The Next Generation of SaaS
“Top 6 Predictions for 2025”
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Scale Venture Partners - GTM Performance Metrics
Maxio & LogiSense State of Usage and Value Based Billing
The Next Generation of SaaS
“Top 6 Predictions for 2025”
2025 is upon us. In this newsletter, we’ll unpack why focusing on Customer Lifetime Value is mission-critical, how M&A activity might surge to expand product portfolios, and why usage- and value-based pricing models are about to get tested by CFOs everywhere.
We’ll also look at emerging metrics like Bessemer’s Rule of X that emphasize both growth and profitability, plus the newly introduced role of AI Operations to manage more advanced AI workflows. Buckle up: 2025 promises to be a pivotal year for SaaS, and the winners will be those that adapt quickly to this evolving landscape.
1️⃣ Customer Acquisition Costs Remain High - Welcome to the Age of Customer Lifetime Value
Remember all the talk about “Revenue Growth Efficiency” in 2023 and 2024? Well, after 2+ years of B2B SaaS companies focusing on becoming more efficient in acquiring new ARR - the results are in and they are not pretty.
According to the 2024 Benchmarkit SaaS Metrics Benchmark Research for private companies, the Blended CAC Ratio—which measures the Sales and Marketing expenses incurred to acquire one dollar of New ARR from both new and existing customers—increased from $1.32 in 2022 to $1.61 in 2023. This represents a 22% increase… not quite the increase in customer acquisition cost efficiency one would expect during a time of prioritizing efficiency!
Source: Benchmarkit 2024 SaaS Performance Benchmarks Report
When you look at a similar metric for Public SaaS companies - the GTM Cost Ratio which measures how much Sales and Marketing expenses was incurred to grow one dollar of Net New ARR, we see a similar trend. The GTM Cost Ratio, first coined by David Spitz in 2023 also does not indicate increased efficiency. In fact, the percentage of S&M expenses to Net New ARR increased from 161% in Q1-22 to ~ 250% in Q2-24. Another way to look at this trend is the Sales and Marketing expenses required to generate $1 of Net New ARR rose from $1.61 in Q1-22 to approximately $2.50 in Q2-24—a staggering 56% increase!
Source: David Spitz - Benchsights
The above reality highlights the challenge of acquiring new ARR, thus increasing the importance of RETAINING and GROWING existing customers. When coupled with the increasing risk of new competition from native AI start-ups, legacy B2B SaaS companies will invest more focus, time and capital to increase Customer Lifetime Value. This strategy allows investors and operators to shift their focus from short-term metrics like the CAC Ratio to evaluating the overall ROI of customer acquisition. By emphasizing the CLTV:CAC Ratio, they can measure Customer Acquisition Costs against Customer Lifetime Value for a more comprehensive view of long-term returns.
Traditionally a 3:1 CLTV:CAC Ratio was considered good.
Our 2025 prediction is that the new CLTV:CAC Ratio benchmark will be in the 4x-5x range, with the majority of the increase coming from increasing customer lifetime value versus reducing customer acquisition costs.
How this will be accomplished is part and parcel to prediction number two below.
2️⃣ Welcome to the Era of Multi-Product Portfolio Expansion
The previous edition of the SaaS Barometer highlights that private SaaS company merger and acquisition activity remained fairly stable in 2024 versus 2023 with f 2,000 acquisitions - chart below:
* Source: Software Equity Group - Q3-24 Report
We predict M&A activity will increase materially in 2025. One primary reason will be that stronger SaaS companies are looking at ways to increase the market opportunity for expansion ARR, and near adjacent applications to their current product(s) is a natural place to begin. When coupled with the fact that many B2B SaaS companies lack the market presence or cash runway to sustain long-term operations, the opportunity to quickly and cost-efficiently acquire adjacent products becomes highly attractive.
Over the past two years, B2B SaaS companies have already increased their focus and resource allocation toward cross-sell and up-sell motions. In 2025, expanding the portfolio of potential cross-sells through new products is poised to become a key catalyst for increased M&A activity!
Below is a table based on Carta data detailing acquisition activity in 2024 by company stage:
Acquisitions will only be one way that legacy SaaS companies look to increase customer lifetime value through an expanded product portfolio - dare I say creating a “platform” versus a “point-solution”. SaaS companies will also increase the amount of investment they make in product development (R&D) as a percentage of revenue. Below are the latest benchmarks on what percentage of revenue is allocated to R&D expenses - segmented by company size:
Source: Benchmarkit 2024 SaaS Performance Benchmarks Report
Our 2025 prediction is that stronger SaaS companies will increase the percentage of revenue allocated to R&D to create new AI centric products that leverage their existing customer data and distribution to provide additional cross-sell opportunities to increase Customer Lifetime Value, a higher CLTV:CAC Ratio and increase Net Revenue Retention Rates.
3️⃣ Value-based & Outcome-based pricing utilization will materially increase
Based upon recent research still being conducted in partnership with Maxio and LogiSense we continue to see an increase in the utilization of Consumption-Based Pricing with ~ 52% of B2B SaaS companies having at least one pricing element based upon product utilization beyond number of users. Another very interesting data point from recent Ibakka research is that ~ 30% of B2B SaaS companies with AI are using pricing that is in part value or outcome based.
Reducing customer acquisition friction to address increasing customer acquisition costs is one primary reason companies are evolving to consumption and/or value-based pricing. The other reason is to amortize the initial investment in customer acquisition costs to higher lifetime value (recurring theme here), while also better aligning the perceived value of the software by the customer to their internal measurements of value including outcomes (value) received.
There are multiple cautions and challenges that need to be considered when evaluating the introduction of new consumption (usage) or value-based pricing which include but are not limited to:
Infrastructure required to ingest and bill against product usage data
Amount of CS resources allocated to product adoption and utilization
Data infrastructure required to monitor and surface utilization trends in real-time
Impact on metrics such as ARR, New vs Expansion ARR, NRR and CAC efficiency metrics
Ability to measure “customer value” in value or outcome-based pricing models
Customer’s CFO acceptance of pricing models with uncertain budget impact
Our third 2025 prediction is that the level of adoption of Usage-Based and Value-Based pricing will increase materially in 2025, especially with many more pricing experiments for AI products.
The last bullet point above is the catalyst for prediction number four below 👇
4️⃣ Buyer’s CFOs will reject more usage-based contracts without some level of protection on usage based cost overages
I have had discussions with 50+ CFOs in 2023 and 2024 regarding their perspective on Usage-Based Pricing. Simultaneously, early in my career I worked at a recurring revenue software business with over 10,000 customers on subscription agreements that included usage-based billing elements. The COMMON things I heard? CFOs do NOT like contracts that do NOT cap the potential costs for a product.
Think about the reality for a CFO, they are responsible for developing an annual budget, managing the financial performance to that budget and also are responsible for forecasting and/or in public companies providing guidance to the analysts. If you budget $1,000,000 for a Usage-Based Pricing product and the actual cost ends up being $3,000,000 that can have material impact on the budget and/or forecasting EBITDA, Net Income and Free Cash Flow Margin…not a preferred situation for a CFO.
In addition, Usage-Based or Value-Based pricing also introduces new challenges and required competences on the “revenue” side of the ledger. If more than 50% of a company’s revenue is Usage-Based, being able to forecast product usage and the associated revenue becomes critical to financial guidance and forecasts…how many smaller companies are equipped to forecast product usage across 100+ customers and/or multiple industries which could have very different exposure to industry or macro-economic trends?
If you are using Usage-Based Pricing, be prepared with our fourth 2025 prediction that more CFOs will question or outright reject Usage-Based Pricing agreements without caps in 2025.
5️⃣ Rule of X will become a more popular metric
Bessemer Venture Partners introduced the Rule of X in January, 2024 to highlight the impact of growth rate versus operating profitability, as measured by Free Cash Flow Margin. Meritech Capital has a similar metric called the “Meritech Rule of 40” that applies a similar multiplier to the growth rate to calculate an adjusted Rule of 40 score.
Both the Rule of X and the Meritech Rule of 40 use the below formula to calculate their version of a “Growth Adjusted” Rule of 40:
👉 Rule of X = (Growth Rate x Multiplier*) + Free Cash Flow Margin
👉 Meritech Rule of 40 = (Growth Rate x 3*) + Free Cash Flow Margin
*Multiplier in BVP Rule of X and the Meritech Capital Rule of 40 multiplier of 3
You can see the “multiplier” trend line presented by Meritech at SaaS Metrics Palooza ‘24 - using a two factor regression model below:
Source: Meritech Capital Presentation at SaaS Metrics Palooza ‘24
What is a good score for a growth adjusted Rule of 40? Bessemer uses their Good (40+), Better (50+) and Best (70+) model. Meritech measures the value of their growth-adjusted Rule of 40 by the increased R-Squared factor to Enterprise Value to NTM Revenue multiples.
Our fifth 2025 prediction is that companies ~ $50M ARR and above will see the growth multiplier increase to 3x - 4x versus the current 2x - 3x in 2024. Growth in 2025 will become more important than in 2023 and 2024!
6️⃣ The Introduction of AI Operations
Over the last 12 - 18 months, many B2B SaaS companies have tested multiple Generative AI solutions to increase the efficiency and effectiveness of their Go-to-Market functions. This has taken many forms from using ChatGPT for Marketing creatives, AI SDRs and the such to automate outbound activities, Co-Pilots to assist sales people in research, list creation and message creation.
I would place the above examples of AI usage in two different categories:
✔ AI Automations which execute pre-defined, rule based tasks
✔ AI workflows which are automations that use LLM APIs like ChatGPT for one or more steps
Our sixth 2025 prediction is that with the rise of Agentic AI experiments and commercial deployments, the need for an “AI Operations” resource—and ultimately an AI Operations function—will emerge. This will be essential to initiate, monitor, and modify AI agents effectively. Agentic AI are programs designed to perform non-deterministic tasks autonomously. We suggest creating an AI Operations function early in 2025 to help ensure GTM data is ready for regular AI automations, to define AI workflows and prepare for the introduction of Agentic AI in 2025 and beyond!!!
Summary
2025 will be a critical inflection point for SaaS companies and the SaaS industry as a whole. The winners will continue to look for new ways to increase customer acquisition, retention and expansion motions to increase the Customer Lifetime Value as measured against the cost to acquire and expand the associated ARR. Simultaneously, strategic SaaS companies will find ways to increase the product footprint to increase expansion ARR, while simultaneously increasing investment in R&D to introduce AI products that exploit their existing customer base and customer data.
Consumption-based pricing and value-based pricing will become more commonplace to decrease customer acquisition friction, while buyer CFOs will be more hesitant to enter into Usage-Based pricing agreements without some level of certainty or cap on total costs for 2025.
Lastly - GROWTH will increase in importance and correlation to higher Enterprise Value to Revenue multiples while GTM functions will look to increase usage of AI Automation and AI Agents to improve efficiency which will create the need for designated if not dedicated AI Operations resources.
🔥 2025 will be a seminal moment in increasing the chasm between the winners and the rest across the SaaS industry!!!
SaaS Metrics Palooza ‘24 was the basis for several of the above 2025 predictions. If you would like to hear from many of the SaaS industry’s top thought leaders regarding how SaaS evolved in 2024 and see the details behind many of the latest trends - all SaaS Metrics Palooza ‘24 sessions are available on-demand for your convenience!!!
Click Here for On-Demand Access to all SaaS Metrics Palooza ‘24 Sessions
Thanks for sharing these insights! It's striking how acquisition costs continue climbing despite the push for efficiency, with both the Blended CAC and GTM Cost Ratios on the rise. Shifting attention to retention, growth, and CLTV seems more critical than ever. It’ll be interesting to see how organizations achieve higher CLTV:CAC marks as we move into 2025.