There are a wide variety of successful businesses an ambitious, smart entrepreneur can start up with remarkable results. From ecommerce businesses that dropship products to Fintech companies that are making cryptocurrency more trustworthy and exchangeable than ever, business leaders have no shortage of opportunities when it comes to launching a new venture.
One often overlooked business model is known as software as a service, often abbreviated as SaaS. Some of the world’s most successful businesses, like Salesforce, Oracle, and SAP, are SaaS businesses. The secret to SaaS success is that customers pay a recurring amount in exchange for continuous access to a software platform.
There are many advantages to running a SaaS business, but one of the most compelling is that SaaS businesses can operate very efficiently. This article will review five tips potential SaaS business founders should know when launching their startup. By following the advice outlined here, founders will be able to generate success more quickly.
- Customer retention is key to long-term success. SaaS businesses succeed when they are able to retain existing customers. That’s because retaining an existing customer is 9 times less expensive than acquiring a new customer. Since customer retention is the key to SaaS success especially, founders must develop strategies to delight customers by continually making product enhancements and providing outstanding customer service.
- Focus on metrics that matter, like CAC, LTV, and ARPU. There are a few key metrics that serve as the leading indicators of SaaS health. Among them are CAC, LTV, and ARPU. This section will review what each metric means for founders.
CAC, or customer acquisition cost, refers to the average amount a business spends to acquire new customers. According to a study lead by Tom Tunguz, a well-known venture capitalist, it takes eleven months for a startup to recoup their CAC. There are a number of different ways CAC can be calculated; one calculation includes the “fully loaded” cost of all salaries and other overhead expenses associated with go-to-market teams, whereas other variations of this calculation only look at expenses related to marketing initiatives.
LTV stands for lifetime value, which is a critical metric for understanding how much an average customer will spend on your platform through their subscription duration.
Last, but not least, is ARPU, which stands for average revenue per user. To calculate ARPU, simply divide monthly revenue by the total number of people using your product. This calculation will help you understand what your go-to market strategy should look like.
- Product-channel fit is just as important as product-market fit. Many readers will already be familiar with the term “product-market fit,” since it has been made popular by experts like Eric Ries. But fewer readers will be familiar with the equally important concept of “product-channel fit,” which refers to the fact that the channels used to market a product must be aligned with the nature of the product itself.
Amazingly, 96 percent of small businesses fail within their first ten years. While a number of factors are at play in business failure, being unable to find the right product-channel fit is certainly one of them. For a SaaS business to succeed, marketers must identify and optimize the channels that generate customers profitably and in a manner that can be scaled.
- Develop customer personas early. There’s a reason over 80 percent of B2B marketers are using or expect to use personas in the near future. Understanding your customer is critical if you want to develop a better product and increase revenue.
Some of the best SaaS businesses, such as Hubspot, use customer personas to better understand the needs and desires of their target audience. They do this by developing archetypal figures which represent the ideal consumer. Then, marketers develop campaigns with a more complete, informed understanding of the target audience in mind.
- Ensure there is continuous feedback between product and go-to-market teams. Remember, developing a successful SaaS business means you must attract, convert, and retain customers. Being able to do this will mean your product needs to react to the needs and desires of prospects and customers alike.
Therefore, the best way for your product to evolve is with consistent feedback from go-to-market teams who interact with prospects and customers on a regular basis. In short, those working on go-to-market or product teams will need to avoid being like the 40 percent of employees who do not communicate effectively at work.
There’s no shortage of things SaaS business founders will need to do in order to get their businesses off the ground. From securing a business loan to recruiting a talented team, founders will be busy.
In order for SaaS businesses to succeed, founders must prioritize customer retention, product-channel fit, and communication. Monitoring key metrics like those mentioned is also a good way for founders to quickly analyze the health of their business.
What questions or concerns do you have regarding your SaaS startup? Get answers by posting in the comments below.