What exactly is the growth that saas companies talk about every day?

How do you assess the value of a SaaS company? The most objective and effective evaluation is growth. Everything else is a feeble excuse.

"Sparking growth" has become the goal and mantra of the entire SaaS industry.

So what is the growth rate of SaaS? How do you measure growth? More importantly, what is the logic of SaaS growth? How do you leverage growth to achieve it?

Until these questions are clarified, SaaS growth is just an empty phrase.

When it comes to growth, everyone understands it differently. Some say to increase customers, some say to increase revenue, and some say to increase both.

Growth is growth in the number of users. This idea comes from the captive and free thinking of the Internet. That is, as long as the number of users is large enough, sooner or later it will be converted into paying customers, from quantitative to qualitative explosive growth. However, so far, no SaaS company has proved that this growth strategy is feasible. And the owner's family keeps talking about the number of free customers, and the family won't have any left over.

In order to show the ability to grow, revenue is a necessary proof. However, the fact that SaaS companies have a requirement for revenue approach does not mean that the revenue is increasing year after year.The growth of SaaS is mainly based on recurring revenue RR (Recurring Revenue).

Because the growth of total revenue is not always predictable and maintainable, it depends on the percentage of revenue from RR.

So double growth in revenue and number of customers is always right?

Not always, it also depends on the degree of correlation between customers and RR. However, usually double growth is close to growth logic. This shows how important it is to understand SaaS growth correctly. Misunderstanding growth can lead to deviations in the entire marketing, sales, customer acquisition, and operations system.

Let's start by defining what kind of company can be considered a SaaS company. It is widely recognized in the industry that a company can be considered a SaaS company only if subscription revenue accounts for 70% of total revenue.

As for SaaS growth, it too requires growth metrics, growth logic and accounting methods to define, measure and account for growth.

The primary metrics to measure the growth of a SaaS are ARR, ACV, and number of customers.

ARR (Annual Recurring Revenue) is the annual recurring revenue, a fundamental measure of how well a SaaS business is doing.The beauty of ARR is the "regularity" of the revenue. That is, if there are no exceptions, the revenue will continue next year and the amount will not fluctuate significantly. That's how measurable and predictable SaaS revenue is.

Obviously, the revenue model that qualifies for ARR is the SaaS service subscription model, which also includes a usage model that can be split into ARR.

Another key metric is the average annual contract value (ACV), which can be simply understood as the average customer price per unit.

As for the number of customers, it is the number of customers in the same period in revenue caliber.

The following table excerpts the number of customers, ARR and ACV of some SaaS listed companies.

From this table, at least the following patterns can be seen:

(1) Most SaaS companies have a low customer unit price and a high number of customers. This suggests that, even abroad, SaaS customers are mainly small and medium-sized enterprises (SMEs). However, for fast-growing companies, their ARR can also be high in this case. HubSpot, for example, has more than $1 billion in assets.

(2) Increasing the price per customer unit ACV will be effective in increasing ARR. ways include expanding customers or increasing pricing.

(3) A particular industry or sector, although the TAM is small, as small as a thousand potential customers. However, the ARR can still greatly exceed the industry average. For example, veeva has less than 1,000 customers, but its ACV is in the millions of dollars.

(4) SaaS companies with multi-billion dollar market caps have only tens of thousands of customers on average. Even in foreign countries, this nine cows for tens of millions of enterprises in the market space.

The logic of SaaS growth can be expressed by the following formula:

ARRn 1=ARRn - Churn (Loss) TACV (Total Annual Contract Value)

A seemingly simple formula, behind which is a bunch of complex factors and design. For example: which target customers to find, how to position the product and design the service, how to design the revenue model, how to set pricing, how to set up the SaaS organization, marketing, sales and management. Each of these factors can have an impact on growth.

In the order of execution, the first step is to set growth goals, which are then broken down into organizations and tasks according to a growth logic.

For some companies that don't understand SaaS growth logic, the order of execution tends to be the opposite. And they are more likely to pin growth on a single point in their chosen track, pop-up marketing, sales gods, etc., leading to uncertainty of results.

Before we talk about growth, we should first identify the company's revenue model to determine if it is a SaaS company. Because this growth model only applies to SaaS.

The most important characteristic of SaaS company's revenue is that recurring revenue ARR accounts for the bulk of the revenue, while ARR corresponds to subscription revenue. Currently, in many SaaS companies in China, NRR non-recurring revenue accounts for the bulk of their revenue structure, for example, project-based companies.

In practice, it is difficult for NRR SaaS companies to adjust to an RR-based revenue structure at a later stage. This may require redesigning the business model and restructuring the business organization.

There is another situation where subscription revenue does not reach 70%, but still grows fast, such as Shopify. in this case, services that are charged based on usage can be packaged into recurring revenue RR or ARR can be increased.

Some domestic SaaS companies have a very small percentage of subscription business, and their revenues come more from projects and other things like NRR. while it is also possible to do year-on-year revenue growth numbers, the growth depends on new customer contracts as there is no subscription renewal revenue.

The biggest problem is that their marketing, sales and other customer acquisition costs have become "recurring costs". This growth is not so much unhealthy as it is a problem with its business model.

In the ARR growth formula above, there is a churn subtractor, or loss.

Foreign SaaS companies have few or relatively small losses; but in the domestic SaaS industry, it's the #1 killer of growth. It's like

the same bucket, it can't withstand being full of holes even if it's large and filling up fast.

In essence, churn is the equivalent of shortening the moment of the growth lever.

So, along with growth, the loopholes of churn must be plugged, or else there will be negative growth. When negative growth reaches a certain level, the entire SaaS revenue model is untenable.

The solution to the churn problem is how to build and assess the customer success (CS) team. However, the role of foreign and domestic CS on growth is very different and can not be copied exactly.

The role of foreign CS is equivalent to post-service promotion, with the aim of increasing revenue. The primary purpose of domestic CS, on the other hand, is to reduce churn by plugging leaks and ensuring that ARR does not decrease.

After determining the subscription-based revenue model, it is time to go all out to generate annual contract volume, or the formula's incremental TACV.

There are only two variables that determine TACV: the number of customers and the ACV.To accelerate growth more efficiently than the conventional approach, growth levers must be used.

The so-called growth levers are effective ways to increase either the number of customers or the ACV. Because the two are multiplicative, not much of an increase will produce a huge increase in revenue.

Let's start with boosting ACV.

Relatively speaking, the leverage effect of ACV is more obvious. For example, to increase the number of new customers signed to 3 times the original number of customers, this is very difficult, at least 3 times more sales staff need to be recruited to achieve. But it is still possible to increase ACV by 3 times. For example, it is possible to increase the unit price by selling to large customers. However, the sales cycle for large customers also becomes longer. So, it becomes a question of efficiency, i.e., how to maintain or approach the previous sales efficiency even after the customer gets bigger.

This is a problem for sales organizations to solve. If you are selling traditional software, this problem is basically unsolvable; but now you are selling services, and by reorganizing the service sales methodology and process, it has been shown that there is a solution to the efficiency problem.

Furthermore, because ACV is directly related to pricing, raising prices can also increase ACV; however, price is an extremely sensitive factor, and raising prices has the potential to affect the growth of customer numbers.

Through methods such as content marketing and value marketing, prices can be increased to some extent; at least the customer unit price can be stabilized without bottomless price cuts due to price wars.

Again, boosting customer numbers.

There are three main ways to increase the number of customers: increase the number of sales people, optimize marketing and cross-recommendation.

However, increasing the number of salespeople is not an efficient method for SMBs (but everyone is using it at the moment). The right marketing strategy is actually more effective, and it's a matter of lead conversion efficiency. HubSpot has given proof in this regard. It has managed to do $100 million in revenue with only a modest sales force.

Cross-recommendation is a common method used by foreign SaaS. Because of the business segmentation of SaaS, customers seldom buy a single SaaS, but use multiple SaaS to support a business at the same time.

In this way, when a customer buys your eco-partner's SaaS, he or she is likely to buy your SaaS as well. the ultimate player in this approach is Slack, which even spends money on advertising for its eco-partners. When customers click on the ads will always find: no matter what to buy, need to buy Slack, otherwise not only a bunch of SaaS difficult to integrate, but also the lack of a business portal. This method is difficult to work in the country. Because there is no cross-partners, all SaaS want to "one-stop" to expand to other people's services.

However, cross-referrals are a cost-effective way to increase customer numbers.

Growth is the primary goal of SaaS companies, but it's not a resolution or a slogan, it's a requirement.

SaaS growth is not something that can be handled by a "growth department" or a "growth hacker". It is a systematic process of growth-operations integration by design.

Respecting the rules, setting goals, utilizing leverage, and quantifying results are the basic principles of SaaS business growth.

Title image from Unsplash, based on the CC0 protocol

Calculation: arr = annual recurring revenue/annualized revenue.

Normalize the recurring revenue portion of a contract for a regular subscription to a one-year value. Typically, ARR includes only the contractually agreed upon fixed subscription fee.

Another metric related to ARR is MRR, and the two metrics measure different time dimensions. In fact, ARR and MRR are a very common metric among SaaS companies in the US.

In the process of transforming cloud SaaS for software companies

ARR (annual recurring revenue) is one such widely used metric. At the beginning of the U.S. stock of cloud SaaS listed companies use this indicator more, such as Adobe, Autodesk and so on. In the last two years, domestic cloud SaaS companies can also use this indicator.

From the public information, the earliest domestic listed company to use this indicator is Shiji Information. In its 2017 annual report, Shiji Information disclosed the cloud SaaS volume, with a repeatable subscription fee (ARR) of 109 million yuan in 2017. Subsequently, in its 2020 annual report, Kingdee also began to use the metric of ARR. 2020 Kingdee cloud subscription annual recurring revenue ARR is about RMB 1 billion, a 58% year-on-year increase.