Software ARR Growth Decline: Factors and Solutions
Software companies, particularly SaaS firms, have enjoyed robust Annual Recurring Revenue (ARR) growth for years. However, the industry is now witnessing a decline in net new ARR growth rates. This shift warrants examination to understand its implications.
Recent data reveals a consistent decline in quarterly net new ARR growth since Q1’20. While Q2’23 showed a slight YoY uptick, we remain far from previous peak growth rates.
Several factors contribute to this decline:
COVID-19 Impact: The pandemic led to cost-cutting and reduced spending, dampening demand for subscription-based products and services.
Global Economic Slowdown: A worldwide economic slowdown resulted in cautious budgeting for new offerings.
Rising Competition: The SaaS market’s growing competitiveness makes customer acquisition and ARR growth more challenging.
Changing Buying Behavior: More businesses opt for “pay as you go” SaaS models, reducing upfront ARR bookings.
Market Saturation: SaaS markets approach saturation, with emerging AI technologies and new products.
Despite industry-wide challenges, some companies sustain strong ARR growth.
To thrive, software businesses must:
Focus on customer retention and account expansion
Invest in AI and product enhancement
Explore new markets analytically which are aligned with customer needs
Do more in PLG and community
In another graph from Clouded Judgement, aggregate “new new” ARR levels in Q1 and Q2’23 is significantly lower than the lows during the preceding twelve quarters from 2020 to 2022. (This data covered a set of ~60 software companies.)
In summary, the slowdown in net new ARR growth results from macroeconomic shifts, competition, market saturation, and evolving customer preferences. While hypergrowth may wane, software companies can succeed by aligning strategies with changing dynamics.
I am grateful to Greg Clark, Founder and Managing Partner of CrossPoint Capital Partners, for his contributions to this blog post.