The biggest mistakes in Saas?
I was out for drinks with some startup types in Halifax last night when I was hit with a simple question: “What’s the biggest mistake a SaaS company can make?” Have to say, I thought it about for a couple of minutes. One of the beauties of this business model is that you usually have a high volume of customers so you have to really try hard to blow it. Still, I did think of a couple of doozies and I’m hopeful you can think of more.
So, what are the biggest mistakes a SaaS company can make?
Not being data-driven: More specifically, this means not being funnel driven. Every change to your product, messaging, website, anything that everything in your business that touches your customer should be done in order to impact a particular aspect of your conversion funnel. Eric Ries calls this “tuning the engine”. If you’re making changes because you think they’re good ideas, you’re not being funnel driven.
Not being funnel driven could be broken down into lots of smaller mistakes, but at a high level, this one is absolutely core.
Using enterprise sales tactics: I recently heard about an entrepreneur who put one of his tech team members on a customers’ site for a week as they implemented his offering. The customer that is getting this red carpet treatment is worth $45/ month. If you need to do sales calls to close small SaaS deals something is wrong. Either your product or company are not ready for the market yet. Only enterprise SaaS companies with big ticket offerings have any business actually visiting their customers.
Those are my two gotchas for SaaS companies. What am I missing?
Some really good comments in the thread, One of the biggest mistakes SaaS vendors make is underestimating the importance of local hosting and storage outside of NA. The data residency/ privacy and sovereignty issues are complex and in mainland Europe even SMB customers are hesitant to adopt or embrace cloud/ SaaS solutions because of local data protection legislation.
I like the comments above about spending a week on site for a $45 PCM deal a SaaS company should have a solid inside sales model and reseller channel to make sure cost of sale is controlled.
So, having said that I'm amazed that when you look at the routes to market (inside and channel) which are fairly low cost options how slow SaaS has and should have taken off outside of NA.
During my time running sales at NetSuite in the uk I had first hand experience of sitting in front of European customers and they just could not get their head around the fact that all their data had not only left the building, but also thier country and in most cases continent.
That's a big ask – even the customers who had reconciled this, saw all the usual cost benefits etc. and were ok with their data being someplace completely different the deal got derailed in legal.
On-premise vendors dont get SaaS as in how to make work, the sure know how to capitalise on all the FUD around why it isn't (yet) working as it could.
SaaS vendors can scale and grow almost virally without the heavy human capital and even physical office locations through using inside sales and channel – yet they don't has anyone actually asked a customer outside of the US why?
Not having a customer success program to measure adoption and the likelihood of a renewal. Measuring success at implementation, but also along the entire lifecycle of the customer.
Absolutely! This is tied to churn which is the most important metric for a SaaS business
I just finished reading the rant (link at end of post) from a Google employee about how Google (for the most part) doesn't think in terms of platforms. I am not far enough in my SaaS career to be an expert but I knew early on that our product would have other uses and that we needed to built our SaaS so it could eventually be converted into a PaaS if needed. After talking with our dev team at first I realized this would require a lot more work and we put it off, but once our product reaches a certain self-sustaining ability our goal will be to develop the PaaS. Reading the rant from this Googler just pushed my beliefs into that direction even more. The difference is that when you build in a PaaS version you may start to think of other verticals that are even more lucrative than your original idea. Also building a great API will allow you to partner with other companies to make your offering even better. Think of how much time people spend on Facebook because they play games, you can play games anywhere online but Facebooks lets you do it with your friends because of the platform.
I really think a possible mistake is to not go to a platform early on and that if you do you might end up with a much bigger business. Link: https://plus.google.com/112678702228711889851/pos...
Thanks for the link. Building with PaaS in mind, even if you never go that way, will ultimately make development faster and will enable integrations. Definitely the way to go.
Tied to weak understanding of the Data, but understanding your user cohorts and the variables that are driving differing behavior between them is key to optimization. Most obvious is Cost of Acquisition and Life Time Value, SaaS firms need to know the inputs effecting different outcomes among different cohorts in order to properly optimize. Less easy to measure is engagement, viral coefficients, and customer satisfaction; are certain cohorts more engaged, satisfied, and viral than others? What is influencing those 'soft' measures, marketing, features, price, etc? Understanding the 'secret sauce' (not so secret if you have great data;) of your best performing cohorts is critical to understanding how to scale efficiently. SaaS companies Fail more because they fail to scale use acquisition than anything else. Too many users and activity on the stack is a first class problem, spend first priority on getting the users on board.
Great comments. So many knobs and levers to tweak in a SaaS business. You have laid them out nicely
I have run into a few SaaS companies that do not understand that their current customer acquisition models may not be scalable. For instance, you can acquire 10 customers a month at $100/per through Google AdWords, but will this price remain constant when you want to acquire 100 customers?
Good point. CAC definitely goes up with volume and adwords only get you so far before you have to hit other channels.
Three that come to mind based on my experience as an SaaS entrepreneur:
1. Underestimating costs – SaaS required hosting/cloud, storage, bandwidth – and they are all driven by usage. Doing proper cost analysis from the start is key. If they are underestimated, cash burn is impacted, and the life of the startup can be shorten.
2. Pricing based on Cost vs Value. Price should be driven by demand and your business model. Unless your business is competing on a low price strategy (which is sustained by economies and scale and some sort of innovation that lowers cost drastically) a company should charge based on the value the solution provides. If caught early, not much of an issue. But if the prices are not adjusted quickly – the price can become a ceiling in the eyes of the customers. Another issue here is that you could start a price war with established companies, and if they have economies of scale they can match the price and have better margins.
3. Jumping into Freemium without a good strategy – it does not work for all SaaS solutions, and it might not bring as many conversions or qualified leads in your target segment. You need to ensure that freemium model fits within the overall strategy – and your cost model supports it.
In theory all these mistakes can be corrected and avoid failure the earlier they are discovered. So I think the biggest mistake of all is the one that impacts any organization:
Not looking at strategy and execution as an iterative process – where you have to review every step and action you take and ensure they fit within the strategy, and the strategy is still valid. Without proper reviewing and adjusting, the mistake compounds – you make new mistakes – and they become harder to fix. In my opinion this guarantees the failure of the startup.
Thanks for your comments.
I don't find 1 to be fatal, but there are clearly better hosting setups depending on the nature of your traffic. You need to understand peaks and other variables in choosing your setup.
Agreed that pricing on cost makes no sense. Met a company this week doing that. They're leaving serious $ on the table.
And absolutely, freemium is not to be entered into lightly. I have posted in the past on the 4 prerequisites for going freemium.
Not monitoring the Customer Acquisition Cost carefully to make sure it is well below Life Time Value… It sounds pretty obvious, but I think it might look simpler than it is. As I'm sure you already read this Mark, here is a link to one of my favorite post by David Skok http://www.forentrepreneurs.com/startup-killer/
Agreed Martin. I target 3 – 6 months of MRR for CAC