SaaS Benchmarks – Security and Performance Costs Drive Up Cost of Revenue

By Lauren Kelley, CEO and founder, OPEXEngine

Security and performance investments, among other items, are driving up COGs for SaaS growth companies

The ultimate goal of a subscription business model is to reduce the cost per subscriber and increase profitability. That does not mean, however, that cost ratios follow a smooth downward trend as revenues grow. 10 years after went public in 2004, we are seeing that SaaS COGs may trend upward, and hit several plateaus along the way. Security and performance investments are two major drivers of the increasing costs experienced by most of the leading SaaS companies today.

In the early days of Cloud computing, SaaS vendors worked hard to convince customers, particularly enterprise customers, that their confidential data was safe in a Cloud-hosted system. That argument has become easier over time as SaaS and subscription services have become more accepted. Cloud providers typically have better security than most companies can afford individually since the Cloud provider can spread the cost of security infrastructure and measures across all customers. SaaS applications are built on an infrastructure that provides the security, performance, and reliability normally found in only the most sophisticated IT departments.

However, maintaining the highest security levels is a continually evolving investment, both because the threat keeps changing, and because the technologies and industry standards keep evolving. Of course, fallout from NSA snooping hasn’t made it easier for US companies either. In addition, as the SaaS model has become more accepted worldwide, and SaaS vendors grow revenues overseas, supporting far flung customers requires greater investments in infrastructure to deliver high levels of performance. Further, many successful SaaS companies move their customer base upstream, from small to mid-sized customers and departmental use, to larger customers and global enterprises, with much higher performance demands.

Security investments fall into a number of areas: physical security of the servers, network security, application security, internal systems security and operating systems security, as well as following the most up to date third party certifications. Investments to improve and expand performance similarly fall into a number of areas; chief among them are often database and data center expansions and improvements.

Take a look at Salesforce, since their IPO in 2004. Salesforce achieved $4B in recognized revenues in the fiscal year ending January 31, 2014. They led the way in the business strategy of building brand in the small and mid-market, then moving upstream to larger enterprise customers, as well as growing a single application into an enterprise platform. As Salesforce has grown customer usage dramatically, expanded worldwide, and offered more applications and functionality to enterprise customers and a platform to partners, Salesforce’s COGs’ trendline displays periods of increasing expenditures, then some reduction, then a higher peak in percentage of revenue spent on COGs.

Salesforce’s COGs as a percent of revenue were almost 24% in FY 2014, growing 33% from the 18% it was in 2004 when revenues totaled $96M. In the meantime, revenues have averaged 50% growth year-over-year in the 10 years. Despite rising over time, Salesforce’s COGs growth rate is lower than the company’s revenue growth rate, so the per subscriber COGs has been reduced — the ultimate goal of a SaaS business.


Compare COGs at the time that Salesforce went public in 2004 to those metrics for some SaaS companies that went public recently. Here’s the most recent data for these companies for FY 2013:


These high growth SaaS companies all have higher COGs ratios than Salesforce does currently and significantly higher than Salesforce did when it went public in 2004. In looking at the 2013 filings for 30 SaaS companies under $300M, COGs averaged 33.2% of revenue. It will be interesting over the next 10 years to see whether these companies have to increase their COGs ratio in a similar fashion to Salesforce or whether this initial higher investment means that their COGs ratios can be reduced as revenues grow.

Key take aways:
• COGs as a percent of revenue are not being reduced as fast growth SaaS companies expand, but actually increasing for many companies as they extend their market reach;
• On-going and evolving security and performance investments are major drivers of COGs, and
• Company growth plans should regularly benchmark these costs and COGs overall against peers and market leaders as new technologies and evolving hosting models are changing the ratios.

OPEXEngine’s Software and SaaS benchmarking has COGs data for private and public vendors, with peer group break-outs by size of revenues, business model and average contract size categories so that like companies can be compared more closely. For more information, go to:

Growth & Changing Face of U.S. Software Industry

Annual Study Finds SaaS Driving Largest Revenue Gains, and Indications of Growth Outside Silicon Valley, Massachusetts & Other Traditional Tech Centers

For Immediate Release

SIIA Contact: Beth Dozier, +1 202-429-1833,
OPEXEngine Contact:  Christine Dunn, +1 617.484.1660,

Washington, D.C. (Oct. 17, 2013) – Small and mid-sized companies in the U.S. software industry are thriving in the post-recession economy, with software-as-a-service (SaaS) firms consistently experiencing the greatest revenue growth and hiring expectations, according to a study released by the Software & Information Industry Association (SIIA), the principal trade association for the software and digital content industries. 

The 2013 Software & SaaS Financial Benchmarking Industry Report was produced by SIIA partner OPEXEngine, the leading aggregator of financial and operating benchmarks for small- and mid-sized software companies. To complete this seventh annual report, OPEXEngine surveyed several hundred private and public U.S. firms with revenues between $1 million and $450 million

The report finds that the entire small and mid-sized U.S. software industry continues to experience strong growth, however SaaS firms are consistently experiencing the greatest revenue growth and hiring expectations in today’s post-recession economy. According to the study, private SaaS firms experienced average revenue growth of 35 percent in 2012, edging higher than the 30 percent achieved by private software firms. In addition, 2012 revenue growth for private SaaS companies was more than twice that of on-premises software companies. Public SaaS firms averaged 25 percent revenue growth in 2012, but the top quartile had a median of 48 percent growth.

While hiring expectations were also strong for private small and mid-sized firms, SaaS companies demonstrated a slightly more significant commitment to job growth. According to the study, private companies plan  to increase employee headcount in 2013 by an average of 26 percent – continuing a positive hiring trend benchmarked at the same rate last year – with private SaaS companies averaging closer to 30 percent planned growth in headcount for 2013. 

“The software resurgence continues, with small- and mid-sized software firms exhibiting some of the strongest post-recession growth rates of any sector in the U.S.,” said Rhianna Collier, Vice President of SIIA’s Software Division. “The study also demonstrates that the face of the industry is shifting, now more than ever, from on-premises firms to SaaS. The greatest gains now unquestionably belong to SaaS firms, which are leading a software industry expansion across the U.S.”

OPEXEngine also noted that more companies outside traditional tech centers on the East and West coasts participated in this year’s study. This data allowed OPEXEngine to, for the first time, compare software firms based in the Central and Mountain regions to their counterparts based in Silicon Valley, Boston and elsewhere. The increased participation also offers a strong indication that there is considerable software industry growth taking place in these non-traditional regions.

“The rise of SaaS, with its remote cloud-based access, appears to be allowing for the establishment of more firms outside major tech centers,” said Lauren Kelley, CEO and founder of OPEXEngine.  “For the first time in seven years conducting this report, we see clear indications that companies are no longer restrained by proximity to the traditional coastal centers of human or financial capital. The expansion of SaaS appears to be contributing to a geographic expansion for the software industry.”

In comparing software firms in different geographic regions, OPEXEngine found that private West Coast firms experienced an average revenue growth rate of 53 percent in 2012, compared to 30 percent for East Coast firms and 25 percent for those in the Central and Mountain regions.   Venture-backed firms had the highest growth among private firms, regardless of location with median 47 percent revenue growth last year, versus 13 percent for the non-venture backed firms.  Profit metrics, however, were better for Central and Mountain companies than for companies located on the East Coast, but not as strong as profit metrics for West Coast companies.

Key findings from the 2013 Software Benchmarking Industry Report include:

  • Private firms expect to increase headcount by an average of 26 percent.  The biggest hiring increases are expected by firms with revenue under $10 million (35 percent) and between $10 and $20 million (26 percent).
  • Private software firms achieved an average revenue growth rate of 31 percent in 2012, compared to 37 percent in 2011 and 28 percent in 2010.
  • Private companies in the $20-$40 million range had the highest revenue growth rate (median 55 percent), compared to 46 percent in 2011.
  • Public companies under $450M experienced a median revenue growth rate of 22 percent, and expect to increase headcount by an average 20 percent in 2013.
  • Public companies in the top quartile showed a median of 48% revenue growth in 2012 over 2011.
  • Private SaaS companies fared much better than private on-premises software companies, experiencing a median revenue growth rate of 35 percent, compared to 16 percent for on-premises firms.
  • Median revenue growth rates were higher for West Coast companies – 53 percent versus 30 percent for East Coast companies and 25 percent for Central and Mountain companies.
  • West coast private firms utilized the most venture funding, having taken an average of $53.5M, while East firms averaged $37.3M and Mid-West/Mountain region private firms averaged $11.4M venture funding.

The 2013 Software & SaaS Financial Benchmarking Industry Report provides extensive financial and operating metrics for U.S.-based companies with 2012 revenues of between $1 million and $450 million. Benchmarks cover key financials, including detailed expense ratios, revenue and profit metrics, geographic break-outs, employee statistics, as well as customer and sales model comparisons. The report also looks specifically at Software-as-a-Service (SaaS) vendors and breaks out all the benchmarks for smaller, private SaaS companies as well as for larger, public, SaaS companies. The 2013 report is the seventh annual benchmarking of the software industry conducted by OPEXEngine.

The 2013 Software & SaaS Financial Benchmarking Industry Report is available for purchase at

About SIIA

SIIA is the leading association representing the software and digital content industries. SIIA represents approximately 800 member companies worldwide that develop software and digital information content.  Information technology (IT) and software security are critical issues to SIIA’s members, many of whom strive to develop safe, secure and state-of the-art products that effectively serve their commercial and government customers alike, while protecting their intellectual property. The SIIA Software Division provides a forum for companies developing the applications, services, infrastructure and tools that are driving the software and services industry forward. For further information, visit

About OPEXEngine

OPEXEngine is the industry leader in delivering financial and operating benchmarks for the technology industries.  OPEXEngine’s benchmarking reports are key tools used by senior operating executives to support the budgetary, strategic planning and investment process.  In addition, OPEXEngine’s On Demand Financial Insights Reports deliver company and industry comparisons in the areas of valuations, revenues, cost and expenses, profitability, employee productivity and cash management for any US public company, created on the fly in minutes.   For further information, visit www.opexengine.comzp8497586rq

Best Practices from Retail FP&A

I recently spent two full days at a Retail Analytics and FP&A conference, which was terrific for many reasons. Retail FP&A (Financial Planning and Analysis) folks are very innovative in tying customer behavior to financial performance indicators. We in the software industry are true babes in the woods compared to retail companies on this one, trust me!

You don’t want to know what they know about your buying behavior and buying probability. (Being a consumer at a retail FP&A conference felt like being a hidden observer at a meeting of TSA officials examining thousands of those full body scanner pictures.)

The key take-away for me was that Retail FP&A is very focused on analysis that really teases out the critical indicators and mechanics of their business, breaking everything down into measurable units of activity, and then putting it together to pretty accurately predict business performance….

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Benchmarks: SaaS IPOers Not S&M Deviants

Good news for sales and marketing executives defending their budgets if they are planning on going public soon: The total amount of money in the sales and marketing budget probably isn’t going to be questioned too much. That doesn’t mean that how they spend their money isn’t going to be questioned, or the effectiveness of the spend; but that’s another issue. In looking at sales and marketing spend for IPOs of SaaS companies, OPEXEngine found little deviation in S&M spending.

We took a few leading public SaaS companies and compared their financials in the year that they went public. It was really interesting that despite the fact that these companies went public in different years, with different macro-economic environments ranging from SalesForce’s IPO in 2004 to Cornerstone on Demand and Jive in 2012, there was only a slight variation in S&M spend….

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Interpreting SaaS Cost of Customer Acquisition

Cost of Customer Acquisition (COCA) is one of the most critical SaaS metrics in determining whether a SaaS business is building a profitable business or not. COCA includes all sales and marketing expense aimed at bringing on new customers. In small and midsized companies, COCA is typically calculated as all sales and marketing expenses from a previous quarter divided by the number of new customers in a quarter.

But COCA is important relative to other metrics, namely the average recurring revenue of a customer (ARPU) and the profitability of a customer’s recurring revenue over the probable lifetime as a subscriber — CLV.

If your COCA is $10,000/new customer and your ARPU is $400/month, then it will take you 25 months to start making any money on this customer, and that’s without any costs to maintain the customer and assuming no churn — how realistic is that? However, if your ARPU for this customer were $2,000/month, you’d start seeing a payback in five months.  We see churn for customers paying a higher average ARPU that is usually higher than for customers paying a lower average ARPU, so the CLV on this customer would probably be better also….

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Interpreting SaaS Churn Metrics

Every SaaS business wants to have very low churn rates. Public SaaS companies often release renewal rates in the mid- or even high 90 percent range, without giving any detail about how the number was derived. In our annual Software and SaaS benchmarking, we’ve been tracking churn rates for six years. We look at churn by two different definitions in order to get at more precise data:

  • By the total number of customers up for renewal that renew
  • By the total dollar value up for renewal that is renewed, or “re-contracted.”

In general, the dollar figure is always higher for every peer group benchmarked than the customer number. Typically, average dollar rate renewals includes expansion within a customer and upselling of a customer. We also see companies with effectively negative churn, or renewal rates by contract value of over 100 percent.

For private SaaS companies in 2011, we found an average renewal rate of 78 percent by total customer renewals and 87 percent by total dollar value.

While these average numbers are for all private companies, generally, renewal rates get better as companies get bigger because a company isn’t going to grow revenue by much if new customer acquisition has to overcome a really strong churn trend — it is easy to model how this works. However, we also see renewal rates may go up and down but trend upward over time as companies grow….

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Critical SaaS Metrics and Benchmarking Event

Critical SaaS Metrics and Benchmarking Event – NYC, Sept. 20 from 8am-10:30am

Register Now – Hear Netsuite CFO, Ron Gill speak about the critical SaaS metrics he tracks to help drive leading SaaS vendor Netsuite's hugely successful growth and valuation on September 20th in New York City. I'm speaking as well about the latest findings in our 2012 Software and SaaS Benchmarking, and how the benchmarks change as SaaS companies go from start-up to IPO.  Register here for the complimentary breakfast, networking and presentations.

Event Details
September 20, 2012
8:00 a.m. – 10:30 a.m. 

The Peninsula
700 Fifth Avenue at
55th Street
New York, NY 10019