4-minute Read.
For anyone is the SAAS industry, you will know the SAAS business Model can be Beautiful and Brutal. This article explores the Beautiful and Brutal aspects of the SAAS Business model.
Why the SAAS model is Beautiful
SAAS businesses are valuable because of their Repeatable Earnings and Growth. The model is beautiful in that the Scalability of a SAAS platform is simple if you have built the product correctly from the outset or at minimum it meets you markets Minimum Viable Product (MVP) needs. Once you have MVP meeting the market needs, you can focus on incrementing functionality of the MVP and incrementally move to product to exceed customer expectations. Once you meet or exceed customer expectations, Scaling is the next part of the journey.Scaling can be achieved by the following key methods:
- New Business Development
- Managing Churn – reducing churn
- Cross sell into the exiting base with new product functionality
- Driving User adoption through education and Customer Experience Management, better adoption typically means more licenced users.
So the Beautiful part of the model is that you can individually manage New Business, Churn, Cross Sell and User Adoption with programs of work to grow the business in 4 different ways, not just through New customer acquisition which is the normal way businesses grow.
Why the SAAS Model is Brutal
The SAAS Model is Brutal for the uninitiated.
- You build a product without getting paid by customers, its all upfront investment, Brutal for Cash flow whether you are Funded or not.
- Even after you have built the product, your customers don’t pay for the product up front as with traditional software licences, they pay for it over time via monthly or annual licence fees. Brutal for Cash Flow again.
- Over time, churn can kill you. What you thought were repeatable earnings evaporate as customers abandon the product because they did not implement properly or did not solve the problem, they were expecting to fix by purchasing the product.
- If growth slows or declines, your company is worth less to both investors and ultimately on exit. This makes it very difficult to attract more funding.
- New players can enter the market, disrupt and kill your business. Many SAAS companies have had a great idea, built a product, gone to market, achieved some success only to be outplayed by a competitor that adjusts it product to address your products market potential. Brutal for you and your investors.
Summary
The SAAS Business Model is Beautiful if you get it right, Brutal if you don’t. Even if you get it right in the short term, you need to stay on top of key metrics with ruthless pursuit and regularly solve for blockages and frustrations in New Business Growth, Churn, Customer Onboarding and User Adoption. Get it right and you will increase your valuation for future investors and ultimately Exit or Sale.
Yeah customer success is critical to get right, we only have some of it right.
Hi Johan, we have seen SAAS companies where 40% growth comes from Customer Success. Worth spending some time on this. Best Lyle.