Rising SaaS Inflation

Just back from the latest SaaStanak meetup in Croatia, where we had a great panel discussion about Bootstrapping vs VC.

Despite the doom and gloom in 2024, founders from both camps see great opportunities on the horizon. I recently posted about one that I personally see specifically for bootstrappers.

The State of SaaS: ChartMogul's Reality Check

ChartMogul's latest report confirmed what many SaaS founders and operators have been experiencing first-hand:

1. New business growth is slowing down

2. Retention has been suffering

3. Startups are trying to offset through expansion

The efficient growth everyone's talking about still seems to be an elusive goal. This puts a lot of pressure on SaaS companies, especially VC-backed ones expected to grow exponentially.

Looking at SaaS Capital's latest spending benchmarks, VC-backed companies are spending ~30% of their ARR on S&M. This has fallen slightly compared to the previous year, but not significantly.

At the same time, sales and marketing efficiency has plummeted, making it increasingly hard to achieve high growth rates.

Let's take a simple example: A VC-backed SaaS with an ARR of $1M should ideally grow 200%+ YoY. However, with prevailing Blended CAC ratios and 30% of ARR spent on S&M, you'd only add between 115k and 261k ARR per year (11.5% and 26.1% ARR growth respectively).

Remember, these benchmarks reflect the broader market, not just VC-backed companies of a certain size. But it gives you an idea of how big the gap is between median and potential hypergrowth.

The Expansion Dilemma: Price Hikes and Customer Loyalty

Companies are struggling most with acquiring new customers, reflected in the sharp slowdown in new business.

Naturally, SaaS companies have shifted focus to expansion. But customers' budget constraints make it tough to generate upsells.

I've seen many companies counteract this by raising prices, sometimes sharply. Probably the easiest way to pump up Expansion ARR in the short term if you're struggling with upsells.

Vertice reports that in 2024, SaaS inflation increased by 12.3%, meaning the same unchanged set of SaaS products will cost businesses significantly more than a year ago. In addition, they see “shrinkflation”, describing obfuscated changes to pricing and value that are not immediately apparent.

The problem? Price changes without product improvements might not be sustainable. There's a high risk of creating a mismatch between delivered value and cost. Especially for low ARPU products with less sticky offerings, this could backfire and hit customer loyalty hard.

I'm noticing it myself. With some tools I use, I'm seriously considering switching (or have already done so) to competitors with better price-performance ratios.

In my opinion, this is a great chance for less well-funded companies to score by providing the same or higher value for less money.

As there is no real pressure for them to prove anything to anyone except their customers.