After examining G2's State of Software report in last week’s podcast, which delves into the supply side, we now shift our focus to the demand side as we explore the data provided by Gartner and Vendr. Surprisingly, SaaS dominates the cloud market regarding end-user spending (Gartner).
Last week, we discussed how the G2 quarterly state of software report indicates that the number of software companies has grown from less than 50,000 in Q3 2018 to 125,000 in Q2 2023. This shows a growth rate of about 7% per quarter. Meaning it's harder for companies to break through the noise.
Gartner's 2023 report revealed that SaaS spending is projected to grow by 17.9% to $197 billion in 2023. However, Q3 data from Vendr suggested net new purchases were down 37% YoY, ACV was down 17% YoY, and multi-year agreements were down 14% for net new and 28% for renewals.
Individual companies seem to be gaining momentum despite market volatility, but the current market condition is causing much confusion among executives regarding growth and investment decisions.
There is concern about long CAC payback periods, which can lead to financial uncertainty.
The typical payback period for a SaaS company pre-COVID was between 12 and 24 months. However, in the downturn market of 2023, 30-35 months was more typical, signaling increased cost inefficiency across the SaaS sector.
Businesses can improve efficiency in the face of increasing CAC by focusing on team training and better positioning. (April Dunford, author of Obviously Awesome, puts this into perspective with a real-life example of shopping for toilets)
When reviewing CAC, we regularly compare it to LTV. However, the concept of lifetime value as a metric has become less prevalent and challenging to define in recent years, possibly due to the uncertainty surrounding what constitutes a "lifetime" in today's rapidly changing world. This observation extends to both fundraising cycles, where it seems less important.
Given the rapid growth in certain sectors like cybersecurity and healthcare tech, the sustainability and normality of such growth rates is questionable.
Cybersecurity is the most secure sector and continues to grow exponentially. It’s described as a sector that one must invest in regardless of market or business conditions.
The exponential growth of the SaaS sector raises the question, “Would it be beneficial to have some barriers to entry in businesses, especially for cloud companies that handle sensitive data?” Barriers can create a more controlled growth velocity rather than runaway growth that could destabilize the industry.
The discussion also touched on the performance of Gong, SalesLoft, and Outreach, noting that these companies experienced a contraction from Q2 to Q3. A question was raised about the viability of Apollo, given the market behaviors shown by Gong, Outreach, and SalesLoft, as Apollo had just raised $100 million.
In the current market, buyers have significant bargaining power, backed by data showing a decrease in multi-year agreements and renewals, with a significant proportion of negotiations.
According to the Vendr survey, the primary clause that significantly impacts negotiations is the auto-renewal provision.
So, how can you, as the buyer, ensure you get the best price possible? It’s suggested that you make it clear that there is competition for the deal and that you should be prepared to walk away during negotiations if you aren’t getting the deal you want.