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How ServiceNow achieves a 99% renewal rate for their SaaS service while front-running as AI innovator.
Consistent growth and the most loyal customer base SaaS has ever seen.
Sebastian Muehl
May 09, 2024
Good morning. This week, I found what they call a rabbit hole. The rabbit hole that is ServiceNow. A SaaS business that peaked my interest because they have a 99% customer renewal rate and were featured as one of the most innovative companies. As I started to dig into it, I became more and more fascinated about how they operate beyond being “a ticketing system.” However, for this email to not break my brand promise of a “5-minute email,” I must ask you to read a bit faster, please.
6-minute read
The Story of ServiceNow
We live in a time when most CFOs want to cut software spending across the organization. 2023 was a year in which many companies cut costs. However, one software company remains a must-have. Coming out of that year with a 99% renewal rate and an average spending per customer increase. That software company is ServiceNow.
How are they staying on top of their game and becoming seemingly unreplaceable? What’s the strategic focus that helps them to be so resilient and pushes the growth?
Forbes ranked them the #1 Most Innovative Company in the World in 2018. And what they presented at the 2024 Financial Analyst Conference will likely put them high up on that list again.
What’s their sauce? Let’s take a look.
Key numbers
💸Total revenue for Q4 2023: $2.437 billion, up 26%.
💰2023 subscription revenue: $8.68 billion
📈600% Growth of ACV (Annual Contract Value) as of Q4 2023 vs Initial Contract
🔥70% of their existing customers spend incremental dollars
🥉No.3 in Fortune Most Admired Companies (in Computer Software)
What is their product?
It’s a SaaS business that evolved into PaaS (Platform-as-a-Service) that enables enterprise IT and support workflows and much more beyond that, as we will see. They started by selling a simple, flexible workflow that allows employees to manage their IT requests. Yes, it is the tool you use to request a new laptop or app access from your IT department. Are you getting excited yet?
What makes them stand out is their simplicity and customizability. ServiceNow's tools don’t require an IT department to set them up. This sounds simple now, but it was groundbreaking in the early 2000s. It is a cloud-based service, so managing upgrades and improvements was easy, and all of it was workflow-based. The sticky part was that it enabled the IT service providers to deliver an outstanding, fast experience to their users. They loved it.
How ServiceNow started
The founder, Luddy, is one of the OG SaaS pioneers. He started the company in 2003 with the goal of making it usable with a friendly UI for the average service worker. He knew it was frustrating for common workers to deal with IT departments.
In one of his first jobs, he realized what gave him the energy to do what he did:
"There is no better experience, than giving someone a piece of technology that lets them do something they never thought they could do.”
He took his first version of the product to market in 2005. It was a simple platform that let anyone create workflows that supported typical business processes. They pitched it and showed all the things that could be done—a wide variety of internal jobs. They called it “digital automation.”
The market’s feedback: “Meh.”
Luddy didn’t understand it… they had all the great things this platform could do. How did nobody see it? At one point, the CEO had to sell their car to make payroll. And it didn’t look too bright for them.
Until they started to narrow down their positioning and understood that they needed to specialize. They went very niche. They narrowed it down to the IT-support workflows and started to pitch these very targeted. And the market was hooked.
From that point forward, they niched down and successfully positioned themselves as an IT Service Management (ITSM) leader. But the ultimate vision remained—expanding platform offerings and enabling everyone to route work simply across the enterprise.
During the early years of expansion, ServiceNow was laser-focused on perfecting its existing customer experience, which led to slower customer and revenue growth. However, it paid off massively when it sought to raise a larger investment round in 2009.
Sequoia managing partner Doug Leone says the positive customer reviews stood out. He had never seen customers raving about a vendor this much.
After the investment, they were able to scale and close enterprise deals with companies such as McDonald’s, Deutsche Bank, and Intel.
The company is worth almost $150 billion today, and it was wise not to follow an acquisition offer to sell to VMware in 2011 for $2.5 billion.
How can ServiceNow keep customers so engaged?
So, what are the secrets that let them keep their existing customer base so engaged? Here are some insights from the COO, CJ Desai:
Never take your eye off the customer experience
As described, customers have been embedded in ServiceNow’s purpose and values from the early days. All questions are always oriented around existing customers.
Expect speed bumps and use them as opportunities
Going back again to how the company started and needed quick pivots from being very generic and “uninteresting to finding exactly what they could help their customers with helped them create new opportunities.
Make the most out of today’s AI solutions
The urgency to hit revenue targets led them to start exploring Machine Learning on top of their own data. Finding factors related to past revenue performance and how they could shape them to predict future performance.
It’s not just a ticketing tool.
Today, ServiceNow generates $8.6 billion in annual subscription revenue at a 99% renewal rate. Let's find out why CEO Bill McDermott thinks they are targeting $20 billion in ARR in the years to come.
The boost to a digital-first world from COVID-19 helped ServiceNow capitalize. They saw a need and expanded their platform into emerging HR, legal, and customer service workflows.
In addition, ServiceNow continued integrating with new platforms critical to their customers' operations. The goal is to span every organization's workflow with a common data model and a single architecture.
As said before, ServiceNow is positioned square in the middle of an organization.
We all have heard these phrases making a run for the new top corporate jargon list. Taking on classics like “no bandwidth”, “move the goalpost,” and “low hanging fruit”:
“We are breaking down silos”
“We are working closely with customers to solve their problems with AI.”
It’s everywhere, blowing up like the feud between Kendrick Lamar and Drake. So, what’s a concrete example that’s being done?
Concrete examples for how ServiceNow uses AI
If ServiceNow’s goal is to be the central data platform, it must show some serious advantages before customers let it be that. Data centralization is a leading factor, but more companies are competing to be “in the middle.”
The first step was to signal to customers in May 2023 that they are serious about AI endeavors by partnering closely with Nvidia.
Another concrete example: ServiceNow runs all its services for its own internal teams, so every employee also uses the product it sells.
An application of its AI layer is the new employee onboarding, which it presented at the 2024 Financial Analyst Day. The slide below shows the benefits. Who wouldn’t want to use this tool?
And an example for fellow F1 fans…
Late last year, Aston Martin’s Formula One team announced a deep strategic partnership with ServiceNow as an innovation technology partner. This is another signal for working as a technology leader at the pinnacle of automotive innovation.
On the CJ & The Duke podcast, ServiceNow Sr. Director of Product Damien Davis mentions the Aston Marin partnership that ServiceNow plans to combine data across many different aspects important to an F1 team.
Teams in F1 fight for fractions of a second per lap. Channeling that data from different sources into a central platform would suddenly allow them to see things they didn’t see before.
Combining tire pressure and temperature data with a driver's heartbeat and their favorite milkshake, who knows what an ML Model can find?
In a time where companies ask themselves:
“Why did we build separate organizations for each function?
“Why would we let them build their own separate data stores?”
“How can we get it all in one place?”
ServiceNow positions itself in a place where company leaders look to solve this.
And their TAM (total addressable market) projections show they mean serious business.
TAM expansion projection
 2005 |  2018 |
2024
What are our key takeaways?
Three steps to be irreplaceable:
In the beginning, they had a great platform that offered a broad set of tools—too broad. Only after narrowing down use cases were they able to find stickiness in the market.
This brings to mind the “Jobs to be done” framework. Clay Christensen established this outcome-driven innovation framework, which we could explore in another post.
ServiceNow became a well-established IT service that, once set up, is really hard to replace. Replacing it would be like ripping out your entire IT department. Everything would grind to a halt. If it works, it is likely one of the last services to be touched.
So now, they are your company's IT backbone and sit squarely in the middle of all of your software. Now is the time to broaden services again and help CFOs in their quest for consolidation. Since it is built as a platform, they can broaden it again via data integrations and a flexible UI to expand on workflows.
Add AI to the mix:
ServiceNow attributes much of its latest success to the integration of AI into core offerings. They are successful because they test it for their own internal processes first. That provides a nice case study and demo, as well as rapid iteration from internal feedback. The CEO, Bill McDermott, mentions that it had transformative gains in productivity and faster development of new applications.
They are leveraging GenAI for data simplifaction and it seems to stick. Once the data is central, they add AI models on top of it to provide new insights (see the Aston Martin example above). A close partner like Nvidia is a force multiplier for them.
Eat your own dog food—ServiceNow was always its first customer. This way, everyone working at ServiceNow could use the product for their jobs.
Companies are looking for the best way to leverage AI. ServiceNow is building a shared set of applications that solve pain points that every company can identify with. They can wonderfully leverage their unique strength of already being in the middle of most of them.
Maybe they can even figure out a bot that eliminates corporate jargon next.
More sources if you want to explore this rabbit hole on your own
What else caught my eye
Round extensions and bridge rounds are here to stay. It’s not looking like it will change anytime soon with interest rates staying up. Bridge rounds are meant to cover short spans but funding is hard to come by these days so this trend will remain for some time.
On that note, thank you for reading faster.
Best,
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