The SaaS business model has been making a lot of traction over the last few years. Stratospheric success of many companies built around SaaS (like Dropbox or Slack) and seemingly effortless disruption of the existing market landscapes they managed to achieve made this model extremely attractive for entrepreneurs from a variety of industries.
Even businesses that have a long and successful history of using other models are experimenting with SaaS. For example, take Adobe Photoshop – it was distributed as a product for over twenty years but changed its licensing scheme to SaaS in 2013, although it hardly seemed possible just a couple of years before that.
However, behind all the highly public examples of successes like Canva or Figma, there are dozens of obscure SaaS startups that never took off or just failed at what they did, usually at the early stages of their existence. And no, excessive competition is often not the culprit. The reasons typically lie with the startups themselves. Most of them encounter more or less the same sets of challenges, but not all turn out to be prepared for them. In this article, we discuss problems that most SaaS startups run into – hopefully, it will help you get ready.
No Market Need
You probably expected the first reason to be related to technology but no, it’s related to the market. Most SaaS businesses fail because they are simply not solving any existing problem. Others may be solving a problem that users do not want to be solved.
The barriers to developing an app are at an all-time low. With sites like Guru, Elance and Freelancer, anyone can assemble a team from overseas and get an app coded for less than $1000. However, most founders find themselves in limbo after product development when they realize nobody seems to care about their app.
Some companies start creating and marketing a product without first understanding market needs. Soon, those companies float away.
While they put a great deal of thought and effort into their company, it was impossible to generate real revenue. They didn’t target their market, and couldn’t get viable feedback which made it impossible to hone their product.
One of the ways you can avoid this problem is to adopt Lean Startup approaches and be customer-centric. In a nutshell, you simply create a small solution and see if there is market for it. From there, you can tweak the solution and scale it based on user requirements and feedback.
Not achieving fast enough growth
If you really have something new to offer on the market, you will get at least some free publicity in the first weeks or even months after launch. Mentions of your startup will appear in all kinds of media, it may be lauded for innovation or described in dubious tones, but it is all good as long as you remain in the spotlight.
However, quite soon this stream will dry out, and the public attention will move on to other, fresher impressions. You have to be ready for it, and the only way to battle this fading attention is explosive growth.
Depending on the kind of SaaS you offer, there are always creative ways to promote it. For example, Dropbox appeared when cloud storage was a relatively new thing and managed to grow 3900 percent in two years by means of a simple referral program. With a little ingenuity, the same can be done in other industries.
Failure to save resources
Many companies burn through financial resources because of not knowing how much money they would need. The reality is that time and money are finite.
There’s only so much time and only so much money to work with. Companies that failed didn’t have a way to accurately track their spending.
A Failing Business Model
With the adoption of lean startup model and many success stories of SaaS companies bootstrapped to profitability, most entrepreneurs assume that it is easy to acquire customers. They assume that after building their product, customers will simply show and sign up. This may be true for the first few customers but in most cases, acquiring customers is an expensive task.
You have to keep two metrics in mind: the lifetime value of the customer (LTV) and customer acquisition cost (CAC). If CAC is higher or equal to LTV, you have a business that spends more money than it produces, and no amount of growth is going to rectify this. Approaches like inbound marketing can help you keep CAC low while looking for ways to increase LTV.
Poor Management Team
Another reason why SaaS businesses fail is having a weak management team. Weak management teams often fail on strategy and do not do enough work to validate the features for their product before and during development. The teams can also carry on through with poor marketing strategies.
In SaaS, management plays a crucial role in determining the direction of the business. While the dev team may seem to do all the work, the skills of the managerial team in researching and understanding their target market, executing customer acquisition strategies and implementing growth techniques is crucial for the good health of the SaaS business. A great management team will hire great employees, from marketing to developers.
Also read: 8 Ways to Toggle SaaS Customer Retention
Advancements in technology will always usher in major changes in IT-related architecture. These changes will always arrive with bumps that need to be ironed out. A lot of SaaS challenges have been faced and many more will follow. However, it can all be seen as learning, that’s par for the course. Hopefully, companies coming up can learn from the failures of some of the great ones.
Comment the challenges that you faced while starting your journey.