fbpx
Contact

What is SaaS product

Max Babych
Max Babych
0 | 219 | 24 minutes
SaaSStartup tips

    Software-as-a-Service or SaaS is not just a “slang used by geeks”. It is a very common business model in the world of digital products. If, like me, you become excited when you see the words “digital” and “product” in the same sentence, then keep on reading! SaaS definition – a method of software delivery and licensing in which software is accessed online via a subscription, rather than bought and installed on individual computers.

    hastle boy

    As Bessemer precisely notes, over the last ten years the number of private companies worth $1 billion or more have gone from 0 to 55. These figures show that it’s more than just a hype driving cloud-based products. It’s a real sign of rapid growth. And it looks like the market is set to evolve from $500 billion to the $ trillion mark over the next few years. The market offers a potential opportunity, so do you want your share of it?

    If you are interested in joining the club of successful founders, let’s examine what the heck SaaS actually is and what you need to know about it.

    What is a SaaS product?

    In simple terms, SaaS is a software that all Internet users have access to. Many of your favorite internet platforms are built on SaaS. Such as Google Apps, DropBox, and Canva.

    SaaS became popular with entrepreneurs in the 90s. Since then, it has become one of the most relevant business models with at least 51% of companies already operating every process using the cloud. This figure is set to increase to 73% by 2020.

    To use the SaaS platform, you don’t need to install anything on your device. The application is hosted by a server provider. Both maintenance and updates are carried out by the host, being invisible to the user.

    In fact, this system has a key advantage. You don’t need any special equipment or specialists to use the software. Just go to the site, use the product and it will help you to increase your profit and flow your processes easier.

    Microsoft acquired GitHub

    As a result, SaaS has rapidly developed as a model for delivering value to the user. The market has reacted. The large corporations have begun to absorb SaaS companies along with their products. For example, in 2018 Microsoft acquired GitHub for $7.5 billion. Adobe acquired Marketo for $4.75 billion and Magento for $1.68 billion.

    In short, the SaaS product market has incredible potential. And this is why there is such competition to gain a share of the trillion size market. To become a successful player, you need to understand the basic concepts and dynamics of SaaS.

    Key characteristics of the SaaS model

    As the market grows, it attracts more and more entrepreneurs who see the potential opportunity of breaking into the league of big players when it comes to SaaS. A significant role in this was the advantage of SaaS over other business models. But is everything really as smooth as it seems within the SaaS model?

    What are the main advantages of SaaS?

    4 most important factors that determine the success of SaaS are:

    1. The main advantage is accessibility. This is the most customer-oriented feature. It allows your clients to both work and have fun at the same time. Whilst they are as mobile as possible in whatever equipment they choose to use, from an old laptop to the latest smartphone.
    2. Customers like to feel that they can access a growing number of your SaaS software applications. They could still continue to use the current CRM or email client. In fact, at the moment, integrations are a must-have requirement as the number of programs used is constantly growing. On average, organizations with over 250 employees use 100 SaaS products. While organizations with up to 50 employees use around 50 products.
      the main advantages of saas
    3. Why would your product be easy to scale? At the heart of any growth are a range of metrics and complex calculations. This is even funny, given the negative rate of some state-owned banks. Even so, the cloud business model implies a simple extension of functionality from a technical point of view. It gives you the flexibility to grow in a particular way and make a u-turn anytime if necessary.
    4. User data is safe. Today, there are high-quality standards for cloud solutions. The number of them is so big that throughout 2022, at least 95% of cloud security failures are likely to be the customer’s fault.
      the main advantages of saas

    Naturally, the advantages themselves are only a set of characteristics. It’s a successful combination of circumstances, the right strategy, and high-quality technical implementation. But everything has two sides.

    What are the main disadvantages of SaaS?

     There are two main disadvantages when building a cloud product:

    1. The main disadvantage of SaaS products is the lack of personal data security. I know what you think. But before you close this article, let me thoroughly explain it to you. Technical requirements, such as ISO/IEC 27017 safety certificate, assist in providing security. But due to the possibility of a repeated leakage of user data, these do not provide absolute security.
    2. Difficulties in complying with government regulations need to be taken into account. There are various types of businesses that store patient information and are subject to state regulation. Thus, they need to thoroughly study these requirements. Whether they are GDPR or HIPAA.

    The disadvantages of SaaS can be attributed and linked to the disadvantages of cloud software. And, thus, at the moment this is a factor that we can attempt to reconcile in the future. So keep your head up.

    the main disadvantages of saas

    What is a SaaS company?

    If your startup is creating a SaaS product, you are officially enlisted as a SaaS company. Your company does not have to be synonymous with your product. Moreover, it is possible to develop multiple products at the same time.

    Take a look at Google. Not only do they own Google, but also Google Maps, Google Drive, Google Documents and Google whatever-else. These are all different products with their own specific uses. 

    It is important to understand that a product is not just the company behind it. A company can focus on several markets and niches simultaneously. And that is why Google, for example, has several products.

    The best SaaS companies (and products)

    G2 prepared a list of the best software companies of 2019, based on the reviews of real users. Let’s take a look at the top 5.

    Google's annual revenue - $136 billion

    Google

    Well, Google needs no introduction. The company developed 137 internet-oriented products. Among them — search engines, advertising, analytics, document creation programs, and maps. We enjoy using its products every day. The company began as a small startup in 1998. And now, after 21 years of trading, has earned over $136 billion in revenue.

    Adobe's annual revenue - $9 billion

    Adobe

    It’s likely you all know what Photoshop, Illustrator and Flash Player are. Adobe owns more than 50 software products in the field of photo and video editing. It is also working with print media and marketing. With its help, users open over 200 million PDFs annually. Users, in their turn, helped Adobe to earn $9 billion last year.

    Slack's annual revenue - $4.1 million

    Slack

    Before the inception of Slack, there was a massively multiplayer game that failed. Slack was born around the same time in 2013. The company now works with three products. They include their main product, the Slack messenger, which is focused around work messaging. The company’s main strength is ease of integrating with many third-party services. And this advantage resulted in 9 million active users per week and $401 million in revenue.

    MailChimp's annual revenue - $400 million

    MailChimp

    When Darwin’s theory met email marketing, the world saw MailChimp. The company owns three products with the main one being MailChimp. MailChimp is an email marketing tool for creating and analyzing email-oriented marketing companies. The company used this impressive combination to send 15 billion newsletters monthly. It resulted in earning the company over $400 million with just 550 employees.

    shopify's annual revenue - $.3 billion

    Shopify

    Shopify is an eCommerce platform that owns four products. Its main product, Shopify, is an eCommerce platform for online stores and retail POS. It has over 800 000 users, who helped Shopify generate $1.3 billion in revenue last year.

    The overview of the SaaS market in 2019

    Business loves mathematics, so you should love it too, or learn to! The more you keep your numbers under control, the more profit you can make. Keep this mantra in mind when developing your own product. Especially when talking about such a giant market as SaaS.

    According to Gartner, there will be a huge boom in the SaaS market. It predicts reaching a market revenue of $85 billion by the end of 2019, an increase of almost 18% since 2018. It also predicts a trend of stable growth in the SaaS cluster as more and more companies begin to adopt cloud software. 

    This is good news for any founder starting a SaaS business, as we can see the market conditions are positive for new projects. Will your business succeed? That depends on your idea and whether it is groundbreaking enough. But take into account that the bigger the market, the tighter competition becomes. I am sure that any entrepreneur understands this vital basic.

    Let’s take a look at the research. The number of competitors in SaaS firms starting around 2012 was less than three on average. By the end of 2017, every SaaS startup faced competition from nine other firms competing in the same SaaS market segment. Considering the example of SaaS marketing solutions, the number of products increased from 500 to 8500 between 2007 and 2017.

    miracle

    Let me explain why these statistics are important. Market growth is good news. But it is even better when you have a very specific niche product. It will help you to stand out from the other 9 SaaS businesses continually trying to take your share of the market. Working out your niche helps you to reduce competition. It lets you become 10 times more likely to create a product that is specific and genuinely useful to the market.

    The types of SaaS products available

    There are various reasons why customers may want to use a SaaS product within their business model. Indeed, it offers a great opportunity for diversity. Using a Capterra study I discovered that there are over 718 categories of cloud products. But if we only consider the most popular categories we can reduce the list to the following: 

    • CRM or customer relationship management software. This software is a must-have for at least 91% of players in the small business league, whatever it is they do. CRM systems allow you to automate sales and marketing activities. The main features include the ability to track case status. It can be done via pipeline, notifications, statistics and an analyst dashboard. The market is expected to grow by up to$35 billion by 2023. Top examples in this field include Salesforce, Hubspot and Freshsales.
      hubspot screenshot
    • Enterprise resource planning or ERP software is the management system of ALL business processes in real-time. It gives a huge boost to help you improve your management approach and management itself. The data suggests the customer satisfaction with their chosen and implemented ERP software to increase to 68% this year. It means your SaaS product has a great chance to be loved from its early days. Plus the market is expected to garner $ 41.69 billion by 2020.If you want to find out more information look at Oracle, Acumatica or Syspro.
      oracle cloud screenshot
    • Project management software helps project managers to collaborate with their teams. It sounds easy, but actually it’s a necessary product if you want to launch a successful SaaS. It is especially important since a lack of clear goals is the most common factor (37%) for a project’s failure. Take a look at companies such as Jira, ProWorkflow and Office Timeline. If you want to be the next game-changer in this market it is important to understand the following. The market is set to grow to $4.33 billion by 2023.
      office timeline screenshot
    • Billing Software is an electronic invoicing form often used for self-service payment. This kind of product covers purchase orders and credit notes. It helps to save data entry costs and eliminates expensive miss-clicks. There are many variants of how to implement such a system. Just find something that inspires you, analyze the market and get going! Meanwhile, Globenewswire notes that the billing software market is expected to generate around $20.5 billion by 2026. We consider some of the best market solutions are Freshbooks, Tipalti, and Xero.
      XERO screenshot
    • Collaboration Software eases the life of organizations by simplifying self-coordination. These platforms usually include communication and the sharing of information features. In contrast to project management software, collaboration software is more like Slack than Trello. The market size will be worth$16.60 billion by 2025. So if you are a public-speaking-guru, this is your chance to start a SaaS product. For inspiration check out Miro, i done this or vabotu.
      screenshot i done this
    • ECommerce software includes everything you need to do for your business on the Internet. It’s a behind-the-scenes management system that enables companies to add or delete products. It provides tools to calculate prices, taxes and everything else to reach commercial prosperity. The eCommerce solutions market is forecasted to reach $21.4 billion by 2020. Do you want to be the next Wolf of Wall Street? Then eCommerce should be your choice, as by 204095% of customers are predicted to buy via the Internet. The most popular eCom solutions are Shopify, BigCommerce, and Volusion.
      screenshot volusion
    • Everything else regarding SaaS is called a vertical application. It’s a special product for a specific niche — a comic store, dojo martial arts, grooming salon or any other business you wish. It’s a general name for niche products made especially to optimize concrete business processes. It is predicted that vertical SaaS companies have a $1.3 billion higher enterprise value than horizontals. And, of course, they are more profitable. Well, you can’t build the next Microsoft without a starting point!

    SaaS product marketing

    One of the keys to creating a successful startup is speed. This principle works well both with technical and business development. The same way you test business hypotheses you have to set up a proper marketing strategy. Otherwise, people won’t be able to become acquainted with the product.

    Thus, the main goal of any SaaS founder is to find, attract and keep customers. And do this as fast as possible.

    The top 3 marketing challenges you will face as a SaaS owner

    There is a lot of data about how and why 90% of startups fail within their first year. 

    disaster girl

    To put it simply, the market face 99% of solutions it doesn’t even need. That is why they have no sales and no growth. If you want to be that 1%, let’s find out what should be taken into account.

    1. In SaaS, it’s important that you promote potential expectations as well as tangible products. 65% of online companies rely on their marketing efforts. It makes the competition even tougher as you will have to compete with recognizable brands with large and active marketing strategies. 
    2. How can you actually promote the solution and expectations? There are user journeys and sales or marketing funnels that can lead you to your potential customer. But the trick is to provide the maximum value of your unique product at every stage of the decision-making process. It is a permanent analysis of relevant questions to give you the most valuable answers at all stages of the product’s development.
    3. What happens after signing in? The fundamental issue is eradicating a high churn rate after users have made their first visit. It is important to share only relevant and useful content. It will encourage customers to return to your site and then retain them. Describe the benefits of your app to the users. It will help to save time.

    SaaS launching

    Naturally, this is a simplified presentation of potentially difficult marketing problems. My personal experience is that simple answers to simple questions are the basis of success. If a product’s goal is clear, then it is far easier to deliver value. There is no need for lame arguments and decisions based on startup experience. Eventually, they may be unnecessary.

    What are the top 5 marketing objectives for SaaS?

    Marketing objectives may sound very simple but are often not so easy to achieve. That is one of the main reasons why 29% of founders miss their chance. They burn through money without activating efficient marketing or sales processes. As a starting point, there are top 5 marketing objectives for SaaS developers to keep an eye on:

    1. What is the only thing you need for growth? Customers and nothing else. As soon as you attract the right audience and convert them from voiceless visitors to loyal customers you can start to skyrocket! Castle made an outstanding list of questions that can help you to identify your target market.
    2. You can use a lot of different channels and combinations to prove your experience which is necessary to build relationships. Users will not be inspired to sign up for SaaS products with no serious reputation or expertise behind them. Check out the 5 points on why relationship marketing is important in business.
    3. Marketing isn’t only content-content-content. SaaS marketers are obliged to optimize user interaction within their site. Make the workflow as smooth as possible. Remove any potential roadblocks for visitors who want to try and test your services before becoming the paying customers. In other words, content is a perfect bait to hook new customers into using your lovely new and easy to use platform. Call them to action and let them fall in love with your product.
      top 5 marketing objectives
    4. Usually, SaaS products let users pay after a free trial. The task is to keep the customer engaged enough to cross the subscription-line. Usually, it happens naturally as your value grows as a distributor. Optionmonster shares with us the 17 proven tactics on how to increase the number of trials. 
    5. Finally, retain your customers as long as possible. Yeah, the most trivial thing you’ve ever heard. But most of the SaaS companies take care only about customers as a revenue-growth-resource. We don’t insist on forgetting about evolution to more expensive plans. But there are plenty of other outstanding useful things you may miss.

    After setting your goals it’s time to put them into action, but how? There are marketing channels for this. Before you actually start any marketing consider the buying process. Many founders (most likely everyone) have already seen these cone-like marketing funnels. At the end of this funnel, should you stop retaining your customers? Of course, the answer is no.

    Marketing channels list you need for SaaS

    Before you actually start marketing activities think about the buying process. Many founders (if not everyone) saw these cone-like marketing funnels. At the end of this funnel, should you stop the retention of the customer? The correct answer is no. 

    That’s why today we use a horizontal funnel with the same stages but other meaning. According to the Harvard Business Review, profits rise as a customer’s relationship with a company lengthens.  It would help you to let users repeat purchases more and more.

    marketing funnel design comparison

    You can use every channel at all stages of the funnel process. But the question is how can you tell the story of your product? Let’s take a deeper look at 7 proved marketing channels.

    Content marketing

    The most important point is content marketing. This is not just my opinion. According to Aberdeen, the annual growth in unique site traffic is 7.8x higher for content marketing leaders compared to followers (19.7% vs 2.5%). The key benefit of content marketing is “return power”, as it increases in value over time. It also continues to attract leads over time.

    While other channels do so only as long as you are investing money into them. You can find an excellent example of thorough content marketing at Intercom blog. It is focused on everything around product development from design to promotion.

    my brand!

    Product trials

    There is nothing more impressive than product trials. Well made test-drives don’t even need words to sell a product. At least 86% of customers are ready to pay for better user experience. But you need to consider a few easy-to-follow tips first. Your product has to be polished and bug-free. You should also input some help for a customer. There are many examples of successful trials on the internet, but personally I prefer the way eVoice has promoted theirs.

    little girl trying something

    SEO

    SEO or Search Engine Optimisation should be your best friend when it comes to content making strategy. It makes your content visible on search platforms like Google, Yahoo or Bing. There are two approaches you need to pay attention to.

    First of them is On-site SEO. It is the content optimization to let users find you online. It works well, but only if you are creating content that people want to read, link to and share. In contrast, you don’t have the same control over off-site SEO. It is the second approach that relies on links to your content being posted. Together these two are regulated by ranking factors. Basically, any website with quality content and a lot of users is an example of good SEO.

    programer vs SEO expert

    Referral marketing

    Referral marketing is a good option. For example, when you ask friends which cafe they would recommend, you usually trust their advice. With SaaS products, it’s a pretty similar story. People like personal recommendations. 69% of SaaS owners say referral leads develop into customers faster than with the help of other marketing routes. Usually, companies make a referral program like Dropbox Referral Program. If you can recreate a similar result, then congratulations, you are on the right track!win+win= referral marketing

    Google Adwords

    No matter how good your content is, millions click on ads on the Internet. That’s why you need to keep an eye on Google Adwords. Especially now, when Google has started to increase their use of ad banners. Well made ads have a lot of specific requirements, but when done well they can be catchy and entice you to click. Thus, let me recommend 10 inspirational examples of ads to help inspire you for your own campaign.

    what does a 'media impression' even mean...

    Co-marketing

    One workable way of content making is co-marketing. You can compare this to when two artists from different music labels come together to create a number one single worldwide. Their target market doubles and, thus, they get double profit. The same logic can be used in SaaS promotion. You can create some desirable content and then join it to another author’s piece. Check out these 10 best co-marketing cases that actually work.

    two parrots jumping around the plate while water falling

    Remarketing or retargeting

    Remarketing or retargeting is a very common strategy that is popular among eCommerce platforms. Once the visitor checks out your website, he or she will start to see your add everywhere over the internet. It’s 10x time more attractive to click than usual ads. To be honest, It’s quite interesting, that 25% of customers enjoy retargeting.

    SaaS product sales

    When you first start a company, you have to take care of the marketing and sales yourself. I have been in a similar situation as the founder of a few startups myself. 

    monkey for sale

    Sales process

    Sales of SaaS is usually a long process with many pain points along the way. It should start only after thorough marketing activities to ease the sales process.  From now on, visitors evolve to the class of “sales qualified leads” or SQL. At this point, as a salesperson, you need to clearly estimate the problems a customer may experience and articulate what benefits they will receive with your brilliant solution. 

    • Telling vs. Selling. You can list hundreds of features your product has. But from my practical experience, it is better to explain how at least one of them will help to improve the quality of business. 
    • Ask 10 random Instagram / Facebook / Airbnb users why do they use it. You will hear 10 different opinions. The most important part of personal selling is to adopt customer feedback. Ideal Customer Persona may help with this. However, the main goal here is to learn to always listen and engage in dialog with a user.
    • Always use data. Implement information in ICP’s. Validate it via interview. Compare it. Numbers = facts. And that’s the point. If you know your customer’s behavior you would sell smarter. It’s a psychology process based on statistics. Just try it and you’ll never come back again to close worthless deals.

    The sales cycle for your cloud product

    The sales cycle is a process that companies undergo when selling a product to a customer. It encompasses all activities associated with closing a sale. The terms and amount of required resources depend on many factors. They include customer, price, feature list and so on. The basic principle works here — the cheaper the product, the easier it is to sell. It is no secret, that $29 per month is nothing compared to $100 000 per year. High prices make it harder for clients to part with their money. That is why you need less involved stakeholders to decide. Let’s take a look at available options:

    1. In a favorable case when you open new market space, you can’t feel like a monopolist. Your sales cycle will be comparably longer than traditional markets & products. The reason for this is due to the need to educate your customers. In fact, 92% of buyers trust referrals from people they know. That is why getting started in a new market can be tricky. But if you can get it right and create a viral product you will be rolling in money just like Scrooge McDuck.
      Scrooge McDuck take a money bath
    2. You typically need from 6 to 18 months to close an enterprise deal. As I mentioned, too many stakeholders can slow the whole process down and over-complicate it. Different departments are responsible for dealing with different problems. Where your customer sees pain, the superiors often see nothing. Enterprises usually want to customize their options. But even though it’s ok to discuss the price, the main thing is to focus on the maximum viable features. Leadfeeder is a great example of this.
    3. What do you do if your dealing with s complex products? Make an impressive demo of your product utilizing your key staff. Make it short and effective, keep the idea simple. 

    SaaS salespersons salaries

    A startup founder must sell their own product. However, business development is impossible without sales delegation. This is why it’s important to take sales costs into consideration. The most popular job portals have researched the average cost of a SaaS representative. The costs include a set of both hard and soft skills. 

    Indeed job portal calculated the salary of almost 210 000 salespersons over the past 36 months. The average salary for a SaaS sales representative is $60.208 per year.  The account representatives’ average salary is $50,409 per year.

    Glassdoor job portal estimated that the average salary of SaaS salespeople is $48 328 per year.

    Recruiting portal Ziprecruiter shows an average salary of $77 986 per year.

    big bang money

     

    However, as an owner, you need to understand that these aren’t final figures. There will be also a number of bonuses from general sales numbers. Rainmakers did an excellent researching job of all available sales ranks using Glassdoor data. I highly recommend taking a look at it. 

    The framework of how to put the correct prices

    Both novice entrepreneurs and experienced SaaS businessmen face the same ongoing problem. Yes, I am talking about pricing. However, there is nothing to worry about.

    The pricing model is essential for any Software-as-a-Service product. However, an average startup spends only 6 hours to set up the price. Is it an issue? I do not think so. It depends on how you actually spend these hours. 

    Firstly, I recommend that you study your competitors and analyze their pricing. This allows you to clearly understand market expectations regarding features value/pricing. Finally, your product price needs to cover all costs and guarantee your growth. 

    meme history.com

    Then, you need to identify the buyer and form a typed profile yourself. This must be done to determine segments of the target audience. The next step is to focus on the most relevant and profitable category. To do so, the whole team should understand every cohort. If you feel a need, work to get as thorough description as possible.

    As soon as you understand the difference and priority of your target audience, then it is the best time to interview them. The trick is in a good-prepared survey which leads to quality data to analyze. 

    The above activities enable you to obtain good pricing from the start.

    Pricing models

    Choosing a pricing model for your product is a complex activity. It is not only about calculating the product budget. The pricing model also includes the customer’s willingness to pay for what you are offering. Various marketing psychology tricks can help to encourage a customer to part with their hard-earned cash. But what pricing model should you implement? Let’s look at the options.

      1. The most popular pricing model is a per-user model. It resembles a per-active-user model. Its advantage is that it is easy to calculate and implement. Moreover, this model is easy to use for both companies and customers. It works well in case users rely entirely on your software. But the question is: What value and value-based metric do you put under this price?
        PriceIntelligently described why
        per-user pricing may not work for you. As I think, it depends on how would you use it. Slack, for example, does it properly.
        price intelligently
      2. In case you only want to work with a few buyers, “tiered pricing” model can be an efficient solution. The trick is to configure feature adjustments without losing service value. It directly connects to the main drawback of using this model. How would you justify the features/pricing to fit the customer? Shopify has done it perfectly. I also recommend you to check the Videofruit case study if you are thinking of using price tiers.
        pricing
      3. The simplest pricing method is a flat-rate model. This is where you take your solution and sell it for a fixed price without referring to users or features. The main advantage lies in its simplicity. But it is important to consider that sometimes oversimplifying processes can lead to loss of the revenue or your customer base. It’s called a flat-rate pricing paradox. However, if you are dealing with a simple app with limited features you could try it. Smart Bundle Upsell is a good example here.
        print screen shopify smart bundle upsell
      4. “Pay as You Go” or per-usage pricing is a very specific model for SaaS. Using this model customers will have to always monitor costs while the company cannot precisely predict revenue. However, it is a perfect choice for payment gateways like PayPal.
        print screen PayPal
      5. Another specific model is per-storage pricing. A well-known example is Google Drive with only 15 GB of free space. It’s a simple and easy-to-predict model that could work well if your product focuses on data. The Dropbox tells why do users should upgrade storage plans.
        print screen dropbox
      6. A very popular pricing system is freemium. But there is room for discussion. How would you separate free and paid features? Is it fair to your customers? Despite these complications, it is still a great pricing model. It allows your customers to become addicted to your product and generate referrals. Well, MailChimp went this way. By the way, pay attention to pricing policy. It’s a common but good trick.
        print screen Mailchimp
      7. As the freemium model, free and ad-supported pricing lets your customers use your application for free. The owner relies solely on app’s popularity to produce cash. It could be as simple as displaying ads. Or you could join the trend of selling your users’ behavior or demographic data. Download any free mobile application in the Apple Store or Play Market and you’ll understand what I mean here.
        print screen VB

    4 pricing mistakes that SaaS companies make

    Mistakes are an integral part of your startup journey, especially when it comes to pricing. But common mistakes can be avoided without the slightest loss. I have listed the top 4 mistakes to help you avoid falling into the same traps:

    Avoidance of pricing

    One of the main mistakes that companies make is the avoidance of pricing. There are many reasons why this happens — from fear and ignorance to the hope of customer feedback. But the fact is that without prices you can’t survive. Even if you work on the basis of freemium or using an ad-supported model, you still need to invoice for premium features or ads. If you are a value-orientated business with a solution that can really help people, then there will be customers willing to pay for your product even in its raw version.

    CBInsights noted, 17% of startups fail due to the lack of a business model. Check the 3rd slide. Here, Steve Ballmer, ex-CEO of Microsoft, notes that “The winners have a better price, business model and revenue”.

    Mr Bean puts finger up

    Do not copy their prices

    Look at your competitors, but do not copy their prices. It’s OK, when you have similar or even the same prices. But only in case that they were calculated separately, and they just match up due to the similarity of your expenses and profit margins. You cannot copy everything your competitors do as it won’t work the second time. You need to make sure you have additional or different values to your competitors, meaning the price will also be different respectively.

    Not price increases

    One of the most common problems SaaS startups face is not price increases. It is important to continually track your costing figures and set an optimal profit margin at all times. The SaaS market is not static but rather dynamic. 18% of startups fail because of cost issues. That is why you need to make sure you are costing your business effectively.

    Wrong pricing questions

    Another big problem can be asking the wrong pricing questions. The most common method used by most SaaS owners to determine the best price is by interviewing their customers. It helps to discover how much they would be willing to pay for the product. But it is not enough to ask your customers how much they are willing to pay.

    Working out the questionnaire is a more sophisticated procedure. It doesn’t matter what results you get. They are still harder to estimate than a straight answer “I am willing to pay so-and-so much”. Thus, it is very important to ask the right questions and analyze the answers. It will help to choose the best monetization option. “The Anatomy of SaaS Pricing Strategy” by PriceIntelligently covers all you need to know.

    Ron Weasley srsly what?!

    Top 6 SaaS key metrics

    There is a unique point that distinguishes SaaS from corporate software developers of the past and current business models of cloud solutions. It is that SaaS is designed for small amounts of recurring income. This means it is important to focus on key metrics. I suggest focusing on these 6 most valuable metrics:

      1. Once you identify the cost of attracting new customers, you will be able to work on finding the most optimal development channels for your product. Customer Acquisition Cost or CAC is a marketing costs divided by the number of new clients over a particular period of time. David Skok referred to this equation as a startup killer. As soon as you begin analyzing this metric you can begin to understand the real scalability of your product.
        CAC = Total cost of sales&marketing/number of deals closed
      2. Lead Velocity Rate or LVR shows the growth of your Sales Qualified Leads from month to month. Put simply, this rate shows how many new leads you attract while you are developing your product. It’s a very important metric as it shows the real market need and interest in your solution. It also helps you to focus on the success of both your marketing and sales. To calculate this metric we use the following formula. Before using it I recommend you to check the following examples of such calculations.
        LVR = QL current month - QL previous month/ QL previous month
      3. By calculating your monthly income you’ll find out your Monthly Recurring Revenue or MRR. This is a complicated metric, as you need to include the revenue from new customers, up-sales, and the churn rate. This is the metric  that shows your current stage of success. You can also use a good calculator here. By the way, a lot of companies use it to take into account Annual Recurring Revenue that typically doesn’t include these nuances.
        Net new MRR = New MRR + Add-on MRR - Churn MRR
      4. The churn rate shows how many customers leave your application over a set period of time. It’s a critical identifier for highlighting your users disappointment. There are many reasons why they might leave.
        This may be due to market conjecture, your own chosen strategy failing or other reasons. Sixteenvetures observed, that a
        5% annual churn rate is considered acceptable for SaaS products. To calculate your churn rate you can track the data from your CRM to see how many users stopped using your software in each month. 
      5. As most SaaS products operate monthly, you need to track your Average Revenue per Account. Also known as ARPA, this is an average revenue per user. You need this data to observe how clients evolve within your platform. Would they be prepared to pay more or less? How much do new customers spend? What are the main reasons?
        ARPA = MRR/ Total number of customers
      6. The most critical thing that can help you to make a decision regarding the course of your products lifetime is LTV. Lifetime Value represents how long you retain users on your product. If your ARPA is $50 and your LTV is 12 months you’ll receive $600 on average per user. If your business model is viable, your LTV would be more than the Customer Acquisition Cost. I would recommend you to check Neil Patel’s case study on LTV calculation.
        LTV = ARPA (Average MRR per Account) * Customer Lifetime

    Metrics are an important part of fundraising. If the founders are familiar with them, it helps them to create a proper pitch deck. Numbers are a hugely important insight for any investor.

    Why SaaS companies fail

    What I personally love about working in the startup community is that I am always learning. No matter if you succeed or fail. There is always a chance to analyze the results, improve them and hone your skill set for future projects. 

     

    Take a look at the 4 most common reasons why startups fail. Let’s find out how to avoid the mistakes that lead to founders appearing on the postmortem list.

    1. In contrast to popular belief, the main reason startups fail does not lie in the technology area. But instead, it is linked directly to market needs. Ensure that the market needs your product and it is not just a vanity project. The easiest way to avoid this common issue is to follow Lean Startup approach. It’s a budget-friendly and customer-centric framework that helps you build successful applications.
    2. The second most common reason is usually considered to be running out of cash. But I think that this is not the real reason. I think it as more about a failed business model. If we talk about metrics, it just means that your churn rate is higher than your growth.
    3. Steve Blank, a well-known author of Customer Development, proved that first-to-market status is overrated. Xerox was the first creator of a computer mouse. But Microsoft and Apple were the companies which made money out of it.
    4. Sometimes investors are impressed with the team rather than the idea or even the product. If you choose the wrong team, you may fail. Successful product startups are built on three main things. They are — the team’s ability to find a market, determine a growth strategy and implement it with limited resources. A poor management team or the lack of good sales people will limit your growth.
      think about it meme

    Learn about SaaS

    Below is a list of the 5 must-follow resources to improve your SaaS skill set.

    1. SaaStr should become your daily reading as it is credited as “the world’s largest community for business software”. It is an impressive and comprehensive guide to everything you need to know about SaaS. I also recommend you check out the Twitter page of Jason Lemkin, the founder of SaaStr.
    2. For Entrepreneurs by David Skok is another example of deep analysis and top quality content. If you want to improve your marketing and sales skills this is a must-read.
    3. Predictable Revenue’s blog focuses on the best sales strategies for SaaS. The author provides various valuable strategies, including reinventing the “cold call” strategy. Ensure you check out this valuable resource.
    4. The most data-driven author in the SaaS industry, Tomasz Tunguz’s blog nails the SaaS concept using deep data analysis. It is a very useful and interesting read.
    5. And finally, the SaaStock podcast. It is a great resource to enjoy. The SaaS Revolution Show comprises over 60 episodes. All of them are informative and cover the entire process of SaaS building. 

    Summary

    I hope you enjoyed this all-in-one SaaS article. We have tried to cover everything regarding SaaS to help you understand how impressive and deep this topic is. Some founders think business development is easy. And, of course, it can be. But only when you are willing to make mistakes, learn from them and continue to move forwards. If you don’t, you will be left behind and not experience any signs of success, especially when it comes to digital products. 

    Thank you for reading this article. I would be pleased to receive any comments on any issues you feel remain unclear.

     

    Posted by

    September 20, 2019
    Max Babych
    Max Babych
    CEO, Founder

    I am serial entrepreneur and IT professional. Launched 4 own products and more than 20 products for customers in SaaS and Marketplace industry

      No comments

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    Subscribe to our blog

    Recommended posts

    Founder & CEO at Lemlist. Guillaume Moubeche shares insights

    Founder & CEO at Lemlist. Guillaume Moubeche shares insights

    Guillaume Moubeche LinkedIn Founder & CEO at Lemlist – I know you were studying chemistry. How have you turned into a marketing…

    read more
    40 Must-Have Laravel Tools & Resources

    40 Must-Have Laravel Tools & Resources

    Laravel is just a framework for PHP programming language. But for successful project delivery coding skills and technical knowledge is not enough….

    read more
    10.7 million revenue! Sebastian Eldridge shares insights

    10.7 million revenue! Sebastian Eldridge shares insights

    Sebastian Eldridge linkedin CEO/Co-Founder at Anchor Worldwide – I know you’ve chosen this sphere because of your relatives’ advertisement business. So, did…

    read more
    What is SaaS product

    What is SaaS product

    Software-as-a-Service or SaaS is not just a “slang used by geeks”. It is a very common business model in the world of…

    read more
    5.7 million revenue! Rhyan Finch shares insights

    5.7 million revenue! Rhyan Finch shares insights

    Rhyan Finch linkedin Owner at 1st Class Real Estate  – How have you started your business? Tell me about the day you’ve…

    read more
    How to remove bad backlinks for free for SaaS

    How to remove bad backlinks for free for SaaS

    How to remove bad backlinks for SaaS In addition to properly building link mass for your SaaS, you need to clean your…

    read more
    How to find idea for unicorn startup

    How to find idea for unicorn startup

    The tech titans that now inspire owners from around the world once started out as unicorn startups. They are now technology trendsetters …

    read more
    How to prepare the pitch deck for startup. Real life story

    How to prepare the pitch deck for startup. Real life story

    I won the startup presentation competition! Participation in any competition gives you a good understanding of where your product sits in the…

    read more
    Max Babych

    Can we send you our next blog post?

    We'll send you about 3-4 posts a month. Only the best stuff you'll like.