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Scaling SaaS: How to emulate Europe’s titans and supercharge your software company’s growth

SaaS
(Image credit: Image Credit: Wright Studio / Shutterstock)

“Software is eating the world.” 

When Marc Andreesen coined that phrase in 2011, he was talking explicitly about the next generation of Silicon Valley companies that were set to drive a new wave of disruption across industries.  

10 years later, it’s safe to say that Andreesen was right about software - but wrong to assume that the US would be the sole or primary driver of innovation in this space. In Europe, we have seen the rapid rise of a number of transformative software, and especially Software-as-a-service (SaaS), businesses over the last decade. SaaS companies are now widely recognized as the engines that are powering much of the growth of the European tech ecosystem. In 2020, more than $12bn of VC money was invested in European SaaS, and the region’s most exciting tech companies are all SaaS businesses; from Romanian-founded robotic process automation company UIPath, which IPOed in April at a $33bn valuation, to Norway’s Visma, which was the subject of the world’s largest-ever software buyout last summer, or virtual events platform Hopin, which hit a $2bn valuation just eight months after launching.   

The pandemic has accelerated our reliance on software, as businesses and consumers have turned towards digital services to stay connected and productive over the past year. As a result, software as a sector has continued to thrive amid the global economic uncertainty. The SaaS industry probably developed as much in 2020 as it would have done in 3-5 years in a more normal business environment.  

While hopefully the coming months will see the impact of Covid-19 wane considerably, it seems clear that the enormous growth opportunity for European SaaS businesses is going to continue for years to come.

Competing in a global market 

One of the reasons that SaaS companies can grow so quickly is because, by their very nature, they can reach a global market from a very early stage. If you build a great SaaS product, then you can - in theory - sell it anywhere, to anyone, from day one. Hopin, for example, is now used by more than 80,000 organizations across all continents, while Austrian startup Kaleido.ai’s image background removal software raced to 100 million users in 2020 - leading to its acquisition by Australian decacorn Canva.  

However, the global market opportunity of SaaS also brings challenges. From planning growth sustainably to minimize churn, to navigating tax laws and regulations across thousands of jurisdictions, there are a number of barriers that can limit SaaS firms’ ability to scale successfully. At Paddle, we speak to over 200 new software companies a month, and work with 2,000 fast growing software sellers every day. Based on this first-hand experience, we’ve identified four factors that SaaS firms with big ambitions must consider when scaling in 2021.

#1 Localisation: not just an afterthought 

Despite the inherently global nature of SaaS, far too many software companies see selling internationally as an afterthought, rather than as a key component of their growth strategy. The international sales that trickle in organically when you start selling SaaS are far too often viewed as ‘free growth’; new customers that you have acquired without even trying. In reality, this small number of customers are the remnants of a much larger potential market. They are all that is left after everyone else has been put off by a failure to localize your offering. 

Let’s say a prospective customer from the US sees that your site prices every item in pounds. They’re not only inconvenienced by the currency conversion process to understand how much they’re actually paying, but they might also have concerns about potential payment conversion charges, or whether the exchange rate is good enough in the first place. All of these factors can leave a prospective sale dead in the water.

That’s why it’s key to localize not just ‘cosmetically’ - making sure potential buyers see their own languages and currencies - but also to offer prices that really reflect the country you’re selling in. Consider purchasing power parities (PPP) and state of markets in different regions and adjust your pricing accordingly so customers feel like they’re getting a good deal. Of course, it’s a big world out there and localizing for every potential market can seem like a huge undertaking. But delivering this kind of localization at scale doesn’t have to be resource-intensive if you find the right partner.

#2 Compliance is key 

Once international sales are rolling in, you also need to pay attention to tax compliance. Being able to offer your product in more than 100 countries is great, but it brings a compliance burden that will overstretch your finance teams at best, or land you in jail at worst, if not managed properly.

Unfortunately, selling SaaS overseas does bring tax complications since sales are often taxed where your customer is located and not where your headquarters is. Since the South Dakota v. Wayfair US Supreme Court ruling in 2018, a number of jurisdictions across the world have adopted this taxation approach, meaning that software businesses have to stay completely up-to-date on tax regulations in every market that they sell in. 

This can be a seriously complex task - the US for example has 11,000 tax jurisdictions - and can put an unsustainable strain on your finance department if you don’t find a way to manage it at scale. Also keep in mind that some markets tax different software products differently, depending on whether you’re selling B2C or B2B.

#3 NRR: the metric that matters 

Now that your product offering is locally accessible and tax compliant, you’ll obviously want to monitor the performance of your international sales. Every SaaS business generates huge amounts of data that can be used to assess performance, identify areas of weakness and to inform decision making. This data can be incredibly valuable, or extremely unhelpful if you don’t pay attention to the right things.  

Historically, the most popular metrics to track performance within SaaS have been Annual Recurring Revenue (ARR), which gives you a high level overview of how much revenue you can expect every year, and Gross Revenue Retention (GRR) which tells you how much revenue you’re retaining from existing customers. 

But what these metrics can’t do is account for customer upgrades, downgrades, and churn to show much your business could grow from your current customer base alone. After all, the acquisition isn’t all that matters when rapidly scaling your company - you want to know that your original customers are satisfied with their product and are spending more money with you. 

Net Revenue Retention (NRR) therefore should be your go-to metric to help you grow a healthy, sustainable SaaS business for the long term. Unlike GRR, NRR takes into account expansions and contractions in your monthly recurring revenue (MRR) to reveal your actual revenue growth - regardless of how many customers you’ve gained. If your NRR is at 100 percent, that means your customers are spending more with you as time goes on; so the higher the NRR, the better.

But don’t just take it from me. Some of software’s biggest global success stories have all had high NRR in common. Take UiPath, which had an NRR of 145 percent before it listed, meaning that even if it had suspended all customer acquisition, it still would have grown by 45 percent from pre-existing customers spending more.

It’s clearer than ever that strong NRR is essential for sustainably scaling a SaaS business; so make it your north star metric.

#4 Delivering revenue - the right way 

Ultimately, the key to scaling your SaaS business rapidly and sustainably lies in ensuring reliable revenue and improving your NRR. And to do this, software businesses need a revenue delivery strategy: a defined plan for ensuring their products stay competitive in a multitude of markets and avoid the pitfalls of tax and regulation. A good revenue delivery strategy lays out how you will manage the systems, processes, and teams – also known as the revenue infrastructure – responsible for optimizing acquisition, retention, and expansion.

In short, a coordinated effort is needed to really unlock your SaaS businesses’ growth potential. Without one, SaaS companies instead rely on a multitude of tools and approaches with no overarching direction, restricting their ability to respond to customer needs and therefore damaging customer retention, increasing churn and reducing their ability to scale as quickly as they want. One way to simplify this process is by using a revenue delivery platform, which can help deliver checkout, payment, subscription management and tax compliance all in one.  

Supercharging SaaS 

If ten years ago software was eating the world, then I think it’s fair to say that last year it was saving it. Without the leaps forward in both consumer and enterprise software that we’ve seen over the last decade, the economic, societal and psychological impact of the pandemic would have been even greater. Software kept us working, kept us entertained and kept us (mostly) sane throughout the last year, and its influence is only set to grow in the years ahead. 

The opportunity for ambitious software businesses in Europe has therefore never been greater. But the next generation of global leaders will have more than just a great product to sell. They will be able to sell in every market, as if they are a local business. They will be able to handle a complex and ever-changing regulatory and tax environment, efficiently and at scale. And they will have a clear focus on NRR to help inform decisions around growth and revenue delivery.

Christian Owens, CEO and Co-founder, Paddle