Over the past few years, we’ve seen the SaaS industry go through a ton of changes and using the help of ChartMogul’s recent report, The New Normal for SaaS, we can comprehend the changes through useful insights. When we look at previous booms, we see that SaaS has gone through a few since 2019. However, since then, the industry has also gone through slowdowns and a renewed focus on sustainability and efficiency. Today, we’ll run through the changes which have shaped the SaaS industry.
The slowdown in new business in late 2021 was largely driven by rising interest rates, inflation, and tighter budgets. As economic conditions become less favorable, the SaaS market grew more competitive, and capital became harder to raise. This led companies to adopt more conservative strategies, focusing on efficiency rather than expansion. The days of easy capital and rapid scaling gave way to a more disciplined approach to growth.
As a few other tech industries went through, the SaaS industry experienced an unexpected spurt in growth during the pandemic, specifically during 2020 and 2021. As companies rushed to adopt digital tools for remote work, cloud-based solutions, and other software solutions, the demand for SaaS products boomed. The economic conditions also nudged SaaS forward such as low interest rates and ample access to capital. With all of this going the founder’s way, there was bound to be a rapid expansion. This led many SaaS companies to invest heavily in customer acquisition, driving revenue to numbers never before seen.
Not literally, but during the growth of the pandemic-fueled economy, SaaS companies also saw a massive push from investors. With more capital to work with, a lot of SaaS companies pursue growth aggressively and due to these, there was a lot of capital distributed with overinflated valuations. Many companies secured large checks and also secured a massive value of recurring revenue, it also created a risk bubble and companies whose growth strategies were unsustainable in the long run.
After all of this, the massive expansion we all saw hit a wall. The industry saw a sharp decline in new business acquisitions as economic conditions also shifted. This affected companies across the board, from early-stage startups to mature enterprises, particularly those with “top-tier” Annual Recurring Revenue (ARR). Growth rates began to plummet, and the industry faced a stark reality; the boom was over, and the focus now needed to shift.
No one can argue that the slowdown of new business started in late 2021. It was driven by rising interest rates, inflation, and tighter internal budgets. As the economy became less favorable, the SaaS market just became a bit more competitive. Raising funds also became a bit more difficult which led companies to adopt conservative strategies. The days of endless funding on ridiculous valuations was gone, so founders needed to adopt a more disciplined approach.
In 2024, the SaaS industry and its founders are finding new footings. There are no more ideologies of “breakneck growth at any cost.” Today, companies are more focused on sustainable growth. The emphasis shifted toward product innovation, operational efficiency, and balancing growth with profitability. Now, businesses are reassessing their business models and aiming for long-term growth and resilience to changing economics.
What does this sustainable business model look like? Well, for starters, one of the most important shifts in SaaS was the focus on retention and Net Revenue Retention (NRR). The economy took a downturn, and many founders found themselves with a SaaS business that lacked a solid business model, particularly those that were reliant on new customer acquisition to drive growth. Companies then realized that retaining and expanding within their current customer base was far more cost-effective than attempting to acquire new users. By 2024, NRR is currently one of the most critical metrics SaaS companies track.
The SaaS industry has grown and descaled since the pandemic boom. There was a high-growth phase in 2020-2021 and then there was a post-boom slowdown. Since all of this has happened, companies have had to adapt to a new reality where efficiency, customer retention, and sustainable growth are the keys to success. As the SaaS industry continues to mature, the focus will likely remain on balancing innovation with various growth strategies.
If you want to dive deeper into these trends, I highly recommend reading The New Normal for SaaS by ChartMogul for a comprehensive view of the current state of the industry.