According to recent Gartner research, the cloud services market is growing—with SaaS “[making] up the largest share of the cloud service market and more than 50% of the overall software market.” Unsurprisingly, Gartner predicts that SaaS’s share of the market “is only expected to increase in the future.”
Now, you’re probably wondering, “Just how fast is SaaS growing?” The short and sweet answer is “pretty darn fast.” As early as 2020, research was suggesting that SaaS’s growth was on an impressive trajectory to becoming the modern way of doing business. In 2020, SaaS applications were estimated to account for 70% of the software in use by businesses throughout the country—with that number expected to grow to 85% as soon as 2025.
What’s more, Gartner’s latest report had forecasted growth rates around 20% for 2022, based on “worldwide end-user spending on public cloud services.” Additionally, infrastructure-as-a-service (IaaS) is where the most action is in 2023, with expected growth of 29.8%.
If you’re in the world of SaaS, of course, these points won’t shock you. It’s a fast-paced industry filled with savvy innovators, bold thought leaders, inventive developers, and a whole cast of supporting characters that create powerful platforms and redefine how we do business.
Every year, countless professionals decide to attend a SaaS conference, and for good reason. Attending a conference is one of the best ways to network and connect with others in your industry, learn the keys to SaaS industry growth, and so much more. Keep reading for a brief overview of SaaS growth rates, some of the factors behind SaaS growth, and an introduction to a brand new conference that will inspire you to be at the forefront of SaaS’s bright future.
Let’s start by defining how, exactly, “growth” is gauged in the context of SaaS.
How Do You Calculate Growth Rate in SaaS?
One of the most common internal measures for calculating SaaS growth is based on annual recurring revenue, or ARR. The basic annual recurring revenue formula is relatively straightforward:
- Add the sum of subscription revenue (for the year) and recurring revenue from upgrades or add-ons.
- Subtract lost revenue (from downgrades or cancellations), also for the year.
Then, calculating growth rate based on ARR only requires a couple more steps.
- First, calculate the difference between the company’s ARR at the beginning—and end—of that range.
- This results in a decimal (e.g., .20); multiply it by 100 for a percentage (e.g., 20%).
You can use a similar formula or framework for calculating other types of SaaS growth as well, by replacing “starting” and “ending” ARR figures with metrics like…
- Gross profit
- Gross sales
- New users added
- Net revenue retention
If you are interested in calculating monthly revenue retention (MRR) growth rate instead of ARR, simply use a given month as the time period you base the “starting” and “ending” figures around.
What Is a Good Growth Rate for SaaS?
If we gauge a company’s growth in terms of SaaS growth benchmarks for ARR, a good annual growth rate (or monthly growth rate) for a SaaS company would be…
- Between 52% and 59%, for companies with $1M to $5M ARR
- Between 46% and 55%, for companies with $5M to $15M ARR (according to Klipfolio)
While ARR provides one lens for evaluating SaaS growth, SaaS companies are increasingly turning to the “Rule of 40” for a better view into their growth. What is the “Rule of 40” in SaaS? As defined by McKinsey & Company, this “critical value creation metric” states that “a SaaS company’s growth rate when added to its free cash flow rate should equal 40 percent or higher.”
Is the SaaS Market Growing Evenly Across All Segments?
While virtually every segment of the SaaS industry is growing, it’s important to note that they’re not all growing at the same rate or driven by the same growth factors. That being said, the fastest-growing segments of the market include cloud-based platforms and services that include…
- Customer relationship management (CRM) platforms designed to strengthen customer relationships and increase efficiency in customer interactions.
- Human resources software for effective engagement and management of employees and teams.
- Accounting and financial systems for efficient and accurate record-keeping and decision-making.
- Collaboration and communication platforms to streamline productivity and keep teams connected.
- Enterprise resource planning programs that can optimize operations through improved resource management and streamlined processes.
Is SaaS Growth Expected to Slow Down Soon?
Most industry experts expect the SaaS industry—across virtually every segment or category—to continue its growth (Gartner estimates growth rates of around 20% to continue). Since the emergence of Salesforce (considered the first SaaS company) at the tail-end of the 20th century, the concept of software-as-a-service has only become more widespread in its adoption.
On that note, it’s difficult to envision a scenario where organizations suddenly decide that SaaS’s major value propositions are no longer advantages. After all, modern SaaS tools enable companies to embrace cloud-based and hybrid solutions, integrate SaaS applications with other business technologies, and derive timely insights through data-driven analytics. And that doesn’t even account for other benefits, like improved security, increased efficiency, reduced downtime, and the flexibility that comes with a recurring subscription model.
Where Can I Learn More About SaaS Growth?
There are countless SaaS conferences occurring every year throughout the country. If you’ve been to many professional conferences, you may be a little skeptical. After all, it’s hard to know exactly what to expect when you sign up for an event. You’ve probably been to a mixture of good conferences, bad ones, and others that were neither good nor bad… they just kind of happened.
Rally 2023 is an all-new conference that centers around innovation, a key feature of the fastest-growing SaaS companies. Rather than bringing together a collection of purely like-minded, industry-specific ideas, companies, and personalities (like so many other conferences), Rally takes a cross-sector approach to SaaS’s role in the modern world of business. Over the course of three days, you’ll find plenty of inspiration in our lineup of keynote speakers, sessions, and other events. (You can view the agenda here.)
What really makes Rally unique is this cross-sector approach, which will empower you to encounter new ideas (or challenge existing ideas) through meaningful collaboration. The conference is organized around six innovation studios, each of which explores the intersection of SaaS with other industries, like: