The Mindset Shift to Grow Profitably in SaaS

Growth is not everything 

Early-stage SaaS companies often chase revenue growth. For a while, revenue growth follows earnings growth. But many reach a point where profits stop growing at the same rate as sales. 

As the business gains scale, growth becomes economically more difficult. Companies need to expand beyond their original customers, products, and delivery models. Each new customer tends to cost more to acquire, serve, and retain. As a result, while revenue continues to grow, profitability fails to keep pace. 

"A lot of companies in this industry tend to chase every incremental dollar of revenue," says Paul Edwards, global practice leader at Grant Thornton | Stax. "But they may not realize that their margin has dropped from 80% to 70%." 

When margins shrink, organizations fail to meet the targets projected in their growth plans. They become more vulnerable to market changes, and their valuations begin to fall. 

"Good companies grow, but great companies grow profitably," says Kristian Rasmussen, a partner at Grant Thornton Advisory Services. So why do so many SaaS companies fail to prioritize profit in their growth objectives? In many cases, because they get stuck in the race for revenue. 

The Race for Revenue 

The search for private equity investors and other investors driven by the concept of growth at any cost often traps companies in a continuous race for revenue. In recent years, this movement has also been driven by low interest rates and the search for gains in scale and market share. 

This logic can lead SaaS companies to seek customers outside of their ideal profile just to demonstrate that they operate in a larger potential market. But this does not always generate good financial results. "You can prove that your product for small and medium-sized businesses works in the mid-market, but your profitability in this segment can be half that obtained with SMB customers," says Edwards.  

According to Kelsey Chisholm, Partner at Grant Thornton | Stax: "The question has always been, 'Is it growing?' But the real question should be, 'How is it growing?'". Some leaders recognize this problem but believe that additional investments will allow them to capture larger markets and regain profitability later. 

Unfortunately, larger, less profitable customers often create long-lasting challenges. "You can win over a large enterprise customer that adds millions in annual revenue, but that customer requires specific customizations and services," Chisholm explains. "The costs come in later. The revenue comes in now, but the full impact won't be realized until over time." 

The Pitfalls of Customization 

Many SaaS companies justify customizations developed for specific customers as future investments in product evolution. "I hear that all the time. Companies say they're getting a big customer and developing features that they can then sell to others," Rasmussen says. 

In practice, this rarely happens. Other customers often have different sizes and needs, making it difficult to reuse these features. In addition, even though there is a business plan to justify this investment, many companies fail to monitor whether the expected results materialize. 

This contract-driven development can also divert resources from long-term product strategy. "The result is a less efficient and less scalable operating model," Rasmussen says. To prevent the pursuit of higher revenues, bigger investors, and bigger customers from dominating every decision, SaaS companies need to change their thinking. 

A Market-Oriented Mindset 

Many smaller SaaS companies still operate with a mindset that reflects their founders, often product experts or high-performing sales professionals. However, sustainable earnings growth requires a different mindset that is more oriented toward unit economics and long-term profitability. 

"When SaaS companies try to grow quickly, many decisions are made in isolation by different functions," Edwards says. 

According to Edwards, sales, product, engineering, and customer service teams can make decisions that make sense for their respective areas, but that, taken together, weaken customers' profitability for the company. 

Profitable growth requires a different approach, based on a corporate strategy focused on generating profit and driven by unit economics, even if this implies concessions in certain functional areas. 

To implement this strategy, companies need to make disciplined and coordinated decisions across different areas. This cross-functional discipline requires the leadership of someone who is responsible, centrally, for the organization's profit growth. 

Who is responsible for increasing profits? 

Profit growth requires discipline between different areas of the organization, but many SaaS companies lack central leadership responsible for this agenda. 

"Product leaders want to build the best possible solution. Sales leaders are looking for revenue. The strategic CFO becomes the third leg of that structure," Edwards says. 

A strategic CFO, with a deep understanding of the business, can hold commercial and product teams accountable for results, question decisions, and prevent the organization from getting carried away by the prospect of winning a large customer or launching an innovative feature without clear economic justification. 

Once a company has developed a market-oriented strategic mindset and has leadership responsible for directing it, it needs to set a clear focus. That focus should be on customers, but perhaps not on the customers that many imagine. 

Which customers are profitable? 

Even though SaaS companies have always been customer-oriented, this focus needs to evolve as they grow. This evolution is key to driving profit growth. 

As new customers become more difficult and expensive to acquire and retain, some businesses turn to discounts and offers. However, this approach reduces the value of these customers and the likelihood that they will stay after the incentives end. 

 "As you grow, acquisition cost and payback become even more important," says Chisholm. 

Organizations need detailed data about customers and business units to make decisions with confidence. When they clearly understand the profitability of each customer segment, they can make the strategic choices they need to realign their business strategy with profitable growth. 

Data Granularity 

Strategic discipline may require difficult decisions and trade-offs that differ from those made in the past. Therefore, it is critical to have data to support these decisions. 

Many SaaS companies focus their analysis on Annual Recurring Revenue (ARR) growth. In some cases, they don't even have the proper financial data about customers or business units to analyze other factors related to profitability. 

To go beyond averages and manage the business based on the factors that effectively influence profitability, companies need to track metrics such as contribution margin per customer, product, and business unit. These indicators must be shared among functional leaders to support the decision-making process.  

At the heart of it all, companies need to ensure that their strategy is connected to unit economics that will ultimately determine their profitability. 

Unit economy at the heart of the strategy 

To drive earnings growth, SaaS companies need the right mindset, the right strategy, the right direction, and well-defined priorities. They also need the right economic indicators. 

Profit margin is important, but it is a backward-looking indicator. When its deterioration shows up in consolidated results, the root causes may already be embedded in customer acquisition, pricing, contracts, product decisions, and delivery complexity. At this point, companies are often forced to take drastic measures and reactive cost cuts. 

Instead, organizations need granular data that allows them to understand their unit economy. Then, they must embed that insight at the heart of the strategy that guides the entire organization.