Have you decided to open up a SaaS startup soon? By 2028, this market will generate over USD 186 billion, proving its popularity. On average, there are nine thousand and one hundred SaaS businesses in America, with fifteen billion global customers.
That means you’ll be entering a severely competitive market. According to Luisa Zhou, the majority of startups fail during the first few years of operation. Hence, your SaaS business will have difficulty surviving if you don’t follow the correct approach.
In this blog post, we’ll discuss a few mistakes you must avoid when opening a new SaaS company.
1. Not Choosing Recurring Payments
The subscription economy might reach USD 1.5 trillion by next year. Moreover, these businesses grow 4.6 times faster than the largest companies in the world.
As a SaaS startup, your business will need this software to get a recurring and predictable revenue stream. Technically, a subscription billing software will offer you the following benefits:
- Recurring payments for local and global clients
- Management of your subscriptions
- Access to hundreds of currencies and languages
- Understanding global tax and VAT compliance
PayPro Global states that SaaS businesses need a steady and robust billing mechanism that helps manage revenue streams. Such tools usually come with unique sales strategies that help you target various customer profiles. With this, you’ll get to manage the billing cycles, automate invoice creations, and eliminate any risk exposure.
2. Poor Financial Management
Being new to the industry, SaaS startups can develop cash-flow issues. This will become a problem only when you lack management and cannot have foresight in your finances. Industry leaders state that financial management is a multi-faceted approach that involves the following:
- Planning for future goals
- Budgeting based on current finances
- Assessing risks and managing them
Without financial management efforts, your SaaS company cannot maximize profits or track cash flow. It’s also needed to ensure compliance with industry-specific regulations. With this, you can manage relationships and develop forecasts for future financial scenarios based on current metrics.
Remember not to use up all your startup capital within the first few months. As a founder, you should also seek new financing opportunities based on your forecast. Moreover, you should keep reporting in mind and track key financial indicators.
3. Not Analyzing CAC and CLV
The initial growth period of your SaaS startup might face a time lag. This can be between sales revenue inflow and the expenditure of acquiring your business. When faced with such a dilemma, startup founders should monitor their customer acquisition cost or CAC.
Monitoring CAC closely can help you adjust the acquisition strategy when it isn’t working. Let’s say your company serves the B2B SaaS landscape. In that case, you’ll also have to analyze the customer lifetime value (CLV). Doing so helps you in the following manner:
- Determine which channels to invest in.
- Understand what strategies aren’t working.
- Analyze your marketing weaknesses and make changes.
Reports suggest that the average CAC in the eCommerce SaaS industry was USD 274, whereas it was USD 1,450 in Fintech. To get the best results from such expenditures, you must keep track of the CAC and other performance indicators. Remember to calculate ROI to verify profitability and help drive sales.
SaaS startup founders should also monitor attrition and churn rates. Analyzing this will help you understand the net revenue retention rate, revenue loss, and average revenue per client.
4. Choosing an Inappropriate Business Model
Let’s say you had an initial business idea when you were new to the market. In this model, you thought about setting up your company by leveraging innovation. Eventually, these can be poorly assessed and inadequate for the changing market trends. For instance, 19% of enterprises fail because of a flawed business model.
The SaaS market is always evolving, proving the need for scalability. That’s why you’ll need in-depth analysis to reflect on your initial business plan. With it, you can achieve positive profit margins.
Industry leaders have mentioned that the SaaS business model should be divided into three parts. These include the following:
- Startup phase: You’re starting to get everything in place and programming a working product.
- Hypergrowth phase: In this phase, you’re working to meet client demands and analyze the market trends.
- Stable golden goose phase: This stage is where your SaaS business starts making healthy profits and rapidly acquiring new clients.
Keep in mind that your operating costs need oversight. Moreover, you can change the subscription prices to meet market competition.
You should also choose a business model that doesn’t have too high an operation cost or CAC. Analyzing the earnings before interest, taxes, depreciation, and amortization (EBITDA) is also important.
5. Not Focusing on the Right Marketing Channels
Investopedia reports that new businesses fail because of poor marketing efforts. Oftentimes, SaaS companies target a wide audience but fail to reach the right people.
SaaS marketing isn’t similar to other marketing tactics. For instance, social media marketing might not work here.
You’ll have to promote, launch, and sell SaaS products through the right marketing channels. These include content, brand, affiliate, email, and inbound marketing. Proper search engine optimization (SEO), video marketing, and referrals are also important.
For example, you can reach potential clients by offering demos of your SaaS product. This can be a good way to persuade them to sign up. Even with a high CAC and lengthy sales cycles, marketing can surely skyrocket your business because you’ll achieve the following benefits:
- Improved product marketing
- Stronger customer relationships
- Increased brand awareness
In conclusion, starting a new business in the SaaS industry will have its challenges. However, you must overcome them if you want to survive in this cutthroat market.
Let’s say your business will solely focus on cloud services. Did you know that cloud spending is expected to exceed forty-five percent of all IT enterprise spending? That means you’ll have to be extra vigilant.
Remember to choose recurrent payment software and focus on financial management. Similarly, don’t make the mistake of not analyzing performance indicators. It’s also important that you focus on the right marketing channels and choose an appropriate business model.
