SaaS Growth Trends Report 2024 with Jon Cochrane

Randy Wootton (00:04):

Well, hello everybody. This is Randy Wootton, CEO of Maxio and your host of SaaS Expert Voices. We’re being the experts to you to talk about what’s going on in SaaS today and what trends we’re seeing unfold for tomorrow. Delighted to have Jon Cochrane, who’s actually a Maxio employee. He’s our Director of the Maxio Institute, join us today. Welcome Jon.

(00:26):

Glad to be here, Randy. Thanks for having me. The Maxio Institute for those that don’t know is our marketing arm, which looks at our 2,200 plus customers. And the billing and invoicing data that we collect is about $16 billion of billing and invoicing data that we collect anonymously and then starts to look for trends and insights. And we launched it about a year ago. I think Q1 of 2023 was our first report that we published, right, Jon?

Jon Cochrane (00:54):

Yeah, that’s right. It’s been a gradual evolution, but really we started looking at this about a year, year and a half ago, and each report trying to put out new and relevant insights to the broader market. 

Randy Wootton:

And the intention obviously is to help inform what’s going on in the private market. There’s a bunch of analysts out there that do a great job of culling through the public SaaS data and what’s happening in terms of growth rates and gross retention and net retention and what they’re seeing more broadly. But the private market remains opaque. There are companies out there like Benchmark and OpenView and others that produce surveys, where people respond to a qualitative survey and they’re really robust. In fact, Benchmark just came out with an updated one, which is super helpful.

(01:38):

But there are very few companies that are able to use the real billing and invoicing data to talk about what’s going on. And so that’s what we wanted to contribute. And I know as a CEO of a company that goes in on at least the quarterly basis to talk to my board about our performance relative to the broader market, it’s invaluable to have these insights in terms of understanding what’s really playing out what the trends have been. And so that’s our opportunity to share. I don’t know if there was anything else you wanted to add to the remit of the report or the institute, Jon?

Jon Cochrane (02:10):

No, I think that’s a really good summary, Randy. I think one of the things that we’re able to shed a little bit of light on are some of the dynamics playing out in the public versus the private. Well, really the private instead of the public markets. Like you were saying, there are a ton of analysts that cover the public markets, but there are unique challenges that the private markets face, and you typically don’t know if things are kind of trending in the right direction or companies are struggling until you kind of get that press release that comes out and takes everybody by surprise. Yeah, they’re just unique challenges that private companies face and it’s really helpful to be able to get a small pulse on, hey, what’s going on within my cohort that my business exists in?

Randy Wootton (02:56):

And so we do split the data broadly at this point between those companies that are less than a million bucks and then everybody. The other thing that we bring to the table is an insight in terms of the pricing model, if they’re using consumption versus more of a subscription term-based model. There is some nuances that we’re able to layer in because of our own business model. And finally in our recent report at the end of the year, we introduced vertical analysis. And what’s happening on the verticals, which everyone wants to know, is like, hey, if I’m in FinTech, how are things playing out in FinTech versus Martech versus developer tech? And so that’s what we’re going to continue to do each and every quarter. I think the thing that has been the other real driver for us is to try to make this timely.

(03:39):

And so as a quarter closes to come out quickly, as quick as possible with the information. Our Q1 reports a little bit delayed. That’s mostly because of our capacity on our team, but we’re going to give you the insights now, which is still better than waiting for the end of the year 2024 to find out what happened in 2024. We with our rhythm are trying to do a flash report at the end of Q1 and Q3, and then a deep dive report at the end of H1, a calendar year, H1, and end of the year. So we’ll talk a little bit about what we learned in the Q1 report today, and then we’ll frame up what we’re expecting for the H1 report that Jon and team is going to sign up to deliver at the end of the podcast. So with that, Jon, broadly across Q1, are we still in the recession? Have we seen a rebound? What’s the top level?

Jon Cochrane (04:29):

Yeah, I think the most exciting thing that people may pay attention to in this report is that we’ve finally seen what appears to be an uptick in growth. And so there are nuances to it. What’s driving it? Right. Right, exactly. We could do a little whoop whoop there. I think if you listen to NPR, they have a buzzer whenever things are going well, we need to get one of those for the podcasts here, Randy. But yeah, we’ve seen a slight uptick in growth and it’s really something that when you look at, we tried to take a look over the last nine quarters, that’s the data that we have right now, when you take a look at the trends, it is a noticeable uptick. Now does that mean that growth is here to stay? I think we would caution strongly being like, we’re back, baby. Growth is here. But it is notable saying, okay, it looks like there are cohort of companies that are figuring out how to succeed, how to grow despite economic headwinds.

Randy Wootton (05:25):

And I think that has been the, for us at least, has been an awesome trend because all last year you and I were chatting about how it had dropped off significantly, almost precipitously, and then it was just flatlining at 14 to 15% growth for several quarters in a row. And so everyone’s talking about could we ever get back to a world where B2B SaaS is growing at 20% plus. Don’t know. And to your point, one quarter of data doesn’t make a trend, but as we talk about our H1 report, if we have two quarters suggesting that there’s this recovery, I think that will be something that everyone will be looking at closely. And so then let’s deep dive a little bit, Jon, so that we have broadly the growth, but when you double click down, there’s drivers of the growth and then by pricing model by size, and then there’s certain verticals where we’re seeing growth. So it’s not consistent growth for all companies across all pricing models, across all verticals. Can you give us a little bit of context on what you’re seeing when we do that double click?

Jon Cochrane (06:27):

Yeah. So maybe we’ll start with the bad first and then we’ll talk about the people who are finding a way to grow. I think one of the things that’s very clear in our data is if you’re facing a negotiated renewal, say it’s an annual invoice or something along an annual renewal with your customers, that cohort of companies is struggling. You see that and you see a parallel to what’s going on in the public markets there. I’ll use Salesforce as an example. In their earnings release, there was a noticeable drop in their stock price. They were saying, “Hey, people are budget conscious, they’re sensitive, and they’re pushing back on their subscription spend.” And we’re seeing that correlation play out in the data. So that cohort has not continued to grow broadly. They are still facing some of those economic headwinds. People are pushing back on their annual renewals.

(07:16):

And it’s clear from the data that we’re seeing so far. To contrast that if you are more of a usage, consumption-driven company, we’ve seen growth continue. For the past really three quarters. That cohort has outperformed those companies who have more of a negotiated contract model, but that gap has widened. They’ve actually continued to grow. They’ve outpaced the growth of the prior three quarters. And so usage, consumption is really driving a lot of the growth right now, and there’s a noticeable improvement for companies under a million dollars.

Randy Wootton (07:55):

Let’s hold it for-

Jon Cochrane (07:56):

There’s a lot to unpack there.

Randy Wootton (07:57):

Yeah, there’s a lot to unpack. One of the things is when we first started this report, we actually noticed that the consumption-based pricing model companies were dropping off faster than the subscription at the time. You had a hypothesis, well that probably makes sense, that in the middle of the recession or the COVID that people that are on more of a month-to-month, which is often aligned with a usage model, would pull back and we would see those companies drop. Whereas the annual contracts is more of a step function. At time of renewal, you’re going to see that play out. And so to your point, there are some companies that have more of that annual motion that are feeling the pain that had been playing out in the consumption market a year, 18 months ago. Do you think that’s true?

Jon Cochrane (08:42):

Yeah. So a couple things going on because I think there is a break point and the story is different depending on if you’re an early stage, like the earliest stage company versus a company that has, let’s call it hit product market fit, and what’s that delineation that we make? We see a noticeable difference in the trends if you’re a business under a million dollars versus over a million dollars. One of the insights that we’ve noticed in the data that we look at is if you’re under a million dollars and you want to, you’re trying to get to the next level, having a negotiated model is a really good way to do that because it’s just the quantity of customers you have to win in those generally usage-based environments, it’s a big burden or it’s a big obstacle to overcome. We still see that trend playing out, but we’ve seen an improvement. Subscription invoicing, that’s still outperforms the usage cohort if you’re under a million dollars. However, again, in Q1, big improvement in those startup, early stage companies who are deploying primarily a consumption-based model. If you are over… Yeah.

Randy Wootton (09:46):

No, go ahead. Please finish your thought. I had a qualifying question, so go ahead.

Jon Cochrane (09:50):

Yeah, yeah. If you’re over a million dollars though, that’s where we see the biggest divergence. Your company’s hit product market fit, you already have a cohort of customers, consumption is just outperforming, so the invoicing negotiated renewals. And so that’s kind of the dynamic that plays out. It’s early stage scrappy company, got to kind of do whatever it takes to break past that initial barrier. Once you’re above there, the companies who have found a way are the ones who have more of that. You don’t have to reengage in the negotiation as you’re consuming whatever widgets you sell or onboarding users licenses, whatever it is, your growth rate, it follows the usage of the business. So you’re having to avoid some of those things that the negotiated companies have to, that they’re just hit right in the face with right now. There’s no negotiation. It’s just, hey, they’re using your product more and you’re growing.

Randy Wootton (10:45):

That’s right. So let’s go back to the distinction you’re drawing between a million and those above a million. Part of the reason why we make that distinction is because we tend to sell to companies that are very early stage, even pre-revenue as they’re getting their billing model up and going, up to companies like 50 million. We have companies that are greater than a hundred million, but we are not playing in the enterprise space. So part of it is our corpus of data, the set of customers we have, we’re focused on that space, sweet spot between two, three, four million and 40 million. But there’s another reason that we focus and make a split between the million dollars and everyone else is because 80% of the companies I think are below a million bucks, broadly across according to the Bureau of labor statistics.

(11:28):

And it just seems like that is its own dynamic. And so maybe can you talk a little bit, is there any other reason why we make that split between a million bucks and everybody else? And is there a nuance to being below a million bucks in terms of product market fit or revenue architecture fit?

Jon Cochrane (11:44):

Yeah, I mean there’s no say one-liner that encompasses why we’ve chosen the one million cohort or less. You’re right when you just take it out of the Baxter Institute, look at the Bureau of Labor Statistics. There are a lot of businesses that say are a sole founder who’s running their own business or they just have five employees and they’ve found a lifestyle business or something like that where growth is not the priority. It’s running a sustainable, scalable business. It’s cash flow positive that can pay everybody’s salaries. It’s out there. But what the data bureau will put out there is they’ll say most companies that start are going to fail pretty quickly within two to five years after they launch. To have a business that launches and it withstands the test of time. It’s just a challenge. And so that’s just the dynamic that has played out for decades.

(12:40):

In our data, one of the reasons why we focus on the $1 million cohort is it was originally we thought maybe our data and the way we were slicing the analysis was wrong. But then we went back, triple check the numbers and we went, no, there are real differences between companies who are above that threshold and companies who are below it. And I think that informs the broader strategy that businesses need to think about as they’re evolving along this growth maturity model, the tactics that you employ when you’re less than a million dollars are different than that when you’re in the one to 10 million. And it’s different if you are 10 and above and it changes, there are these different inflection points that companies need to be aware of. They need to think about, you need to plan for in your growth evolution. The one million dollar cohort, the change in the analytics and the findings was really undeniable. So much so that we essentially had to call out. We said there are these different dynamics at play.

Randy Wootton (13:40):

And what we saw, I think just to put a fine point on it, out of 1500 customers, so we do a bunch of filtering to make sure the data is accurate. We have north of 2,200 customers broadly across Maxio, but in this specific cut of the numbers in Q4, the growth rate for companies less than a million bucks was 5%. And in Q1, that’s spiked up to 26%. By contrast, the company’s greater than a million dollars in Q4 was at 19% and that’s dropped to 16%. And so part of that is, hey, they’re small companies, they get a couple hundred thousand dollars and they got massive growth. But I do also think there may have been a clearing out a bunch of companies were less than a million bucks went out of business and post-COVID, there’s been some funding, especially in the AI sector and cyber and etc. And so I think you’re starting to see companies to get to a million dollars, if you’re starting from zero, it’s like a two to three year thing unless you’re on a white hot tear.

(14:41):

And so you’re seeing companies that got founded in 2022 that are coming into focus at a million bucks, post-COVID post the pullback. I think you’re seeing some VC activity happening in that early stage founding. Do you have any other thoughts in terms of this cohort of the new kids on the block that are hitting a million bucks?

Jon Cochrane (15:04):

The one thing that when I saw a spike in the numbers in Q1 really where my mind went was I wonder if we’re having a similar trend that we really last observed back in 2008, 2009 during the last financial crisis. And one of the things that occurred then was you had… There was kind of this, everybody was growing and then all of a sudden everything dried up and companies who were able to get started in that cohort, I think of a couple of notable ones, Dropbox, Airbnb. You can find articles published on this of companies who launched in 2008, 2009, 2010, found a way to survive within really an unprecedented time and make it, have done phenomenally well since then.

(15:57):

We could be seeing that dynamic playing out again, this is a very hard time for companies who want to get funding. To get funding. You really have to be best in breed. You have to have the numbers. If you’re going to get a bank loan, this is an expensive time to do that. Given inflation, business loans, you’re paying a pretty hefty premium somewhere between probably 10 to 15%. That’s a real cash consideration or real cash drain to basically finance that debt. If you’re a company that has found a way to either bootstrap or you can take on funding, this could be that dynamic playing out 15 years later.

Randy Wootton (16:41):

Well, we’ll certainly come back in our reports, subsequent reports and talk more about it and see what we’re seeing. And then one of the things I love that you and the team do, Jon, is you do reach out and look at other, you contact other analysts and you quote other sources to help triangulate on what we’re seeing and to put it into broader context, which I hope our listeners and readers appreciate as well. It’s not just our data, it’s data within context. To that point, let’s then shift to the verticals. We’ve talked about the split in terms of pricing model consumption versus subscription. The world still is going to be hybrid, but what model do you use at what stage? We have a lot of data around that. We talk about what’s playing out in the million and the greater than million. And then at the end of 2023, we layered in our first vertical look. But you’ve been able to go back and provide data for previous quarters and the trends. What did we see in the data for what are the verticals that are winning?

Jon Cochrane (17:39):

Yeah, most recent, the two that are really at the top of the leaderboard in Q1 are software companies in the dev engineering space and those who also are focused on transportation, logistics, supply chains. Previously they were kind of middle of the pack or bottom third, but they have popped to the top most recently. Super interesting when you look back and who were the juggernauts over the prior eight quarters take out Q1. Cyber is the undeniable, they’re the heavyweight champ within that cohort. But we’ve seen a pullback in that sector. And I think some of the dynamics when we were, like you were saying Randy, we try to contextualize the insights that we’re having to some of the broader things that we’re seeing from different analysts in the market. And there was a theme saying cyber has been doing phenomenally well.

(18:29):

People have been beefing up their cyber, but there comes a point where they can’t just continue to charge more and more and more for that data because people eventually are going to say, “Okay, well there are other people and other competitors that are in the space and I have to find a way to have a reasonable cyber budget.” So we saw that. We observed a pullback there but where we observed the newcomers, the dev tech, the supply chain tech, they’ve now risen to the top of the leaderboard.

Randy Wootton (18:58):

Well, let’s split those little apart and we don’t know exactly why, but I think you and the team have developed a hypothesis for why do we think developer and engineering tech has been growing like crazy recently?

Jon Cochrane (19:08):

Yeah, I think our hypothesis right now, again trying to triangulate to what we’re observing in some of the private companies out there and some of the themes that we’ll see is we have conversations with different companies out there. Companies have had to optimize for EBITDA. For those of you that aren’t familiar with EBITDA, it’s basically earnings before interest, depreciation, taxes, amortization, essentially what’s your cashflow? If we had to simplify it down, cash coming in needs to be greater than the cash going out. And so one of the most expensive costs for any business is headcount. 70% of a business’s expenses is tied to headcount and you’ve just observed multiple rounds of layoffs all throughout the private industry. You can’t just cut all of your employees and then expect to continue to grow. You need to find a way to grow smarter, in a more scalable fashion. And so if you’re going to do more with less employees, you need to be able to supplement those employees largely with new tooling.

(20:10):

That’s the dynamic that we think is likely playing out here. You’re going to need some sort of software to supplement the leaner operation that you’re running as a private business right now. That’s our leading hypothesis right now, but we’re certainly going to double check that when we put out the next report here in about a month.

Randy Wootton (20:29):

Yeah, I think it’s a great observation. And one of the things as you guys pulled together, we were talking about the carnage of layoffs in 2022 and 2023, and there’s a variety of reports out there. I’ve heard it’s up to a million jobs had been eliminated in 2022 and 2023 in the tech sector, Tech Crunch I think what you quote said it was 300,000 in 2023, whatever. It was a lot. But what they also said is the layoffs have continued and that through basically the first quarter of this year, there was another 60,000 laid off. And I don’t hear that in the press as much. It felt like at the end of the year everyone was like, we’re done with the layoffs, everyone’s going to start hiring again. But I don’t think that’s necessarily true. We’ll be following that as well as one of those trends in terms of the layoffs as people are tightening their belts and obviously the two ways that you get better business performance brute force as you raise prices and you lay people off.

(21:25):

And I think everybody in the software industry has done that. We’ve seen that in the price increase with Salesforce and others where they just said, “You’re going to pay 9% more and tough.” And we’re like, “Okay.” And I think that’s been playing out in enterprise software writ large. And then the other thing to your point is how to drive efficiency. One, you sort of restructure, you take advantage of labor arbitrage. I think there’s another theme which you and I have chatted about and we’re going to look more closely at is the assumption with VCs and PE firms in terms of AI augmentation and what these tools are going to do to make marketers more efficient at their job. And I think one area you’re seeing that play out, not the first person to say this, but is developers. Buying AI tools like copilot, et cetera, that are helping them produce more code or getting 80% of it done right, the QA.

(22:18):

And so I do think, I’ve been talking about banging this drum that CEOs and CFOs of private companies are going to have to have, next year going into their fiscal year 25 planning cycle, a line which says, and here’s our AI efficiency gains. So not just tooling that you’re describing, but intelligence. The augmented intelligence that is going to help us all do our jobs better. And so that’s the clarion call for all functional leaders to, if you’re not experimenting with AI right now and how to make you better, you’re going to fall behind, especially if you’re looking for investment from the top tier VCs and PE firms.

Jon Cochrane (22:54):

Yeah, it’s pretty wild how powerful that technology can be and how it can augment. And I’ve seen things like it helped me get over writer’s block. Well, writer’s block is a huge… The block, it’s not called writer’s block for any reason. The block is real. But yeah, to your point, call it coding block, whatever it is. If you can just get more efficient, get it done quicker, it’s really powerful. I think I was reading an article actually put out by one of our Maxionauts the other day and they were saying, is AI going to replace human? Everybody goes to Terminator and grow us from going to take over the world. I think the thing that is pretty clear is people who know how to leverage AI are going to outperform people who don’t know how to leverage it.

Randy Wootton (23:36):

A hundred percent agree. I remember I was CEO of a company called Rocket Fuel, which is a first generation AI company. It was the real deal AI, and we had 25 models that we were updating every night, algos, and we had thirty-ish data scientists on staff and another 30 client managers analysts that were helping with clients, customers to do marketing optimization. And we were in that boom versus doom dichotomy, Jetsons versus Terminator. We were putting all the media planners out of the job and this was like 2015. And what we tried to frame was it wasn’t about artificial intelligence, it was augmented intelligence. Fast-forward, guess what? Those media planners and buyers aren’t doing the same thing they were doing back in 2015. They’re all taking advantage of what’s called programmatic buying today. And so I think every industry can look towards what’s happened in marketing, what’s happening in sales in terms of AI, and it’s improving the outbound motion and qualifications, et cetera.

(24:31):

And if you aren’t playing with it, you are going to get left behind. Well good. Well, Jon, I think we’ve covered most of the report on the industry side. I think the lowest growth rate industries, media tech, e-commerce, HR in Q1 over the last eight quarters, e-commerce and retail have been the lowest average growth rate, marketing and sales and media tech. Marketing sales and media tech surprise me just because that industry is totally overcapitalized. There’s like 40,000 different vendors and I think as every CFO is looking at every function and saying you need to tighten your belt, that often marketing and the advertising teams have bought a bunch of tools and so they’re being pulled back and a bright line is being drawn between the must have and the nice to have. And I think that’s what we’re seeing play out is who are the winners and who are the losers in those categories. With e-commerce and retail, with the strong consumer trends that we’ve seen in the broad market, do you have a sense for why they might be not growing as fast as some of the other industries?

Jon Cochrane (25:33):

Yeah, I think that that’s something that we’re certainly going to take a closer look at in the next report. I had been reading some articles the other day basically saying that before we had the growth at all costs, the infusions of all positional capital into the economy, consumers really were price sensitive and you had to have competitive prices to win somebody’s business. And a lot of that went away. That conventional thought went away in 2021, 2022. And we’re just now starting to see a return to, you just can’t continue to charge people exorbitant profits. I mean, you’re observing in the public markets. A lot of these companies are having record profits and people are starting to connect the dots and go, this is not all inflation. These are smart companies who know how to take advantage of a situation and now all of a sudden that’s going to have to start… I think we’re seeing the beginning of that playing out in the B2C market. People getting smart. You got to compete on price.

Randy Wootton (26:38):

I’ve been reading some articles. Are we ready for another consumer contraction? So great. Well, I’m going to put you on the spot, Jon. So we’re teeing up the next report, which will be at the end of Q2. Hope to have it out in 30/45 days [after the ] the end of Q. Two is, other than what we’ve already talked about in terms of what we’re focused on in our year end report, in our flash report along the dimensions we’ve described, do you have any Christmas presents for our readers and listeners for the next report?

Jon Cochrane (27:07):

Yeah, I think the thing that we’ve really wanted to do, Randy, is shed some light on… We’ve hinted at it and said, Hey, these are the top industries. What we haven’t really shed a lot of light on are… There’s a book by Jim Collins, Good to Great. There are a lot of good companies, but what do the great companies do that are different than those who are good companies? That’s one thing that we want to start unpacking. Who are the top 10%? What are the characteristics about those companies that are different than say a company in the top 25%. It’s a big difference if you’re in the top 10 versus the top 25. That’s one of the things that we want to start unpacking.

Randy Wootton (27:47):

That’s great. The mean versus the median versus the mode.

Jon Cochrane (27:51):

Yeah. Yeah. And it’s interesting when you start looking at it that way. A lot of our data is based on averages, but when you start getting into the mean, medium, mode, the top quartile, top deciles, it’s interesting.

Randy Wootton (28:04):

Well, that’s great. And I do think you have to have enough data to make it meaningful. And so obviously what is a statistically significant amount, we’ll try to do it. I do think this was… I’ll never forget when we came in with our year end report for our board, Chelsea Stoner, our general partner on the board, and we talked about the million dollar below million dollar threshold, and she’s like, “Gosh, Randy, that just didn’t make any sense.” I was like, “Well, what do you mean?” And Battery would say they see 5,000 deals a year of which they only do 20 and that there are still companies in that less than million bucks that are killing it. So I do think our ability to discern, distinguish what are the top 10%, top 20%, whatever it is we have to draw, what do they look like? What’s their profile versus everybody else?

(28:52):

CJ Gustafson, one of the guys I’d really love to follow, just posted about the T2D3 and you triple, triple your first two years, you double, double, double for the next three years from zero to a hundred million in seven years. That used to be the glide path that, the acceleration path that everyone needed to hit, that everyone was funding. And I think if we are able to get into the quartile and see the strivers versus the thrivers distinguish that and buy vertical we’ll help those companies that really want to be the world’s best say, look, I got it and this is what it means to be in this rarefied air. So with that, Jon, thank you to you and your team for the hard work to get this out. We’re publishing it in the next day or so and I look forward to feedback and comments on what people find valuable and what they would like in our next iteration. So thank you, Jon.

Jon Cochrane (29:44):

Yeah, thanks Randy. Appreciate the time.