Amidst the global landscape of software consumption, growth trends on both the supply and demand front. For majority organisations, engineering teams typically use the most number of SaaS apps - an average of 108 applications. Notably, between 2022 and 2023, the highest surge in SaaS application usage was witnessed by IT and security teams, experiencing a 33% increase, predominantly in point solutions and Return on Investment (ROI) tools. In the initial stages of a company's growth, there is a significant reallocation of software expenditures. This allocation stabilises once the employee count reaches 250, remaining consistent in subsequent phases.
Insights from the SaaS Inflation Index report 2024 by Vertice highlights that in 2023 companies spent a substantial $7,900 per employee to SaaS products—an increase of 27% compared to 2022- now a bigger contribution than healthcare.SaaS inflation is 68% higher than that of other products, compared to 22% in 2022.
This is not entirely surprising, as the report discloses a 73% escalation in prices among software vendors, averaging a 12% increase over the past year, with companies like HubSpot and Microsoft increasing their prices by 12% and 15%, respectively. Projections for 2024 indicate an 8.7% increment in expenditure for identical SaaS products utilised in 2023.
The increase in software prices was also a factor of the moderation in the growth rates for B2B business in the past years. Growth rates for subscription businesses processing up to $100 million exhibit a plateau, concluding the year with a 14% growth in Q4 2023—a 6% decline from the same period in 2022 (Maxio Institute). This shift prompted a parallel phenomenon—consolidation of SaaS portfolios for the companies.
“Our data demonstrate the path to immediate action for CFOs is to better identify and consolidate SaaS apps, given the cost reduction pressures currently facing every company,” said Jody Shapiro, chief executive officer and co-founder of Productiv. A McKinsey survey of 50 CIOs, overseeing IT spending exceeding $10 billion highlights that 60% of them plan to decrease software-related expenses during a downturn, while 75% anticipate maintaining or reducing spending on new vendors and products. CXOs are tightening restrictions on self-procurement, even in the dev/test environment.
In this landscape constantly shaped by evolving software usage, software sales is undergoing a profound revolution. Changing buyer behaviors, stakeholder dynamics, and an unyielding pursuit of value are steering the industry in unprecedented directions. Let’s delve into the key strategies that are reshaping how software is sold, ensuring businesses stay not just relevant but at the forefront of current consumption trends:
Amidst the uptick in interest rates and escalating capital costs, there's a noteworthy shift in investor sentiment—from a pursuit of "scalable" growth to an emphasis on "sustainable" growth. Software investors, drawing on the industry's resilience in past recessions, are eyeing opportunities to boost their portfolios, aligning with the nuanced demands of the current landscape. Sure, SaaS is riding the AI wave, there’s surge in Vertical SaaS and there’s booming demand for API connections - Investors are on the lookout for opportunities in India and beyond with innovative distribution strategies, poised for some serious growth. It's a hunt for the next big thing in the ever-evolving software landscape.
1. Significance of Net Dollar Retention (NDR): The narrative has pivoted from considering Annual Recurring Revenue (ARR) as the primary metric for sales efficiency. Forget the old-school funnel approach to customer acquisition – in the world of recurring revenue, it's more like a bow tie than a funnel or a pipeline. As companies progress through subsequent funding rounds, the emphasis shifts towards pivotal indicators such as net revenue retention and market share. These metrics assume heightened significance in gauging the sustained success and impact of a SaaS enterprise in the dynamic market landscape.
2. Professional Services Beyond Initial Implementation: This can open up opportunities to unveil Professional Services, including adoption and optimisation services, empowering sales and customer success teams to attach these services beyond the initial deal. Optimisation services (as shown in Fig below) dive into usage data, collaborating with customer teams to enhance product experience, expedite adoption, automate operations, and influence business outcomes. Not only are these services highly profitable, boasting margins of up to 60% at maturity, but they also hold a crucial role in maintaining customer retention and, consequently, enhancing Net Dollar Retention (NDR).
3. Value-based pricing coupled with usage-based revenue models: Unlike subscription, cost-plus or competitor-based strategies, value-based pricing circles around customer-centric valuation. This approach aligns pricing more closely with the distinctive benefits and features provided by the solution. Adopting this strategy that involves charging clients based on both software usage and the value delivered necessitates a comprehensive understanding of the customer's business outcomes. Achieving success with value-based pricing requires commitment, necessitating alignment and seamless collaboration among sales, growth, customer success, product development, finance, and marketing teams. For companies with less than $1M in ARR, employing a subscription invoicing model tends to yield better success than relying solely on usage-based pricing. This trend was evident in Q4 2023, as companies utilising subscription invoicing experienced an annualised growth of 33%, outpacing their consumption-based counterparts. However, the dynamics change once a company surpasses $1M in ARR. Businesses with consumption-based models and annualised billings exceeding $1M achieved a 22% growth, surpassing their subscription invoicing counterparts by 6% in Q4 2023 (Maxio Institute).
4. Migration to PaaS and Emergence of iPaaS: Looking ahead to 2024, there is a projected migration of SaaS towards the realms of PaaS (Platform as a Service). This development empowers businesses to construct customised applications as extensions to their primary services. Major players such as Salesforce and Box have recently introduced PaaS-centric services, aiming to secure a robust market share in their respective niches. According to the Tropic report, the average company had over 102 SaaS solutions in 2023 (Fig below) - exposing employees to the risk of errors or spending excessive time navigating multiple tools. This scenario poses challenges for businesses that need to extract data from these tools for critical strategic decision-making. In response, Integration Platform as a Service (iPaaS) tools have emerged as significant solutions, focusing on empowering companies to leverage their data to its fullest potential. Projections indicate that the iPaaS industry is expected to reach a noteworthy $10.3 billion by the year 2027.
As the industry undergoes evolution and innovation gains momentum, software alone ceases to be the moat for investors. Instead, what truly distinguishes successful ventures are formidable sales teams, lucrative contracts, unique distribution channels for B2B SaaS, substantial user bases, and robust retention and engagement strategies for consumers. As growth stock investors embark on the pursuit of a new SaaS dimension, the industry promises exciting opportunities in the changing landscape of software sales and adoption.
At 3one4 Capital, the team has intentionally built a long-term commitment to responsible investing and to support the evolution of an ecosystem conducive to RI. This active commitment has helped the firm secure the signatory status to the UN PRI.
3one4 Capital has been ranked by Preqin, a global reference database for asset management, as India’s top performer for two of its funds, in the recent Alternative Assets report. The seed and early-stage funds managed by the firm have been recognized for their performance amongst the India-focused venture capital funds in this Asia Pacific-focused report published in 2021. With industry-leading Net IRRs, 3one4 Capital’s Rising I & Fund II are the top two amongst the best performing India-focused VC funds between the vintage years, 2010- 2018.