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The Future of SaaS: Outcome-Driven Solutions with AI

Plus: The Key to Unlocking Your Startup's Growth in 2024

Good morning MRR lovers,

Here is the first newsletter of 2024. Let’s dive right in.

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🍿 Quick Snack

  • 🎯 AI is transforming the SaaS industry by creating outcome-driven solutions. SaaS products are now functioning more like co-pilots, actively assisting users to achieve desired outcomes.

  • 📉 SaaS companies faced low growth rates in 2023 and need to find ways to manage costs while expanding business. Two strategies for growth in 2024 are adopting usage-based pricing models and prioritizing resilience and efficiency.

  • 🍟 Extra Fries: AI is transforming construction management, SaaS funding is shifting towards sustainable growth and efficiency, and vertical SaaS companies are well-positioned to succeed despite the rise of AI.

🍔 The Full Meal

Outcome-driven solutions are the future of SaaS

  • AI is not merely a step forward in productivity or efficiency; it is a transformational shift that will alter how SaaS is created and how it is utilized by customers.

  • Prior to the emergence of AI, SaaS offerings were mainly created to automate specific tasks or streamline certain processes.

  • However, with the emergence of AI, we are witnessing a new trend where SaaS products function more like co-pilots, actively participating and assisting users to achieve their desired outcomes.

This has two significant implications for the ecosystem:

  1. Existing startups and established companies must rapidly adapt and integrate AI assistance into their products to maintain a competitive edge.

  2. On the other hand, emerging startups must completely rethink their solutions rather than just incorporating AI into an existing product.

Here are some examples of companies in the latter category:

  • Inflection AI is creating a personal assistant called Pi. Pi lets anyone quickly receive relevant information and advice on their interests.

  • Metropolis is revolutionizing the parking industry by enabling checkout-free payment for drivers while allowing operators to replace all parking revenue systems for a fraction of the price.

  • Adept AI is building an entirely new way to get things done. It takes your goals in plain language and turns them into actions on the software you use every day.

  • Builder.ai: “Software built at the speed of thought” — this company offers a no-code AI-powered app development platform designed to build and operate software projects faster and cost-effectively.

Unlocking Growth in Challenging Times

  • In 2023, the year-over-year growth rate of SaaS companies experienced its lowest point in the last five years.

  • The existing challenge for founders is to find creative ways to manage costs while continuing to expand their business.

  • In 2024, there are two strategies that SaaS companies can implement to drive growth:

#1 - Consider adopting an usage-based pricing model

  • SaaS companies are moving beyond traditional licensing and seat-based pricing to more flexible models, such as usage-based pricing (UBP).

  • UBP is gaining popularity because it offers more predictable revenue streams and enhances customer satisfaction (customers don't feel like they are "overbuying," they only pay for what they use)

  • UBP models also outperform traditional subscription models in terms of ARR growth, with companies opting for a UBP model growing at an average of 200% annually, compared to 116% for subscription-based companies.

#2 - Prioritize resilience and efficiency.

  • These metrics can make or break your business (more details here):

  • Quick Ratio

    • Definition: Gross New ARR divided (÷) by Gross Churned ARR

    • This metric gauges a company's efficiency in growing its Annual Recurring Revenue (ARR) against the amount of revenue lost due to churn.

    • As companies grow, their churn rate naturally increases while their growth rate slows down due to a larger customer base. Therefore, the Quick Ratio tends to decrease as companies scale.

    • To be considered a top-performing company, the Quick Ratio should be maintained above 4x. This means that for every $1 of lost ARR, companies should add $4 in recurring revenue.

    • This metric can be particularly useful for early-stage businesses where metrics like Rule of 40 are typically less applicable due to the speed of growth and aggressiveness.

  • Burn Multiple

    • Definition: cash burn divided (÷) by net ARR.

    • It provides a measure of how much a company is spending to generate each additional dollar of recurring revenue.

    • The goal for top-performing companies is to keep this number below 1x.

    • Note: This number is typically higher for early-stage companies with lower ARR. However, as ARR grows, companies should aim to gradually reduce this number to below 2, then 1.5, and ultimately below 1.

  • CAC Payback

    • Definition: CAC divided (÷) by [New MRR x Gross Margin]

    • This metric measures the time it takes (in months) to break even when acquiring a new customer.

    • An exceptional CAC payback is under 12 months.

    • However, in today's environment, customers are more challenging to acquire, and it is common to see a CAC payback of 20-30 months.

  • Productivity Ratio

    • Definition: average ARR per FTE divided (÷) by average Operating Expenses per FTE

    • This metric can help companies make informed decisions about their workforce.

    • As companies grow, it is expected that their productivity ratios will surpass 1x. This is the ultimate goal that every startup should aim for.

    • On the other hand, companies with a productivity ratio under 1x should pay attention to their workforce's costs and consider investing in measures that can improve productivity.

🍟 Extra Fries

  • 🛠️ AI is revolutionizing construction management, driving significant market growth, enhancing project efficiency through improved planning and risk management, and fostering better collaboration and safety on job sites. (Read More)

  • 📊 In 2024, SaaS funding is shifting towards sustainable growth metrics and efficiency, with a focus on ARR per employee, Rule of 40, and unit economics as key indicators of fundability. (Read More)

  • 🏆 Vertical SaaS companies are in a good position to succeed and remain resilient, thanks to technical limitations, psychological preferences, and efficiency gains, despite the potential for AI to enable internal software development. (Read More)

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