SaaS Myths Debunked with Data

On February 21, 2013 by Alexander

Software-as-a-Service (SaaS) companies start with a certain set of ideas about what customers want and how they’re going to make money. Freemium, up-selling, online-only sales…the list goes on.

As a technology journalist, I used to hear all the arguments for how SaaS business were superior to the old-guard enterprise software incumbents. Yet now that I’m inside a startup offering a cloud-based service, I see that it’s a little more complicated.

David Spitz and his team at Pacific Crest, a boutique investment bank, have a remarkable presentation available that breaks down some of the myths of SaaS-style businesses. The presentation is based on a survey of 70 private companies selling SaaS to enterprise and SMB customers.

Key findings:

  • Up-sell isn’t a strong strategy, accounting for just 20% of customer average value.
  • Companies got strong revenue growth from field & inside sales. Online-only sales appear aspirational.
  • Professional services are great for margins, out-performing industry averages by a long shot, but only accounting for a single-digit percentage of revenue.
  • “Try-before-you-buy” is displacing fremium and fremium isn’t converting.
  • Median YoY increase in marketing spend is 32 percent.
  • Median yearly contract value is $37,500.
  • Yearly billing is more popular than monthly billing, but month-to-month is more popular for yearly contract values under $5,000.
  • 87% annual renewal rate.
  • Month-to-Month contracts churn at 18 percent.

[HT: Brad Feld]

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