The SaaS business model has gained significant popularity in recent years thanks to the remarkable success of companies like Dropbox and Slack. The ability of these companies to effortlessly disrupt traditional market structures has made the SaaS model highly appealing to entrepreneurs from various industries, even those with long-established histories using other models. For instance, Adobe Photoshop switched to a SaaS licensing model in 2013, despite previously being distributed as a product for over two decades.
However, while high-profile success stories such as Canva and Figma grab the headlines, many SaaS startups are less fortunate and fail, especially in the early stages of their development. This is not always due to intense competition but rather to the challenges that most SaaS startups face and are only sometimes equipped to handle.
This article will explore the common problems that SaaS startups encounter to help you prepare for them.
1. Identifying the market
Compared to other types of businesses, the defining characteristic of a startup is its need for a clearly defined market. Startups often forge their market by identifying and solving a previously unrecognized problem. According to Max Babych, CEO of SpdLoad, the most significant advantage of developing SaaS for a newly created market is the absence of competition, but this also presents the challenge of having no defined users or market. SaaS startups face this primary challenge, as they often fail because they need to solve an existing problem or one nobody cares about. This can be prevented by utilizing the lean startup methodology: develop a small-scale solution, gauge the response, and adjust and expand based on feedback if there is market demand.
2. Achieving fast enough growth
When you introduce a novel product to the market, it’s likely to receive free publicity in the initial weeks or months after its launch. Your startup may be praised for its innovation or criticized, but either way, it will have captured the public’s attention. However, this wave of attention will eventually subside, and the public’s focus will shift to new and fresh offerings. To counteract this, explosive growth is essential. Depending on the type of SaaS you offer, there are always innovative ways to promote it. Dropbox, for instance, capitalized on the relatively new trend of cloud storage and saw a growth of 3900 percent in two years through a simple referral program. With some creativity, the same can be achieved in other industries.
3. Establishing a viable business model
Many SaaS startup founders have an implicit belief that once they launch their service, they’ll be inundated with subscribers. This may be true for the initial group of enthusiastic customers about the service, but more than this group is needed to sustain a business. Attracting more customers can be costly, and it’s crucial to understand that not all expenses associated with customer acquisition are justified. Two key metrics to keep in mind are the lifetime value of the customer (LTV) and the customer acquisition cost (CAC). If CAC is equal to or higher than LTV, the business will spend more money than it generates, and growth cannot solve this issue. Approaches such as inbound marketing can help keep CAC low while working to increase LTV.
4. Keeping customer turnover low
A SaaS startup will fail if the customer turnover (churn) rate exceeds the customer acquisition rate, which is only a matter of time. That’s why it’s essential for startups to not only prioritize fast growth but also to manage churn effectively. While some factors affecting churn, such as changes in customers’ priorities, are beyond control, others, like poor customer support or inferiority to competing products, can be addressed.
5. Problems with supporting systems
The vast majority of SaaS start-up teams are overly enthusiastic about the core features of their new service and may need to fully comprehend that a remarkable product is only sometimes sufficient to retain customer satisfaction in the long run. Supporting systems such as onboarding, customer support, billing, etc., are just as crucial. If your customers need help utilizing and adopting your solutions, they are far more likely to abandon your service.
Although examples of highly successful SaaS companies like Google Docs or Slack may appear appealing, it is crucial to understand that simply adopting the SaaS business model does not guarantee success. Instead, SaaS businesses face their challenges and must be fully prepared to tackle them.
Measuring success,
In conclusion, these are the top 10 challenges SaaS companies face. To ensure they are progressing in the right direction, SaaS companies must monitor their progress and evaluate their success by keeping an eye on important metrics, such as
- Monthly recurring revenue (MRR),
- Customer churn rate,
- Customer lifetime value (LTV),
- The average revenue per user (ARPU)
- Net Promoter Score (NPS)
Don’t worry if you need more clarification about how to keep track of these performance measures – numerous software and tools are available to help you. You can easily find various options by conducting a simple online search.
In conclusion, monitoring your financial status can provide insights into your revenue and expenses, allowing you to make informed decisions about your spending.
To achieve this, consider using software such as QuickBooks or FreshBooks, which simplify the process of tracking your income and expenses and offer comprehensive reports to understand your financial position better.
Final Thoughts
SaaS has become famous for entrepreneurs looking to start and grow their businesses. It offers advantages like steady recurring revenue, reduced expenses, and a stable business model, which is why nearly 85% of companies are now using at least one SaaS application.
However, some challenges come with running a SaaS business, such as customer churn and capital raising requirements. The challenges outlined in this article are some of the most commonly faced by SaaS businesses.
Despite these challenges, a well-managed SaaS business with a strong business plan can succeed. So if you’re considering starting a SaaS business, do thorough research and create a solid plan.
For additional tips on growing your SaaS business, visit our blog, where we discuss various topics, including marketing, sales, and product development.
