SaaS margins are back — but only for the top quartile

The top quartile of public SaaS companies expanded operating margins by an average of 540 basis points year-on-year, according to data from a major buy-side research firm shared with us this week. The median SaaS company, by contrast, was roughly flat.

The bifurcation is the loudest signal in SaaS in years.

What the top quartile did differently

Three patterns recur in the companies leading the margin expansion. First, sales and marketing as a percentage of revenue is down materially. The shift toward product-led adoption and the maturation of efficient outbound have, finally, started showing up in the income statement.

Second, the COGS line is benefiting from infrastructure efficiency wins that compounded quietly over the past three years. The companies that invested in unit-economics engineering — multi-tenant optimization, smarter caching, intelligent data partitioning — are now harvesting those investments.

Third, the headcount discipline that the 2022-2023 correction forced has held. Companies that meaningfully reduced headcount during the correction have, in most cases, not added it back, and revenue per employee has compounded.

What the bottom quartile did

The middle and bottom quartiles tell a different story. R&D as a percentage of revenue is rising — usually a sign of either over-investment or revenue stagnation. Customer acquisition cost has not normalized as quickly as the top quartile achieved. The net retention curves, in the companies whose data we could see, are flatter than peers.

The strategic implication for SaaS founders is uncomfortable but useful. The market is no longer rewarding companies for growing — it's rewarding companies for compounding efficiency while growing. The companies that haven't yet shifted to that operating model are running out of time to do so.

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