Building high growth A SaaS company is never easy, but founders who feel the job is more challenging than ever aren’t imagining things — the economic shifts over the past couple of years have profoundly affected the landscape.
In 2023, the year-on-year growth rate of SaaS companies fell to its lowest level in the past five years. As a result, organizations scrambled to secure their financial foothold by freezing hiring and organizational structuring frameworks, improving toolkit use, and introducing performance management initiatives. However, finding the fine line between managing costs while still promoting growth is a very delicate matter, and requires a sophisticated approach to monitoring and measuring business health.
When cost cutting is no longer practical, it becomes clear that more creative changes are needed to right the ship. Adapting to this new reality requires the industry to reevaluate how and what success should be measured. Traditional success metrics such as the rule of 40 and the magic number must be reviewed in the midst of an unpredictable and competitive market.
But if the old rules of the game no longer apply, how can companies measure their performance under the new normal? As Head of Analytics at ICONIQ Growth, I spoke to and surveyed nearly 100 of the best-performing SaaS companies, and analyzed more than 10 years of their operational and financial data that is not available to the general public. These companies range in value from $1M ARR to post-IPO, providing the most transparent view of the SaaS industry at every stage.
What we’ve learned could fill a book (and, in fact, ours). Growth and operational efficiency report (Spans nearly 70 pages of ideas). However, we felt it was important to summarize some of the key strategy shifts that SaaS companies should consider adopting in 2024 to unleash growth and new industry standards that will help these teams get a more accurate picture of how their performance stacks up in today’s environment. .
Reevaluate pricing models to unleash growth
Traditional success metrics such as the rule of 40 and the magic number must be reviewed in the midst of an unpredictable and competitive market.
Traditional licensing and seat-based pricing has long been the ideal for SaaS companies. While this approach may serve most businesses well initially, it may mean leaving money on the table in the long run.
Our research shows that the growth rate decreases as companies expand, with companies achieving high growth in the early parts of their life cycle thanks to signing on new customers to add to a small but growing base. However, once companies reach ~$100 million, expansion becomes the name of the game and the primary driver of growth.
With seat-based pricing, expansion is possible, but customers who watch their spending will put off paying for additional seats and stick with their plans for as long as possible. In this model, teams must effectively resell their products to existing customers to achieve growth.
For this reason, companies should question the status quo and consider newer pricing models such as usage-based pricing (UBP), where appropriate (i.e. depending on the product, target customer type and sales traffic). UBP has been gaining traction over the past five years, and it’s easy to see why. By setting prices based on usage rather than traditional licensing or side-seat models, teams are encouraged to improve efficiency.