In previous studies Forrester has shown that SaaS is a major growth catalyst of ongoing investment in IaaS and PaaS in enterprises. Source: Source: Forrsights: The Software Market In Transformation, 2011 And Beyond Shifting Buying Preferences Lead To New Software Priorities by Holger Kisker, Ph.D. with Pascal Matzke, Stefan Ried, Ph.D., Miroslaw Lisserman Link: http://bit.ly/ijJy70 The following table is from the report:
Microsoft Global SMB Cloud Adoption Study released in March, 2011 is one of the most comprehensive done this year on this topic. Of the many findings, the study predicts 39 % of SMBs expect to be paying for one or more cloud services within three years). One of the best studies on cloud adoptions done this year Source: Study Results Document (PDF (22 pages): http://bit.ly/gN8yTx
North Bridge Venture Partners, GigaOM PRO and over a dozen research partners completed the study The Future of Cloud Computing 2011. The study found 13% expressed high level of confidence in cloud computing for enterprise applications, with 40% experimenting and 10% saying they will never use cloud-based platforms as they are too risky. A presentation of the results can be found here:
Springboard Research (Forrester) completed a study of cloud computing adoption in Asia finding 31% of companies with 50 or fewer PCs will adopt cloud-based applications in 18 months, 56% with up to 500 PCs. The key findings are available for download from the source URL below the infographic.
TechTarget published their analysis of virtualization and cloud computing adoption in the study, State of virtualization and cloud computing: 2011. Of the many findings, a few of the most significant is how pervasive VMware ESXi 4 and later (vSphere) is throughout enterprises today. The study also shows that 7% of those interviewed had implemented cloud computing in 2010, growing to 9% in 2011 – quite conservative compared to many of the other adoption rate analyses completed. You can find the results here: http://searchdatacenter.techtarget.com/feature/State-of-virtualization-and-cloud-computing-2011
Yankee Group has found that in 2011, 41 percent of very large enterprises (more than 10,000 employees) have already deployed or are considering deployment of platform as a service (PaaS) within the next 12 months, compared to just 32 percent in 2010. They have also found that mobility is most significant factor driving cloud adoption in the enterprise. Source: http://professional.wsj.com/article/TPCHWKNW0020110722e77q0004d.html
Bottom line: The economics of enterprise software are about to go through a major shift, forcing software vendors to be more focused on how to deliver value at the business strategy level than ever before.