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

Software-as-a-service (SaaS) growth slowed in 2021 following a record pandemic-driven 2020, according to a new report.

SaaS companies reportedly saw revenue grow by an average of 32% — a 46 percentage-point drop on the previous year’s growth. The data is published in the new Outliers: State of SaaS Growth report commissioned by Paddle, a payments 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 that we’re now seeing something of a return to normal growth rates.

“As our report shows, the industry couldn’t maintain the levels of growth the first year of the pandemic delivered, and we’ve seen a correction as we head into 2022,” Paddle cofounder and CEO Christian Owens said.

Recurring revenue

The benefits of SaaS are well understood. Building a company around recurring revenue versus one-off or infrequent purchases creates a healthier business model, given that it’s less reliant on new sales. By 2023, Gartner has predicted that 75% of all direct-to-consumer companies will offer subscription services, but only one-fifth of those will “succeed in increasing customer retention.”

Thus, reducing churn and keeping customers is important for any SaaS business to thrive. This is why Paddle’s report identifies the “outliers” from its survey — that is, software companies that “continued to thrive through the slowdown.”

Specifically, the report points to three core “growth levers” that are shared by the most successful SaaS companies. One of those constitutes embracing new growth models, which includes exploring a more dynamic pricing ethos — 40% of companies that regularly change their pricing reported a 25% higher increase in annual recurring revenue versus those that didn’t. And the survey also found that 20% of companies haven’t changed their pricing in the past five years.

Without experimenting on prices, companies — particularly those in the early-stages of their journey — are more likely to undercharge for their product, or simply miss the mark on their product’s true value. There isn’t a one-size-fits-all SaaS model, which is why businesses need to play around with their pricing and figure out what gets maximum revenue with minimal churn.

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

But companies probably don’t want to pay for software that they rarely use. And if they end up using the software more than they anticipated, they may end up getting saddled with so-called “overage” penalties for exceeding a pre-agreed limit. This is why consumption or “usage-based pricing” has grown in popularity in the SaaS sphere — it makes more sense that a company pays for what they’re actually using, rather than a set monthly or per-seat fee that may have extra “hidden” costs.

Just a few weeks ago, a usage-based billing platform called M3ter exited stealth with $17.5 million in funding, with the promise of a metered pricing engine that helps SaaS companies work around the “operational headaches” of consumption pricing. Paddle, in fact, was a launch partner, integrating M3ter into its own product in recognition of the fact that its customers might want to dabble with different pricing models.

Removing friction

Aside from dynamic pricing, Paddle’s report also identified “going deep on customer experience” as a notable growth lever, which involves “removing friction from the buying experience” through self-serve options and localization.

While translating for other languages is of course an important part of this, companies that accepted payments in just one additional currency grew 12.7% faster in 2021 than those that supported a single currency — and those with support for more than 25 currencies saw a 24.8% higher growth.

“Other than language, there are three [localization] levers to consider — local currency, local payment methods, and local spending power,” Paddle’s VP for customer success Julika Loecklin noted. “The combination of these
has a powerful compound effect on growth.”

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

“Ask yourself — where are we now versus where we want to be, and how are we going to get there?” Paddle’s head of people, Hanna Smith said. “It’s not always new skills that you need; career development comes heavily into play as well. Work with managers to find any gaps and spot potential.”

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