Barely a day goes by when we don’t hear news of an early stage SaaS business raising millions in funding. But when we see the big smiles, bold visions & eye watering amounts of money, it is easy to forget that, for these founders, the hard work is yet to come. Hidden behind the headlines is SaaS-land’s dirty little secret. That secret is that three quarters of these venture backed SaaS start-ups will fail.
Once the honeymoon stage is over, & growth begins to plateau, the terminal flaws in these businesses can begin to show. A lack of strategy. Poor leadership. Employee turnover. High burn rate. Running out of money. Any & all of these can call time on start-up businesses that only months earlier were the next big thing. The money disappears, the energy fizzles out, the opportunity has gone.
Dazzled by growth, founders are often blind to the mistakes they are making in those early days. Obsessed with growing fast, they neglect the fundamentals of how to grow well. At Jungle we have a philosophy of ‘Build to Last’. We work with SaaS founders to help them build businesses that will stand the test of time. Here are three oversights we often see among SAAS founders which we would like them to avoid.
Acquisition is like a drug for young SaaS companies. New logos are great for your reputation, morale boosting for the team & reassuring for investors. But a time will come when your MRR hits a ceiling and your top line remains resistant to any investments in sales or marketing. Whatever worked for you in the first few months, don’t work for your business anymore! This is when you know you have taken your eye off the customer.
SAAS is a great business because it is a high GM business with predictable revenue and active base of users. So long you provide value, consumers will buy you every month- that means focusing on retention is super critical.
Some of the reasons for a higher than estimated churn could be:
Lack of customer support
Poor customer experience
Poor onboarding experience
If you find yourself in this position, get to the root of the problem fast- understand where the problem comes from and how you can prevent it. Do follow-up emails / exit survey to understand why people leave.
If you can refocus your pricing strategy to an annualised plan- consider that.
Subscriptions longer than one month have over 30% better revenue retention than monthly plans. You should try and get an upper limit of 2% monthly logo churn and no more than 7% annual churn.
We spoke in another video (below) of key metrics to track and quick ratio is one of them: it’s the idea that new and upsell MRR should be much higher than Lost revenue (downgrade and cancelation). 4x is usually a good thing to target.
Some things to keep in mind: CAC is usually much higher than Cost of Retention, and upselling also brings a lot more stickiness. Either because you sell to more team members within an organization, or because at the user level you are adding more value and capturing more of their workflow.
Which make focusing on getting negative revenue churn critical — which is when your revenue from existing clients is higher than lost revenue (downgrade and cancelation)
In order to deliver higher negative revenue churn:
tracking expansion revenue separately
aim for 20/30% of monthly revenue coming from upsell.
Look again at your pricing policy and when possible go for usage based pricing (per transactions, storage capacity)
If you find yourself relying on paid marketing to hit your targets, alarm bells should start ringing. You are buying growth not earning it. The moment you turn off the tap — or someone turns it off for you — the funnel will begin to look pretty empty. This combined with poor retention and high churn rates would mean disappearing revenue.
Too often founders fail to identify their over-reliance on paid marketing because they are using a blended CAC figure as a key reference point. When you look at CAC in the aggregate rather than at a channel or cohort level, it is too easy to miss this fatal flaw in your business model.
Existing customer referrals are the best recruitment tool you can hope for, but they don’t come for free. Not only do you have to provide a high quality experience they value enough to recommend, you also need to nurture these relationships & amplify them.
Make no mistake, winning in SaaS is hard. Smart founders have to be heads down in the data but eyes open to the mistakes they might be making along the way. Prioritising the right metrics is a great way to keep yourself honest. Focus on CAC rather than a blended CAC figure, then double click on this figure to reveal hidden truths by channel & cohort. This level of analysis will help you identify your real ICP & give focus to your acquisition, retention & expansion strategies. Combine these smart growth strategies with a high value customer experience & you will be giving yourself the best chance of success in the cutthroat world of SaaS start-ups.