The past 12-18 months have been a challenging macro environment to sell software. Budgets have been under scrutiny and buying urgency has often been low, even if you can prove a high ROI. 

A good way to get a read on the current demand is to look at the results of companies selling on a consumption-based model. Why? Consumption models enable flexibility, allowing customers to quickly dial up or down usage as their business needs evolve or budgets change in response to macro conditions. 

The cloud giants and other platforms like MongoDB, Elastic, and Snowflake have consistently mentioned proactively working with their customers in optimizing (reducing) spending on their platforms to ensure high gross retention and strong partnerships. In contrast, typically, customers get a chance to reduce the contract size in seat-based offerings at the end of the annual or multi-year contract.

When the macro environment worsened, consumption-based companies’ growth was hit harder. The YoY growth in July 2023 of public SaaS companies on a consumption model dropped by over half–to 18%–compared to their 3-year average growth rate of 39%. In comparison, companies selling primarily as subscriptions (seats) dropped only by a third. 

We’re still early in earnings season, but the cloud giants, who sell predominantly on consumption, have announced earnings. 

Here’s the broad update on each including some commentary from their earnings calls. You see growth ticking up. 

AWS (Amazon): $97B run rate growing 13% YoY (up from 12% in last quarter)

  • We’ve also seen that a number of the deals that typically signed more quickly, but were signing more slowly in more uncertain environments. A lot of those got done in the last quarter,”

Azure (Microsoft): Estimated $74B run rate, growing 28% YoY (same as last quarter)

  • “That period of massive optimization only and no new workloads start, that I think has ended at this point”.

Google Cloud: $37B run rate growing 26% YoY (up from 22% in last quarter). 

  • I think there are regional variations, but the cost optimizations in many parts are something we have mostly worked through. We’re very pleased with the momentum of GCP with an increasing contribution from AI.”

What do they have in common? They all mentioned that optimizations are stabilizing and new workloads are picking back up again. As headwinds subside, AI is proving it can catalyze the next growth phase.

It’s worth calling out a few nuances. 

First, if you’re primarily selling seat-based subscriptions, especially to high-tech customers, the reduction in headcount that many of your customers have seen isn’t reversing soon, so budgets may well be stagnant or lower. Second, there is still a bias toward consolidating spend on broader platforms versus best-of-breed point solutions. Finally, it’s likely the tailwinds from AI workloads are more pronounced today for the cloud giants and other data/infra providers than most SaaS applications. While many applications have been rolling out AI-powered capabilities, it’s still early days, especially in terms of pricing and business value. That’s likely to change and you will see some early green shoots from ServiceNow, Freshworks, and Github Copilot

Nonetheless, with macro headwinds subsiding, your customers are likely past the paralyzing uncertainty. This means it’s back to normal buying patterns. In other words, back to business for startups to get more data points on their path to finding PMF, or the right time to pour additional gas in the tank to scale their GTM efforts. If that’s you, please reach out to us!