If you look at the history of SaaS, revenue multiples continue to go up. From a low of roughly 2x in 2009 to a staggering 20x 12 years later.
This valuation increase means that the market sees big opportunities for software companies and they are willing to pay more for the returns they expect from these companies in the future. The growth in SaaS has come at the expense of other types of software, namely on-premise software companies that haven’t been able to keep pace with their high-flying SaaS competitors. While this line in the sand might seem like an old guard versus new guard and an easy comparison to make when thinking about company valuations, there is a similar bifurcation happening now in the market among SaaS companies and it’s worth paying close attention.
Not all SaaS revenue is valued the same
Usage-based pricing (UBP), also known as consumption-based pricing, is taking the software world by storm, and as OpenView points out, “public markets are rewarding usage based companies with valuation multiples at 50% of their peers that aren’t usage based.” What does this mean if you are competing against a UBP company? The market believes you need to bring in $2 for every $1 your UBP competitors collect. If that is the case, how do you compensate your reps? Can you pay them the same commission as a company that has UBP? The answer is most likely no. We have written at length about how UBP might or might not be right for you and how you can think about implementing it in your sales motion.
Bottoms Up vs. Tops Down
If every dollar of revenue was equal there also wouldn’t be a huge divergence in what companies paid for software businesses when acquiring them. A more interesting recent example is how much Okta, a top-down enterprise software sales motion, paid for Auth0, a company with a bottoms-up approach to selling. At 37x revenue, it was one of the highest valuations ever paid for another software company that was over $1B.
Okta currently trades at ~13x their Next Twelve Months (NTM) revenue but they were willing to pay 37x for Auth0. Another way to think about this is for every dollar Auth0 sold, it was worth 3x every dollar Okta sold. Why such a divergence in value? There are likely many factors, but I wouldn’t overlook the simple efficiency in the Auth0 go-to-market motion and the potential flywheel it can create.
PLG - The panacea in the public markets
Overall, the PLG trend remains hot in earnings calls and what investors are looking for in software companies’ go to market motion. PLG also has intangibles that can go beyond bottoms up and UBP. Jon Ma at Public Comps did a nice job of summarizing how companies that sell with product data tend to have better margins, are growing revenue faster, have a better Net Dollar Retention (NDR), and are bigger at the time of going public.
The Trend is Your Friend for CRO and AE
If you are a CRO or CEO, you have to be excited by the fact that over the past decade the value of software businesses has increased by ~9x. But when you look under the cover, the data tells a story that you also have to optimize your go-to-market motion to get the type of premium you are looking for with each dollar of revenue you bring in the door. It was once sexy to sell a big upfront deal with a recurring maintenance contract in the mold of Oracle, but that fell out of favor to a subscription model that allowed customers to pay annually for their software. Today, it appears, that the market is valuing other lucrative pricing and go-to-market motions that favor the customer having more control over their spending and allowing them to more effectively grow their spend over time.
If you are a seller, you might be asking, what does this mean for my commission check? If you are working at a company that is highly valued because of a UBP, bottoms up or PLG motion, you might think you aren’t as valued. But, in fact, every dollar you bring in is worth more to that company than a more traditional sales model. You have a strong argument that you should be paid a higher percentage of every dollar that you bring in.
In conclusion, I believe we are entering a golden age for sales and while you might not be going out for as many steak dinners with your prospects in the future, that doesn’t mean you can’t make more money than you ever dreamed of.