SaaS Scale and SaaS Maturity Are Not the Same
By Justin Talerico
Apr 30 2019
I’m actually a bit cranked up about SaaS scale and SaaS maturity being confused and comingled. We’re working with a couple of SaaS companies at roughly the same revenue scale but wildly different maturity levels. The problem is that both founders see themselves in the same stage of development because annual recurring revenue (ARR) is often misused to measure maturity. This is especially true in companies with ARR less than $3M because at that scale, you have to look deeper than the aggregate to understand where they’re at. This is sort of SaaS 101, but it remains a common misunderstanding: ARR ≠ Maturity.
SaaS Scale: ARR
I’m fine with using ARR to measure scale. Obviously, there are other means, like user, customer, or headcount. But, for the most part, ARR is the go-to yardstick for SaaS scale. And, probably most importantly, ARR over time shows the company’s growth trajectory, which illustrates a lot. But it doesn’t show maturity.
SaaS Maturity: Much More than ARR
The problem with ARR is that it can be had so many different ways. Sample size is critical to maturity and ARR doesn’t give us that without looking deeper.
CUSTOMER COUNT AND SAAS MATURITY
For every million in ARR, a SaaS could have 10, 100, or 1,000 customers. At 10, the sample size stinks, at 100 there’s some good data, and at 1,000 we know a lot. There’s simply no way that an enterprise SaaS with 10 customers and $1M in ARR knows much, if anything, about market fit — pricing, packaging, sales, marketing, onboarding, customer success or churn. There is no ideal customer profile. That knowledge only comes with experience, which only comes from winning 50, 100, or 200 customers. Growth-stage maturity for that SaaS comes much later in the ARR game — probably in the $5M range. But, there are many founders who think they’re ready to raise growth capital when they hit $1M in ARR. The reality is that they know next to nothing about their model and dynamics, and can’t hope to put $5M+ in growth capital to good use from that vantage point.
The flipside of that coin is the SaaS with $1M in ARR and 100 customers. They probably have enough scale to have done some marketing and sales experimentation. They may have some pricing and packaging testing under their belt too. It’s likely they have a good sense of retention and customer success requirements. Regardless of revenue, they have ten times the number of real customer experiences than the guys who have ten customers. That’s a whole different level of understanding of the business. It’s a whole different level of maturity. And obviously, at 1,000 customers the learning is only stronger.
CUSTOMER CONCENTRATION AND SAAS MATURITY
Another black eye that crops up in sub-scale SaaS company maturity is customer concentration. Having a small number of customers isn’t good, but having one or two whales among them really sets maturity back to the stone age. Outsized customers are tempting, especially for bootstrapped or poorly capitalized startups. But because they are, by nature, special cases, they don’t help you evolve your model and growth dynamics. They aren’t your ideal customer profile, and only when you dial in that ICP and learn from it, can you hope to accelerate real growth drivers like sales, marketing, and customer success. And because whales represent such a large chunk of your revenue, they also get disproportionate attention and consideration that nullify the learning you get from their behavior. They’re outliers, and not where your growth will come from.
100 Customer SaaS Maturity Reminiscence
I remember when we hit 100 enterprise customers and the confidence we had that we understood our market and our ICP. We had large enough sample sizes of sales calls, marketing response rates, usage data, onboarding processes, close-lost reasons, churn reasons, packaging and pricing testing, and so much more. That was growth-stage maturity for us. Was there ARR attached to that? Sure there was. But finding, winning, and keeping 100+ real customers is what taught us how to scale. Not ARR.