From: allin
The Software as a Service (SaaS) industry is experiencing a significant slowdown, particularly highlighted by the recent performance of Salesforce, considered a bellwether for the entire sector [01:26:47].
Key Indicators
Salesforce, noted as the largest pure SaaS company and the first multi-tenant SaaS firm to operate at scale, showed a “huge slowdown” in its latest quarter [01:26:47], [01:26:51], [01:26:54], [01:26:59].
Key metrics illustrating this downturn include:
- Net New Annual Recurring Revenue (ARR) The net new ARR added by Salesforce in the previous quarter dropped by two-thirds compared to the prior quarter [01:27:02].
- Customer Acquisition Cost (CAC) Payback Despite the decrease in new ARR, sales and marketing spend remained consistent, leading to an explosion in CAC payback [01:27:10].
- Previously, CAC payback was around two and a half years [01:27:33].
- It now takes 155 months, or over 10 years, to recoup customer acquisition costs, a model deemed unsustainable [01:27:16], [01:27:32].
This indicates that while SaaS valuations corrected earlier in the year, the industry is now witnessing a correction in its top-line revenue [01:28:07].
Impact on Businesses
The extended CAC payback period necessitates a reduction in customer acquisition costs [01:28:16]. Companies can achieve this by:
- Reducing Marketing Spend Cutting back on advertising or event expenditures [01:28:33].
- Reducing Sales Headcount Implementing layoffs within sales teams [01:28:27], [01:28:30].
This anticipated contraction in jobs creates a “vicious cycle” for the industry [01:28:46]. Previously, SaaS startups benefited from existing customers expanding their usage (seat expansion), leading to 120-150% of the previous year’s revenue just from retention [01:29:02], [01:29:07]. With current freezes and layoffs in headcounts, this trend could reverse, resulting in “seat contraction,” meaning companies might start the next year with only 80-90% of the prior year’s revenue due to churn [01:29:21], [01:29:28].
Future Outlook
SaaS companies must adjust their financial planning to account for this new reality [01:30:08]. Growth expectations have shifted, with “2x is the new 3x” [01:29:45]. Achieving 2x year-over-year growth is now considered as good as, or better than, the 3x growth seen in the previous year, which was easier to achieve in a “frothy” market [01:29:47], [01:30:01]. Restraining burn rate is crucial, as predicted revenue may not materialize [01:30:11].