As SaaS revenue growth slows, agile pricing and localization could be its savior

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Growth in software as a service (SaaS) slowed in 2021 after a record-breaking 2020 due to a pandemic, according to a new report.

SaaS companies reportedly saw revenue increase by 32% on average, down 46 percentage points from the previous year’s growth. The data is published in the new Outliers: State of SaaS Growth report commissioned by Paddlea payment infrastructure provider for SaaS companies, which is based on a survey of 180 SaaS companies and proprietary data from “thousands of Paddle customers”.

So while SaaS was a major beneficiary as the world went into lockdown, with companies scrambling to configure their tech stack for a distributed workforce, Paddle’s report suggests we’re now seeing a return to rates normal growth.

“As our report shows, the industry was unable to sustain the growth levels of the first year of the pandemic, and we saw a correction as we approached 2022,” said the co-founder and CEO of Paddle. , Christian Owens.

Recurring revenue

The benefits of SaaS are well understood. Building a business around recurring revenue rather than one-time or infrequent purchases creates a healthier business model, given that it is less dependent on new sales. By 2023, Gartner predicted that 75% of all direct-to-consumer businesses will offer subscription services, but only a fifth of them will “succeed in increasing customer retention”.

Thus, reducing churn and retaining customers is important to the prosperity of any SaaS business. That’s why Paddle’s report identifies the “outliers” of its survey, that is, software companies that “continued to thrive during the downturn.”

Specifically, the report points to three fundamental “growth drivers” shared by the most successful SaaS companies. One of them constitutes embrace new growth modelswhich includes exploring a more dynamic pricing philosophy — 40% of companies who regularly change their prices reported a 25% higher increased annual recurring revenue compared to those who did not. And the investigation also revealed that 20% of companies have not changed their prices in the past five years.

Without experimenting on price, companies – especially those in the early stages of their journey – are more likely to underprice their product or simply miss out on the true value of their product. There is no one SaaS model, so companies need to play around with their pricing and figure out what generates the most revenue with the least churn.

According to the report, the most popular SaaS pricing structure among respondents was tiered pricing, which is usually something like “basic,” “enterprise,” and “enterprise,” with each tier incrementally offering more features.

What is your pricing model? Tiered pricing leads the way.

But companies probably don’t want to pay for software they rarely use. And if they end up using the software more than they intended, they risk being hit with so-called “overshoot” penalties for exceeding a pre-agreed limit. This is why consumption or “usage-based pricing” has gained popularity in the SaaS sphere – it makes more sense for a business to pay for what it actually uses, rather than a monthly or per seat which may have additional charges. “hidden costs.

Just a few weeks ago, a usage-based billing platform called M3ter released stealthily with $17.5 million in funding, with the promise of a measured pricing engine that helps SaaS companies bypass the “operational headaches” of consumer pricing. Paddle, in fact, was a launch partnerintegrating M3ter into its own product in recognition that its customers might want to experiment with different pricing models.

Removal of friction

In addition to dynamic pricing, Paddle’s report also identified “deepening the customer experience” as a notable growth driver, which involves “removing friction from the shopping experience” through free options. -service and location.

While translating into other languages ​​is of course an important part of this, businesses that accepted payments in only one additional currency grew 12.7% faster in 2021 than those that supported only one currency – and those that supported more than 25 currencies grew by 24.8%. higher growth.

“Besides language, there are three [localization] levers to consider – local currency, local payment methods and local purchasing power,” said Julika Loecklin, Paddle’s vice president for customer success. “The combination of these
has a powerful compound effect on growth.

Elsewhere, another of the key SaaS growth levers that Paddle has identified is one that’s pretty much relevant to any business – hiring the right people and making the right talent adjustments based on a company’s current stage of growth.

“Ask yourself – where are we now relative to where we want to be, and how are we going to get there?” Paddle people leader Hanna Smith said. “It’s not always new skills you need; career development also comes into play. Work with managers to find gaps and spot potential. »

The Outliers: State of SaaS Growth report is available for download now.

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