Growth efficiency at North American software companies has taken a tumble. In recent years, these companies have faced greater competition and rising costs, resulting in a decline in global IT spending, senior partner Chandra Gnanasambandam and colleagues note. Software companies continued to invest in growth, but they were less efficient at producing new revenue, according to a McKinsey study of 116 companies. Median growth efficiency—defined as maximum growth with healthy margins—declined 50 percent from 2021 to 2023.
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Three charts show growth indicators for North American software companies between 2021 and 2023, measured quarterly. The charts are ordered as follows (from left to right):
- A line graph shows revenue growth, measured as the quarter-on-quarter percentage change in revenue. Revenue growth peaked at about 35% in Q2 2021 and then declined, dropping to about 11% by Q4 2023.
- Another line graph shows growth efficiency, calculated as a ratio comparing recurring revenue growth with sales and marketing spend. Growth efficiency declined by about 50% between 2021 and 2023, dropping from a high of 0.79 in Q1 2021 to 0.37 by Q4 2023.
- A vertical bar graph shows total sales and marketing spend, measured in billions of dollars. Sales and marketing spend increased steadily from a little over $20 billion in Q1 2021 to just shy of $35 billion in Q4 2023, which demonstrates that despite increased investment in sales and marketing, software companies experienced a significant decline in growth efficiency from 2021 to 2023.
Source: S&P Global; McKinsey analysis.
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To read the article, see “How efficient growth can fuel enduring value creation in software,” July 29, 2024.