The SaaS business model has been making a lot of traction over the last few years. Stratospheric success of many companies built around SaaS (like Dropbox or Slack) and seemingly effortless disruption of the existing market landscapes they managed to achieve made this model extremely attractive for entrepreneurs from a variety of industries. Even businesses that have a long and successful history of using other models are experimenting with SaaS. For example, take Adobe Photoshop – it was distributed as a product for over twenty years but changed its licensing scheme to SaaS in 2013, although it hardly seemed possible just a couple of years before that.
However, behind all the highly public examples of successes like Canva or Figma, there are dozens of obscure SaaS startups that never took off or just failed at what they did, usually at the early stages of their existence. And no, excessive competition is often not the culprit. The reasons typically lie with the startups themselves. Most of them encounter more or less the same sets of challenges, but not all turn out to be prepared for them. In this article, we discuss problems that most SaaS startups run into – hopefully, it will help you get ready.
1. Identifying the market
The main difference between a startup and any other kind of business is that a startup often does not have a clearly identified market to work with. In fact, startups often create their own markets by defining a problem nobody thought needs solving before. According to Max Babych, the CEO of SpdLoad, the most significant advantage of SaaS development for a market that did not exist previously is that “you have no competitors. The only thing to be aware of is other startups picking up your idea. But there are also disadvantages — there are no defined users and market”. And here you have the main problem. The primary reason why SaaS startups fail is that they do not solve any existing problem. Alternatively, they solve a problem nobody is interested in solving. In other words, they are doomed to fail before they even start out because they misjudged their market. You can avoid it by adopting a lean startup methodology: create a small-scale solution and evaluate the reaction to it. If there is a market for it, modify and scale it based on the feedback.
2. Achieving fast enough growth
If you really have something new to offer on the market, you will get at least some free publicity in the first weeks or even months after launch. Mentions of your startup will appear in all kinds of media, it may be lauded for innovation or described in dubious tones, but it is all good as long as you remain in the spotlight. However, quite soon this stream will dry out, and the public attention will move on to other, fresher impressions. You have to be ready for it, and the only way to battle this fading attention is explosive growth. Depending on the kind of SaaS you offer, there are always creative ways to promote it. For example, Dropbox appeared when cloud storage was a relatively new thing and managed to grow 3900 percent in two years by means of a simple referral program. With a little ingenuity, the same can be done in other industries.
3. Establishing a viable business model
Most SaaS startup founders are subconsciously sure that once they show the world their service, clients are going to subscribe to it in droves. It may be true for the first group of customers, i.e., people who are initially interested in and enthusiastic about the kind of service you intend to offer. However, there are too few of them to account for much, and attracting further clientele is an expensive task. Many startup founders do not realize that not all expenses are justified in acquiring a customer. You have to keep two metrics in mind: the lifetime value of the customer (LTV) and customer acquisition cost (CAC). If CAC is higher or equal to LTV, you have a business that spends more money than it produces, and no amount of growth is going to rectify this. Approaches like inbound marketing can help you keep CAC low while looking for ways to increase LTV.
4. Keeping customer turnover low
As long as the customer turnover (churn) rate is higher than customer acquisition rate, the startup will fail; it is just a matter of time. It is why SaaS startups should focus not just on keeping their growth as fast as possible, but also on maintaining control over churn. Some factors in this regard are outside of your control: i.e., changing priorities of individual customers. However, you can eliminate other factors, such as poor customer support, inferiority to other products on the market, and so on.
5. Problems with supporting systems
Most SaaS startup teams are, by definition, too enthusiastic about the core features of their new service and often do not realize that an awesome product is often not enough to keep customers satisfied in the long term. Supporting systems (e.g., onboarding, customer support, billing, etc.) are just as important. If your customers experience inconvenience and friction with adopting and using your solutions, they are much more likely to leave.
While examples of highly successful SaaS solutions like Google Docs or Slack may look highly attractive, you should understand that merely adopting this business model does not guarantee success. SaaS businesses go through their own challenges, and you have to be specifically prepared for handling them.