SaaS products are becoming commonplace. It is an evolutionary stepping stone in business modeling, offering customers the flexibility they desire and businesses the potential for rapid growth. Even with such promise, the industry has witnessed the rise of a SaaS purgatory, where once-promising businesses fall flat. High upfront costs are the hoop SaaS businesses have to jump through to become successful.
For SaaS startups, growth can be a double-edged sword. SaaS businesses have high upfront acquisition costs reflecting sales and marketing, research and development, hosting infrastructure and customer support. To be successful, SaaS companies need to earn revenue over the lifetime of their customers — that means surviving the early years of low profitability.
The goal of any early-stage SaaS business is to grow monthly recurring revenue (MRR) by 15-20 percent month over month. This is becoming (more) common today, because unlike the first generation of SaaS companies, customer skepticism around cloud-based services is lower than in the past, thanks to access to more distribution options, like app stores and freemium models.
But the industry struggles a little with how (and when) SaaS businesses need to show a clear path to profitability. Valuations and trajectories of promising businesses have stumbled. Growing at 15 percent + MoM for two years is great. But doing so with 75 percent of leads being organic (non-paid) and with customer payback periods of one year or less is even better.
So how do we change the math and unlock the value that SaaS promises? Here’s what you need to know when navigating the SaaS minefield:
Focus on Customer Acquisition Costs
A reality in SaaS business is the high initial costs to operate and slow-growing revenue over the customer lifetime. This is fantastic for SaaS customers, who get the flexibility they desire. But it also means that a customer is typically unprofitable for the first 12-24 months.
To balance the short-to-mid term objectives of finding product-market fit, attaining 15 percent MoM MRR growth, and setting yourself up to unlock the underlying value, start tracking (and understanding) the core operational metrics that makes SaaS tick.
Early on, hone down to one core metric: Customer Acquisition Cost (CAC) : Customer Lifetime Value (CLV). Ensuring your total costs associated with acquiring a new customer (CAC) are less than their lifetime worth (CLV) is vital to SaaS profitability. Even if all your other metrics look fantastic, getting this one wrong will sink the ship.
Give Your Customers an Easy Way to Upgrade
Begin with a low-friction offering, such as a freemium (e.g. Slack) or free trial-based (e.g. Zendesk) model. High initial costs will scare off potential customers, while a complex product requires expensive sales and support right off the bat. With free or low-cost offerings, online SaaS opens the door to a broad range of first-time customers. This works best when facing large, horizontal markets. Remember that 100 raving fans can be more valuable than 10,000 “users.” Early word-of-mouth success means 80 percent or more leads come from organic (non-paid) sources. B2B companies like Atlassian drive huge top-of-funnel interest with charitable cause campaigns — requesting a $10 donation to get credit card details, filter out unqualified users and make upgrading easy.
Create “Aha” Experiences That Drive Word-of-Mouth Referrals
Successful SaaS companies map out their customers’ buying and growth journey and obsess over optimizing activation and conversion rates. This in turn drives up platform adoption, MRR/customer and customer satisfaction. Customers should have “aha” moments — magic moments of sudden realization of how a product will solve their problems — throughout the customer journey. An “aha” onboarding experience that produces satisfied customers, as reflected by high Net Promoter Scores, will drive word-of-mouth referrals and repeat purchases.
So how to do you this? One approach is to micro-analyze the hurdles and buying decisions faced by a new user, then deliver personalized in-product, email, and live touch points to guide a user through their journey. As a rule of thumb, get a new user to an “aha” moment within 30 seconds of signup, and you earn three more minutes of attention. Deliver another “aha” after three minutes to earn 30 minutes, and 30 minutes will earn you three days. Most SaaS trialists are emotionally bought in (or not) after three days. Intuitive, attractive design decorated with on-voice copy (including 404 pages) can help differentiate a SaaS business and drive social shares and forum chatter.
Build a Conversion Engine That Destroys Onboarding Costs
Build a repeatable, light-touch sales model to drive down customer acquisition costs while maximizing sales growth. Onboarding customers one at a time is lengthy and costly. So figure out what works manually, then automate those best practices to delight your small and large customers alike. Create “swimming lanes,” or sales channels, that align acquisition and support costs with the average customer sales price (ASP) to continuously drive down your company’s CAC to CLV ratio. You’re winning if you have a payback periods of under two years in the first two years of selling, and can drive this further down as you scale.
Scale Using Automation and Real Time Dashboards
Growing quickly while ensuring that lead and customers aren’t slipping through the cracks is more manageable if your list of activities are automated and you have up-to-the-minute insights. Codify your swimming lanes, personalize your customers’ journey, and diagnose what’s working and what’s not with an automated customer engagement technology stack.
Fortunately, the marketing stack for high-growth SaaS is (relatively) painless and inexpensive to develop today using best-of-breed tools. Start out with the customer identity by linking CRM to marketing automation or messaging. Add subscription billing, then incorporate in-product events (via Salesforce APIs or Segment) to personalize messages and early-diagnose conversion or churn signals. Integrate your business-intelligence software to combine usage, revenue, activity and billing data into dashboards, enabling your teams to monitor and react in real time.
Make Sure Your Upgrades Vanquish Cancellations
While new monthly recurring revenue (MRR) is the lighter fluid that ignites a SaaS business, successful long-term growth comes from expanding existing customer MRR faster than cancellations occur. This is known as attaining “net negative churn,” which you can achieve two ways.
First, commit to continuously improving the customer experience by regularly measuring satisfaction levels with a Net Promoter Score (NPS) survey. Loyal customers are more likely to renew, expand and refer friends and colleagues. Second, SaaS pricing and packaging can make or break future growth. Regardless of your company’s SaaS pricing axes (e.g. editions, users, functionality), as customers grow and mature, seamlessly up-selling them to the next package is critical to offset cancellations. Hone a value-based pricing path that minimizes upgrade friction, reduces discount requests and guards against competitor switching threats.
Always Keep an Eye on Your Key Metrics
While these techniques should come as no surprise, many SaaS companies still have yet to fully embrace them. By incorporating steps like those mention above, a SaaS company can hit predictable performance indicators, revenue growth, and long-term profitability.
The SaaS business model takes a keen eye and ability to prioritize the right SaaS metrics to establish success. Our early-stage KPIs are as follows:
- Number of monthly trials
- Percentage activation (trials who achieve product usage levels)
- Percentage conversion (trials who convert to paid within 45 days)
- Average MRR/Customer
- Total MRR
- Percentage of new customers who expand the following month
- MRR churn percentage (monthly)
- Net Promoter Score (NPS) at day 90
- Percentage of organic leads
- Cost per lead (CPL)
- Customer acquisition cost (fully loaded)
This post was originally published to Autopilot’s Medium channel.
Mike Sharkey is the CEO and co-founder of Autopilot, where he leads a team driven to help marketers harness the power of automation and build better relationships. Prior to founding Autopilot, Mike helped build two other successful companies in Australia, Stayz, wwhich was acquired by FairFax Digital in 2006 and again by HomeAway for $225M in 2013, and Sharkey Media, a digital marketing agency.
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