Why do SaaS companies have their year end in January?
This week ChartMogul published their indepth SaaS Growth Report - surveying 2,200 SaaS businesses on their growth from zero to $30m ARR.
There are some fantastic insights so I encourage you to download the report yourself.
In this article I want to look at one specific topic - seasonality, and how that influences when SaaS companies should have their year end.
SaaS companies experience seasonality
Let’s start with the two charts from the ChartMogul report.
In this first we can see that over calendar quarters Q1 is the largest growth quarter-over-quarter in both the seed (<$1m ARR) and the Series A-C phase ($1m-$30m ARR).
The difference between the quarters is less pronounced than I would have expected.
My experience has mainly been in Enterprise SaaS so I suspect these figures are flattened with a large proportion of PLG and SMB focused products with less seasonality.
The second chart breaks the numbers down to individual months:
Here we can see that within Q1, it is actually March that is showing the largest growth compared to the previous month, and that December shows the lowest - largely impacted by the holiday season.
Note: My read of the chart is that as it shows month-over-month growth, because December has the lowest growth that by default makes January higher as it starts from a lower base - I would be interested to see the revenue split month by month.
Does it matter when your year end is?
During my 25 years in SaaS I have worked in companies where the year end was July, December, January and April.
Can you guess which were the biggest booking months in each of those companies?!
It is totally self-inflicted.
And I can tell you it is self-inflicted because in two of those companies we switched the year end after an acquisition and guess what happened to the biggest booking month - it moved to the new year end.
Everyone in your team from the SDRs, to the marketers, to the AEs, to the sales leadership to the CEO are all consciously, or subconsciously, affected by the quarterly or annual cadence of your business.
There is just less urgency and activity at the start of the quarter or year, and more at the end.
As you travel through a quarter and annual cycle you will hear:
“What would it take to get this done by the end of the quarter?”
“Now is a really good time to negotiate.”
“Do they know it is our year end?”
“If you can do this by December 31st I can throw in free implementation.”
(and these phrases are more often than not coming from your sales leaders not the AEs!)
All of these messages train buyers to build their own buying process around your financial calendar - every company knows the best time to buy Salesforce is on 31st January!
For Enterprise sales the customer’s financial calendar is key
If you are selling a $250 a month SMB SaaS product then the customer’s budgeting cycle is less of an issue.
However if you are selling a $250,000 a year product, then it is absolutely central to the customer’s decision making.
Your buyer will have to allocate the spend to a particular OpEx budget, and depending on whether they are on a calendar or tax year will influence when they can sign this off.
Let’s look back at that second chart and see what we can infer.
Many customers are on a calendar year - which means January is often the first month when new budgets are released - that makes a good reason why we see an uplift in growth month-over-month.
A significant proportion of larger companies have April as the start of their calendar year. So why is March the largest of the twelve months?
Companies typically operate a ‘use it or lose it’ for their budgets and so budget holders will try and ‘burn’ available budget to ensure they don’t get cuts for the following year.
These are just my assumptions from balancing my experience with what I see in the charts.
Why does January make sense for your year end?
As we looked at earlier - whenever your year end is it will be your biggest month.
The chart above shows July as being one of the worst months for growth - but I spent ten years at a company with July as the year end and it was absolutely our biggest month.
(the company was founded out of the Cisco ecosystem and Cisco’s year end was July)
So wherever you put your year end it will be big.
The advantage of a January year end (as followed by Salesforce, Workday and a number of large public SaaS companies) is that you get a double year end.
You get the customers who are using up their budget before the end of December.
You get the first month of their new budget for those that want to kick projects off in January.
Its not all good news though.
What you lose is the urgency and build up to the end of the calendar year - “we have one more month so we can relax a bit!”
Everyone rolls off for their holidays, and then you have to gather the troops up again in the first week of January, including your buyers who may have taken that longer ski trip and not be back until the 10th,
And then align everyone on your mutual action plan to bring the contracts in on schedule in under three weeks.
In my experience - unless you have contracts almost good to go before the Christmas break, you’ll face a lot of stress and deal slippage come 31st January.
Great sales teams get it done regardless
The best sales teams will get it done whenever the year end is.
The best sales teams will not be waiting until the last day of the quarter or year.
The best sales teams have a good enough relationship with their customers to get the deals done - in December, in January, in July.
Pick a year end that aligns with how your customers want to buy.
Pick a year end that aligns with the technology partners you work with.
Focus on removing the unconscious bias to relax for the first half of the quarter or year.
“We have loads of time” is not a good phrase to hear!
When is your year end and why did you choose it?
Would you consider changing your year end to affect the way your buyers buy and your sellers sell?
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