How Many SaaS Companies Reach 1 Million ARR?

For many years now, the benchmark of success for SaaS companies has been $1M ARR (annual recurring revenue). But how many SaaS companies reach that milestone? And today, even if it is reached, is it still considered a mark of success?

This article discusses those questions and will help investigate what is required for success for SaaS companies in today’s marketplace.

How Many SaaS Companies are There in The First Place?

Before getting into how many companies reach the $1M ARR mark, it’s essential to first understand how many SaaS companies exist. According to statistics, in 2022, there are approximately 17,000 software as a service (SaaS) companies in the United States. The United Kingdom is second, with 2,000 SaaS companies and 3 billion customers worldwide (Statista). 

That’s quite a lot! Of those companies, only about 4% reach $1M ARR.

Only 4% of the SaaS Companies Reach $1 Million ARR

According to Venturebeat, only 4% of SaaS companies reach 1 million ARR. And only 0.4% of them reach $10 million ARR. Therefore, if that is the benchmark, many SaaS companies fall short. Let’s consider then what it actually means to reach that level of annual recurring revenue and how companies do it.

What Does It Mean to Reach 1 Million ARR?

Historically, to achieve $1M ARR, companies needed a few hundred customers and about two to four years.

However, if we look closer, it may not have been the milestone that caused these companies success. But, the journey they took to get there.

Consider this:

To achieve $1M ARR, here are things a company has to do

• Achieve a solid product with proper market fit
• Develop the ability to identify new groups of prospects and gain new customers
• Learn to secure year-long contracts, not just month-to-month ones
• Overcome reasonable churn
• Sustain regular customers for at least two years

These learned lessons are the actual value and could be worth well over $1M in annual revenue. Companies learn what to do, what not to do, and how to survive in the long run.

That’s not to say the revenue has no meaning. For potential investors, this amount of revenue signals a startup’s readiness.

And that’s where things get a bit tricky for SaaS companies.

What Makes a Successful SaaS Company, Successful?

If you’re a startup, and you’ve been told that the hallmark of success (and receiving potential investment dollars) is achieving $1M ARR, then it can be easy to put blinders on and only focus on reaching that goal. Even taking shortcuts becomes an option if you allow it. Growth hacking measures have littered the landscape for SaaS companies.

Today’s SaaS buyers are spending more than ever and willing to continue spending over $1,000 in MRR (monthly recurring revenue). With such a high amount, it takes less than a hundred customers to achieve the $1M mark. Needing so few customers, companies and owners can turn to growth hacking tactics to reach those numbers quickly, bypassing all the opportunities for learning along the way.

Conversion rates and churn numbers matter less in this environment and, instead of it taking several years, it can take the company less than 12 months.

What is the cost of those shortcuts? And if a company achieves $1M ARR in such a short amount of time, is it really a successful SaaS company?

What Makes a Successful SaaS Company, Successful?

The question is a difficult one to answer. Indeed, some companies have scaled quickly and gone on to great success for many years. But, perhaps the real success of a company is measured differently. Instead of a quantitative measure, more qualitative ones.

Common traits of successful SaaS companies

There are a handful of areas one should look for to determine the worth of a SaaS company:

• The Sales Learning Curve (SLC)
• Online Marketing
• Customer Support
• The 6 Cs

The Sales Learning Curve (SLC)

Study the Sales Learning Curve to know when it is the right time to invest in sales. Many software businesses fail because the founders invest too much money in sales before refining their sales models. This can lead to them running out of money and losing their business.

What is the company’s track record (or plan) for acquiring new customers and nurturing existing ones? Both are necessary for the health and growth of a business.

And it’s essential to understand how SaaS companies handle churn.

Online Marketing

Today’s customers are savvy and do their research about the products they buy (PWC). Online marketing efforts should be robust. Content created by the company should inform its customers and increase the brand’s value. Understanding the success of a company, means understanding the message they are portraying to their customers.

Customer Support

One of the main reasons why many SaaS businesses fail is because they do not provide quality customer support. Unlike traditional products or software, SaaS companies must consistently offer support for their customers.

Investing in call centers, online chats, and email are all efforts a successful company must deploy. And the level of those investments shows how much the company truly cares about its customers.

The 6Cs

The 6Cs are Customer Life Time Value (CLTV), Customer Acquisition Cost (CAC), Churn, CMRR Pipeline (CPipe), Cash Flow, and Committed Monthly Recurring Revenue (CMRR).

These numbers can tell an entire story about a company, including its likelihood of future success.

And the traits listed above provide a holistic view of SaaS companies beyond a monetary benchmark.

How to Follow the SaaS Business Model?

SaaS businesses are built in three phases: setup, growth, and stabilization. Each phase has its own unique set of activities.

The Setup Phase

In the setup phase, SaaS companies invest in product and marketing development. This includes building out the software and ensuring it works as promised, creating marketing materials and messaging to attract customers, hiring customer support staff, and setting up sales channels.

Growth

The Growth phase is when the company focuses on growth. This includes focusing on sales and marketing to acquire more customers, improving customer relationships through better service, increasing pricing and package options to boost revenue, and investing in product development for further market expansion.

Stabilization

The Stabilization phase is when a SaaS company refines the processes and systems developed during the setup and growth phases. This includes refining its product offering, increasing customer retention rates, investing in technical support staff to improve customer service, implementing automated processes to reduce manual labor costs, and optimizing pricing plans for optimal revenue.

What are The Biggest Challenges SaaS Companies Face?

SaaS companies face various unique challenges when trying to achieve $1M ARR. These include:

Customer Acquisition Costs

Acquiring new customers can be expensive, especially for SaaS start-ups. It’s essential for these businesses to focus on cost-effective customer acquisition strategies such as content marketing, referral programs, and online advertising.

Competition

SaaS companies must compete with other providers in the market offering similar products and services. Companies must set themselves apart from the competition by putting a unique spin on their product offerings, and understanding customer needs better than the competition.

Product Development

SaaS companies must spend time and money developing their products to stay competitive. This includes user testing, gathering customer feedback, and regularly releasing new features.

Customer Retention

Retaining customers is essential for any SaaS business to survive. Companies must ensure that they provide a great product and service, answer customer queries on time, and keep their customers updated with the latest product changes.

Final Thoughts

Though achieving $1M ARR is a milestone most SaaS companies strive for, some many other qualities and traits enable a successful SaaS business. By effectively using the setup, growth, and stabilization phases; developing strong customer relationships; understanding their CLTV, CAC, churn, CPipe, cash flow, and CMRR numbers;  and utilizing online marketing efforts to increase their brand value, companies can make a real impact on their growth.

By following the SaaS business model, entrepreneurs can create an effective way to reach that $1M ARR and beyond.