Comparing current benchmarks to pre-COVID-19 benchmarks
Remember this time, a year ago? We were all on our 5th, or 20th version of a 2020 operating budget/plan, working 100% remotely, and trying to forecast the rest of the year. Most companies hunkered down, shifted to fully remote sales and marketing, transferred unnecessary travel budgets into other buckets, and conservatively managed expenses.
The results are in and we’ve published the latest benchmarks incorporating 2020 actuals in our platform. We’ve analyzed changes and shifts which we’ll be documenting in more detail to our subscribers, but wanted to share a few trends here.
SaaS Revenue Growth Benchmarks Didn’t Change Much...Except for Outliers like Zoom
Covid drove some big winners and losers: any company selling to restaurants, travel, entertainment, etc. either pivoted quickly or lost out. Most companies selling tools and infrastructure to support remote business, learning and civic engagement did well in 2020. Zoom is the extreme outlier for the winners, growing 326% from $623M (2019) to $2.65B (2020) and hitting the Rule of 40 metric out of the park at 356. Sorry, we are enjoying baseball in Boston after a year of watching teams play to a stadium of cut-outs.
For 80% of companies, the median revenue growth rate benchmark either increased or decreased in the range of 5-10% for almost all revenue cohorts. This was not a meaningful change, except for companies smaller than $10M where median growth rates dropped between 10-20%. Early stage companies as a group did show more changes. Median growth rates for companies under $5M dropped more than companies with revenues between $5M-$10M. And companies with revenues under $10M selling to the SMB were hardest hit, with an almost 50 point decline in growth rates last year. It was a tough year to be small, whether as a supplier or a customer.
Cost of Revenue and Gross Margins
The median cost of revenue as a % of revenue shifted a few points up and down for all revenue and business model cohorts. Basically, that isn’t meaningful because it isn’t statistically significant. As we look back on this period, Covid didn’t seem to have much of an impact on how SaaS & software companies delivered products over the past year. Alongside Cost of Revenue benchmarks, median Gross Margin benchmarks also didn’t change in a meaningful way in any revenue or business model cohort. For the most part, they improved slightly and for bigger companies, the improvement in the median was close to 10 points. For smaller companies, there was only a point or two of difference from 2019.Gross margin benchmarks are about the only metric where we see anything close to a bell curve for SaaS companies, regardless of revenue size and operating model. In the latest OPEXEngine survey data, the majority of all companies fell between about 68% and 82% gross margin, with the average at 71%.
Operating Expense and EBITDA Improvements
In general, the fastest growing SaaS companies, those with greater than 50% growth, reduced operating expense more than other cohorts in 2020, resulting in improved EBITDA benchmarks for 2020. Most growth SaaS companies with greater than 50% also have significant capital invested in them and they could turn the expense and spending dials down during the pandemic and operate more efficiently - but didn't reduce growth by much, if at all. SaaS companies with revenues between $100M-$500M and median 65% annual growth managed to reduce operating expenses from a median of 101.5% in 2019 to 98% in 2020. This improved median EBITDA from negative 20.3% (2019) to negative 11% in 2020. When we look at companies by the amount of invested capital, VC-backed fast-growth companies, again, we see the most impressive gains both in reducing operating expenses and improving EBITDA margins.
COVID-19 Forced Companies to Get Better About Sales & Marketing Productivity
One of the most interesting things to come out of the comparison of pre-Covid to post-Covid SaaS operating benchmarks is the improvement in several Sales & Marketing productivity KPIs. One that we track is the Magic Number. Magic Number benchmarks improved almost all benchmarking cohorts, and especially for those segmented by the amount of Capital Investment (see above table). The one exception in this area was early-stage companies where the results were more mixed. Improving Magic Number benchmarks support the old adage (usually attributed to Peter Drucker, even though according to the Drucker Institute, he never said it): what gets measured gets managed. Investors like to see companies tracking and managing their Magic Number of Sales & Marketing productivity. We see Magic Number as a high-level indicator of whether further diagnostics into Sales & Marketing productivity are needed. Benchmarking is a good way to stay on top of the productivity that your peers are getting from the evolving bucket of Sales & Marketing tactics. Digging into productivity benchmarks, almost all revenue cohorts and operating models shortened the number of months required to recover CAC. Larger companies as well as companies selling larger contracts showed the greatest improvement in median Months to Recover CAC, reducing it to 20 months and below for enterprise large contracts.
2021 and Beyond
As we look ahead to the second half of 2021, it is clear that some of the ways we improved our businesses under Covid aren’t going away. The efficiencies gained from Sales & Marketing remotely are being added to more traditional ways of acquiring and supporting customers and further improving ROI. The biggest takeaway from comparing the pre-Covid and post-Covid benchmarks is that we expect companies to continue with tighter management of operating expenses with a greater focus on productivity and efficiency. Throwing money at growth will be less prevalent now that we’ve seen what can be accomplished with more focus on expense management. Expect to see greater analysis of both R&D and Sales & Marketing ROI investments required in order to build company value.