“There are no secrets in life; just hidden truths that lie beneath the surface.”
The same is true with Software-as-a-Service (SaaS). SaaS offers organizations a variety of benefits, including:
- Lower cost of entry
- Greater reliability and easy upgrades
- Integration and scalability
- Higher adoption rates and accessibility
These benefits help explain why more companies are switching to SaaS-based models each day. The continuous evolution and increased maturity of SaaS offerings is expected to drive-double digit growth. Gartner estimates the market to grow to $73.6 billion in 2018, up from $60.2 billion.
Successful SaaS companies—like any startup—must grow quickly in order to secure future investment. There is little room for error, oversight, or miscalculation; all of which can stall—or worse—bring growth to a screeching halt.
To ensure a cloud transition that provides your organization with benefits, avoid these three common mistakes.
Mistake #1: Neglecting Customer Success
The formula for growth is simple: keep/grow existing customers and acquire new users. While easy in theory, many organizations struggle to effectively execute their sales strategy and grow revenue. Low churn is critical to sustainable growth, especially in a product’s infancy. Enter customer success, the secret to reducing churn and improving the revenue trajectory.
Customer success ensures that organizations achieve their desired outcome. It differs from customer service. Customer service is about issue resolution. Customer success is proactive and continuous, for the purpose of growing revenue.
What is the intended outcome of customer success?
- Users are successfully setting up an account and realizing your solution’s value. The sooner value is realized, the sooner you can have a positive return on your investment.
- Organizations are able to identify at-risk customers and take the necessary corrective action. This helps reduce churn, which positions your organization for sustainable revenue growth.
- You are able to meet the needs and wants of your customers, leading to increased customer satisfaction. Happy customers are more likely to be brand advocates.
Mistake #2: Inadequate Pricing Structure
SaaS pricing is not easy. Get it right though, and you improve bottom-line performance significantly; a 1% improvement in price optimization typically yields an 11% improvement on operating profits. Finding the appropriate balance of options and quality benchmarking are among the key considerations. If ignored, they can hinder your success.
Software organizations commonly use a “cost-plus” pricing. Organizations fail to realize that SaaS delivers value in a different way than traditional selling models. The pricing structure should reflect the market’s perceived value of your product—not the raw costs to further develop your services.
Use competitive and market pricing to better understand where to start. But do not set pricing structures solely on these insights. Why? Organizations often undervalue their product or service, resulting in revenue loss. Understand the value your product or service provides. What differentiates your product or service from competitor products? Use this information to set price and drive revenue performance.
Further improve revenue performance by offering different plans with different feature sets. Why? Spending habits vary from customer to customer. Different pricing tiers encourages customers to sign up and upgrade over time as product reliance increases.
While different pricing tiers may help drive revenue performance, too many tiers can be counter-productive. This can overwhelm the customer and deter them from choosing your product or service. Use three plans as the rule of thumb, though this will vary by market and service.
The SaaS market is highly competitive and constantly evolving. Pricing strategies need to constantly evolve with the change. Consider revisiting your pricing strategy 1-2 times per year. Getting the pricing right will improve retention and acquisition efforts and drive top-line revenue.
Mistake #3: Selecting the Wrong KPIs
For SaaS companies, there is no shortage of data and metrics to sift through – customer acquisition cost, recurring revenue, brand awareness, annual contract value, traffic, customer churn, customer lifetime value. Not all metrics are useful in determining the health and sustainability of your organization. But what measures can you rely on to indicate early struggles or burgeoning success?
- Churn – best in class SaaS companies consistently retain 90%+ of their customers. Positive YoY revenue growth is challenging when retention rates materially fall below best practice; companies struggle to offset the revenue loss with new customer acquisition.
- Recurring Revenue – A metric that tracks churn, retention, cross-sell/upsell and new sales on a monthly basis. Recurring revenue ensures the proper balance between short and long-term business objectives.
- Customer Acquisition Cost (CAC) – The amount you spend (i.e. sales and marketing costs) to acquire new customers. It indicates whether additional investment can be made in sales and marketing—or if costs need to be scaled back. The sooner you recover CAC, the better. Best-in-class SaaS organizations typically recover CAC within 12 months.
- Customer Lifetime Value (CLTV) – The average revenue you generate over the lifetime of a customer. CLTV provides insight into your organization’s economic viability and efficiency. Businesses with a 1:1 CAC to CLTV are unlikely to generate profit. Best-in-class SaaS organizations typically have better than a 3:1 CLTV:CAC—and as high as 8:1.
While there are many benefits of moving to an SaaS organizations, mistakes can also be made. These mistakes include neglecting customer success, having inadequate pricing structures, and selecting the wrong KPIs. Avoid these common mistakes to improve organizational efficiencies and drive greater revenue performance.
For more assistance with shifting to an SaaS model, download the SaaS Checklist Tool. Or come visit me and my colleagues in .