When we initially decided to work on this report, what we had in mind was to create an end-to-end analysis, looking from acquisition to retention. However, due to the amount of data, we had to split this analysis into two. Last week, we published the first part, "Spend to Revenue - Inbound Metrics", where we analyzed the journey from spend to revenue and the relationship between spend, inbound revenue, and inbound ratio in revenue from 2022 to 2024.
In this report, we’ll look up until the retention part because growth is not just about adding new business, but also about keeping them. Winning by Design’s bow tie model is a great way to showcase this; win is just the middle part of the journey. Henceforth, in this report, we are going to try to understand the lifetime value of customers by looking at inbound and outbound relationships, close rates, deal sizes, and churn rates in the last two years.
This report contains the data of 28 B2B SaaS companies using HockeyStack since January 2022. We analyzed more than $300M in revenue and more than 10K closed won deals, but please keep in mind that we only included the closed won data if the deal was closed by April 30, 2023. The reason is that this would show the churn rate, but if we included deals from, let’s say, November 2023, our data would be flawed as the contracts would still be ongoing. Another point I'd like to highlight is that we only included yearly deals for 2023. For instance, if a company closed a two-year contract in February 2023, that deal wasn’t included in this analysis. However, if a company closed a two-year contract in February 2022, it has been included here. You can find more details in the following methodology section.
- Spend: Any paid media spend, including but not limited to Linkedin, Google, Facebook, Reddit, YouTube, Bing, Capterra, or spending through ABM platforms.
- Sales Cycle: Time between the become an MQL date to closed won date, unless otherwise specified. Outbound sales cycle means time between the first meeting date with sales to closed won.
- Inbound: Deals created from a marketing touchpoint or organic/direct deals.
- Outbound deals: Deals created from a sales touchpoint.
- Total Deals: Deals created from inbound, outbound, and other sources, such as partnerships or similar activities, all new business.
- Deal Created: Defined as the point at which the deal amount field is filled.
-Deal Size: Total new business revenue added divided by the number of closed-won deals (also known as Average Contract Value, Deal Size, Selling Price, Deal Value)
- Revenue: The total value of closed won deals.
- CW: Closed won deals, new business, or new revenue.
- Inbound Ratio: The proportion of inbound deals in the total deal count.
-Outbound ratio: The proportion of outbound deals in the total deal count.
-Other ratio: The proportion of deals that are not inbound or outbound in the total deal count, such as partnerships.
-Blended: Inbound and Outbound together.
-Churn: If contract renewal didn’t happen after the end of the contract or if the contract has been canceled during the contract period (could be void clauses, churn clauses, anything.)
- Sample Size:
- Sample Description:
- Date Range: From January 1, 2022, to April 30, 2024, a total of 28 months.
- Contract type: Annual, Two-year, multi-year contracts. For yearly contracts, we analyzed the data from January 1, 2022, to April 30, 2023. For two-year contracts, we analyzed the data from January 1, 2022, to April 30, 2022. Therefore, for the two-year contracts, our sample size is limited to 4 months, whereas our sample size for the yearly contracts is 16 months. For multi-year contracts, we have only analyzed the deal size but not the churn rates.
The first data point we’ll look at is the close rates. In some of the previous reports, like Marketing Influence in Outbound, we already touched on this data, but now we’ll look at the historical trend to see the historical performance of close rates quarter over quarter. In the graph below, we’ll be looking at the Inbound and Blended data, where Blended is the average of inbound and outbound.
For simplicity, I wanted to work with two-dimensional data where we can apply simple logic to find our answers. For example, if the blended close rate is increasing while the inbound close rate is decreasing or staying flat, it means the outbound close rate is increasing.
According to our dataset, the average close rate in the last two years is 20.7%, which is very aligned with what I’ve generally experienced with other companies. When we look at the inbound close rate, we’re seeing a 10% difference, with the average inbound close rate being 22.62%.
There are a few interesting things that draw my attention. The first thing is the inbound performance in the last quarters. Although the average difference is only 10%, we’re seeing fluctuations in the blended close rates, whereas on the inbound side, the close rate has never been under 20%. In fact, it has been pushing 25%, indicating that fluctuations in the blended close rate have been caused by outbound. For example, as expected, the first and last quarters have the highest close rates, but in the second and third quarters, we’re seeing sharp declines in the blended close rates, whereas these declines are minimal in the inbound close rates.
The second thing I want to highlight, as I already briefly touched on, is the fluctuations in close rates. Although in 2022, there were fluctuations on the inbound side, the close rate data was pretty stabilized in 2023. However, on the outbound side, we’re seeing high numbers in the first and last quarters only. Another thing is that, in contrast to what we saw in previous years, the blended close rate in the first quarter of 2024 has been very low, behind that of 2023 and 2022.
Although compared to 2022 and 2023, we’re seeing a similar decline on the inbound side, the difference between the close rate of Q4-23 and Q1-24 is just 4%. Therefore, it’s safe to say that the inbound close rate has been consistent and still has a powerful ratio. In contrast, the blended close rate in Q4-23 was 27.79%, and it was 16.02% in Q1-24, so it declined by 42%. Considering that we are not observing this trend on the inbound side, this indicates that the outbound close rate has been pretty low in the first quarter of 2024 compared to the last quarter of 2023. We’ll analyze this data even further in our 2024 First Half Recap report in mid-July.
We are seeing a similar pattern to what we saw on the close rate side. The difference between the inbound deal size and blended deal size is not massive on average. But when we look at the 2023 data, we see that the inbound deal size has been more consistent. As mentioned in the 2023 recap and Q1-2024 recap reports, the average deal sizes have fluctuated throughout the quarters. For example, although the most deals were closed in the last quarter of 2023, the most revenue was added in the first quarter of 2023 due to the drastic differences in the deal sizes, where the prices were cut down by more than half.
Interestingly, when we split this data by inbound and blended, we see that inbound deal sizes have actually not decreased at all. For the entire year of 2023, inbound deal sizes stayed consistent. For example, in Q1-23, the average deal size for inbound was $24.9k, and in Q4-23, it was $23.1k, whereas the blended average was $31.6k vs. $15.6k. This, however, does not mean that inbound is better because outbound deal sizes actually start way higher than the inbound ones. In the first two quarters, these deals have better deal sizes, but in the second half of the year, we observed a huge difference in 2023.
This graph also has some interesting data in it. Firstly, we can see that the first quarter has historically been the quarter with the best deal size, both on the blended and inbound views. For the last three years, we’re seeing a huge spike in deal sizes from quarter four to quarter one.
Furthermore, we’re seeing that the average deal size has been constantly decreasing from the first quarter of 2022 to the last quarter of 2023. On the inbound side, however, the first quarter of 2024 is the first time we’re seeing the average deal size go above $30k. On the blended side, the first quarter of 2024, although historically the quarter with the best deal size, has had the lowest deal size in the last three quarters.
Also, I think it would be worth looking at this graph together with the close rate data. Although deal sizes have been constantly decreasing since the first quarter of 2022, we’re also seeing much better close rates now. You don’t need to be a data scientist to say that the increase in close rates is probably caused by the decrease in deal sizes. In 2022, the average blended close rate was 19.89% and the average deal size was $25.76k. In 2023, the average blended close rate was 22.88% and the average deal size was $22.50k (this average deal size might look different from what was presented in the previous recap reports; the reason is the sample size is different). Now let’s do some math:
In 2022, the close rate was 19.89% and the deal size was $25.76k; in 2023, the close rate was 22.88%, and the deal size was $22.5k. If there were 100 deals in each year:
2022 = 100 x 19.89% x $25.76k = $512.3k
2023 = 100 x 22.88% x $22.5k = $514.8k
There’s only a $2k difference; I must admit that I wasn’t expecting to see such a close number. Let’s have a look at the inbound data.
This time the average deal size in 2022 is $24.78k, and in 2023, it’s $22.48k; the close rates are 20.8% and 24.06%.
2022 = 100 x 20.8% x $24.78k = $515.5k
2023 = 100 x 24.06% x $22.48k = $540.9k
In the inbound example, we’re clearly seeing a more significant difference. 2023 was definitely a better year than 2022 when it comes to inbound deals; although the deal size got lower, the close rates were higher.
Now here comes the most exciting part: what’s the average churn rate in B2B SaaS? Do we see different churn rates for different deal sizes or for inbound and outbound deals?
According to our dataset, the average churn rate between January 1, 2022, and March 31, 2023, is 14.89%, meaning that almost 15 out of every 100 closed-won deals actually churn after a year. Similar to the close rates and deal sizes, we’re seeing slightly better performance on the inbound level, where the average is 13%; this also equals a 13% difference between inbound and blended.
In both blended and inbound views, we’re seeing the highest churn rate in the deals that were closed in the last quarter. This is interesting because Q4-22 was also the quarter where the deal size was the lowest, so it can’t just be because of cost-saving.
This makes me think, could it be because sales teams overpromise or oversell the product at the end of the year to hit their targets, and once customers start using the product, they don’t get satisfied? We only have the data for one quarter, so I don’t want to make such a big assumption, but I do find it odd to see the highest churn in the last quarter, especially when we know the deal size has been the lowest.
Another interesting thing is that we’re seeing relatively low churn rates in the first quarters of both 2022 and 2023 in both inbound and blended views. Although the deal sizes have been the highest in these quarters, the churn rate hasn’t. This situation prevents me from saying that the high churn rate in the last quarter of 2022 is caused by cost-saving.
Next, I want to look at what percentage of the contracts were annual and what percentage were longer. For this, we’re not going to limit ourselves to the data between Q1-22 and Q1-23; we’re looking until the end of Q1-24 as what we want to see is the portion of contracts.
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As expected, we’re seeing that the lion's share goes to annual contracts. Interestingly, though, there was a huge spike in 2023 in multi-year contracts; especially those longer than two years, which increased by 2x in the first three quarters of 2023, and then went back to where they were before in Q4-23.
What about deal sizes? Do longer contract terms mean different deal sizes? Yes.
It seems that two-year contracts are 12% cheaper than one-year contracts, and multi-year contracts are around 22% cheaper than one-year contracts.
In terms of churn rates by contract length, we’re also seeing lower churn rates in longer contracts, which is expected as longer terms often lead to better adoption rates. On average, two-year contracts have a churn rate of 11.5%, and one-year contracts have a churn rate of 16.93% (closed-won deals from January 1, 2022, to March 31, 2023).
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