A core plank of the SaaS economic model is under extreme pressure


Share post:

elcome to the TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily TechCrunch+ column where it gets its name. Want it in your inbox every Saturday? Sign up here.

Anna is out this week, so I’m back in the saddle for today. Here’s about 1,000 words on something that I’ve been chewing on for a few weeks!  — Alex

Under pressure

Modern software companies grow in two key ways. They sell their products and services to new customers, and they sell more of the same to existing clients. The latter category is important as it helps with growth, and profitability.

It’s simple enough to understand: As SaaS companies sell their code on a subscription basis, they collect revenues over time. This means that sales costs are upfront and the revenue trails. The upside of having a subscription revenue stream over a one-time sale, even if the latter might be more convenient for cash flow purposes, is that it allows for strong revenue predictability. Everyone loves that.

However, spending to land new customers and collecting the sales value later means that SaaS companies can burn a lot of cash to build their customer base. Sounds tough, right? The magic of SaaS, however, is in the upsell. As most software products today charge on a recurring (subscription) or usage basis, they often see revenues from their existing customer base rise over time.

This is called net retention, net revenue retention (NRR) or net dollar retention (NDR). There’s not one perfect definition of this metric, so when you read an S-1 filing or similar from a software company, make sure to read how it defines net retention; otherwise you can wind up thinking that its business is better than it really is!

How does all that add up to profitability? Simple: Once a SaaS customer has paid back its acquisition costs (and related), its recurring revenues are largely a profit source. And, as customers tend to spend more over time, they also contribute to growth. It’s that combination of long-term profitability, growth and predictability that has made software revenues worth so much over time.

However, the net retention reality in the market is evolving in a manner that appears pretty tough for software companies, both large and small. NDR rates are slipping all over the software landscape, meaning that a lot of software companies are seeing their growth rates decline, not due to their inability to sell to new customers — or not merely that problem — but because their existing customers are not buying as much as they used to.

Source link

Lisa Holden
Lisa Holden
Lisa Holden is a news writer for LinkDaddy News. She writes health, sport, tech, and more. Some of her favorite topics include the latest trends in fitness and wellness, the best ways to use technology to improve your life, and the latest developments in medical research.

Recent posts

Related articles

How to raise a Series A in today’s market

If you’re an early-stage founder, the crazy days of 2021 are a distant memory. Money is tight,...

Why we’re seeing so many seed-stage deals in fintech

Welcome back to The Interchange, where we take a look at the hottest fintech news of the previous...

SBF’s trial starts soon, but how did he — and FTX — get here?

The highly anticipated criminal trial for Sam Bankman-Fried, former CEO of bankrupt crypto exchange FTX, begins Tuesday...

A tale of two research institutes

If you’re lucky, once a year you get to put together a panel built on pure kismet....

Tinder goes ultra-premium, Amazon invests in Anthropic and Apple explains its new AirPods

It’s that time of the week again, folks — time for Week in Review (WiR), TechCrunch’s newsletter...

How much can artists make from generative AI? Vendors won’t say

As tech companies begin to monetize generative AI, the creators on whose work it is trained are...

Venture capital is opening the gates for defense tech

Welcome to the TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily TechCrunch+ column where...

Humane’s ‘AI Pin’ debuts on the Paris runway

You’d better believe that Humane is going to milk the media hype cycle for all it’s worth....