2020: The Year Software Saved the World

SaaS businesses around the world are going to start 2021 on the front foot.

To understand why, we should take stock of the past – exceptional – few months.

The rapid proliferation of SaaS businesses, enabling the world to work, trade and stay connected, is great news for all of us – as builders and private individuals. Many of our sellers recorded huge growth across lockdowns, as demand for their services surged. Progress within the SaaS industry over the first nine months of 2020 was probably equivalent to what you’d expect to see over three to five more normal years.

Many companies have done exceptionally well. UiPath became the first European decacorn this year. Hopin, the online events platform (and also a European company), reached a $2 billion valuation just eight months after launching. Outside of Europe, Salesforce bought workplace messaging tool Slack in an enormous $27.7 billion acquisition in December.

We are entering 2021 way ahead of schedule. But this means software providers will have to be smarter than ever to succeed – because rising standards always go hand in hand with unprecedented levels of competition.

We must continue to capitalise on this opportunity and keep building.

Customer churn hit an all time high

When Coronavirus triggered lockdowns worldwide earlier this year, software providers faced a reckoning. As economic conditions toughened, businesses and consumers took a long hard look at where they were spending money and cut any services and subscriptions that weren’t absolutely essential. The result? March 2020 was the biggest month for churn in the history of SaaS. Recent findings from the Revenue Collective also revealed that more than 95 percent of revenue leaders surveyed said their business was affected by Covid-19 in March, while the vast majority had begun to reduce their forecasts for 2020 by 25 to 50 percent.

But this huge spike in churn was followed by rapid growth for many SaaS providers, as new working patterns drove businesses and consumers to adopt new tools and services. The combination of extraordinary impact followed by extraordinary change, to which we all had to react or die, should provide us with a novel – resilient – way of thinking as we go into 2021.

2021 will be the year of smart scaling

Next year will still be pretty uncertain, as years go. But whereas the perennial focus has been entirely on acquiring new customers, a global pandemic has set us all on the path of retention: no company should assume that any new customers acquired during COVID will automatically stick with them through another period of change. Developing a solid strategy focused on retention and defending against churn in the short and long term by making themselves truly indispensable is now a necessity.

And that dominant attitude in most fast-growing SaaS companies – to chase any and every sale with the sole objective of getting as big as possible as fast as possible – means 2020 is responsible for accelerating another trend: the end of the ‘growth at all costs’ era. Companies now prioritise annual recurring revenue (ARR) over all else.

Instead, 2021 will see a growing emphasis on sustainable – but still rapid – scaling strategies. Investors will be looking to companies that have both growth potential and strong underlying fundamentals. That will mean a greater focus on metrics like NDR, which takes into account upgrades, downgrades and churn, to tell you as a percentage how much ARR from current customers you’ve retained across a certain period of time. It’s the ultimate customer success metric and one every SaaS executive needs to be on top of to get the best picture of their growth.

The impact of getting this right is huge. Even minor improvements in NDR have a massive impact on a SaaS company’s revenue. According to Harvard Business Review, just a 5 percent reduction in churn rate can increase profits from 25 percent to 95 percent, and a business must increase acquisition by 12-14 percent to match just a 1 percent reduction in dollar churn.

“Whereas the perennial focus has been entirely on acquiring new customers, a global pandemic has set us all on the path of retention.”

Meeting the opportunity

As it becomes easier for early-stage businesses to create and sell software to meet the growing global demand, the next phase of growth is likely to be driven by an explosion of small and medium-sized software companies, who are already emerging from both the traditional industry hotspots and a raft of rapidly maturing tech ecosystems in Eastern Europe and Asia.

Thinking about the year ahead, we all have ambitions to fly on the tailwinds we have coming out of 2020. While it may be tempting to revert back to our old ways of focusing only on the top line, SaaS companies will be more successful if they build upon all that we’ve learned this year. In my next post, I’ll look at how to focus on retention and hypergrowth – a new standard for all of us.

This article was written by Christian Owens from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to [email protected].