6 Main Reasons Why SaaS Startups Fail and How You Can Avoid It
Over the past decade, the information technology (IT) landscape has evolved significantly. A large number of IT applications are rolled out each year, creating a bunch of challenges for the end-users. Some of the trends that have transformed the IT landscape include decentralized DevOps teams, agile working techniques, and the migration to the cloud.
Apart from these, one major trend has emerged in recent years that has broadened the scope for IT landscapes – the growth of software-as-a-service (SaaS). SaaS businesses have increased in numbers owing to their cost-effectiveness and relatively easier route to enter the market. However, a very small chunk of SaaS startups is successful.
The main question here is, why do SaaS startups fail despite the widespread adoption of SaaS?
In this article, we have listed down some of the main reasons why even the most promising SaaS startups fail.
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1. No market for the product
For any startup that aims to be successful, the know-how about the market is very important. However, a majority of the SaaS businesses fail to scale or grow because they are not addressing any problem. The other scenario could be that they are offering solutions for problems that do not need to be solved.
At present, due to technological advancements, application development is very easy and has a very low entry barrier. With so many websites such as Freelancer, Elance, and Guru, it is very easy to build a team at affordable prices. While application development may be easier than before, startup founders are often clueless after product development. They realize that there is no real interest in their application.
Solution: One of the most effective ways to prevent this problem is to be as customer-centric as possible. In addition, adopting a Lean Startup approach is another solution to address this problem.
Spend time on research, create a small solution, and find out if a market exists for it. Then, you can gradually modify your solution based on the feedback you receive.
2. Non-optimal business model
Current trends suggest that a lot of SaaS companies are turning to a lean startup model. In addition, with an influx of tons of stories that talk about how entrepreneurs have bootstrapped their way to profitability, it is easy for new founders to assume customer acquisition is easy.
A lot of companies think that after they build a product, customers will sign up immediately. Although that could be true for the first batch of customers, customer acquisition requires some monetary investment.
In a SaaS business model, founders should primarily find answers for these questions:
- What is the most scalable approach to acquire new customers?
- Is there any way to monetize them at a higher cost than the cost of acquiring customers (CAC)
SaaS startups should increasingly focus on creating a model that boosts their lifetime value while keeping CAC low. Inbound marketing strategies prove to be quite effective to improve customer acquisition without letting your costs touch the roof.
3. Churn is higher than growth
For a SaaS startup, the churn rate should remain at the same level as customer growth increases to break even. If the churn is higher than growth, the business will fail eventually. Hence, SaaS startups should predominantly focus on lowering their churn rate.
Practically, it is impossible to get rid of churn completely due to an array of unforeseen factors. However, you can manage a few contributing factors of churn.
4. Want to scale too quickly
Premature scaling is an open invitation to failure, and as a founder, you should be wary of this.
Premature scaling can be a byproduct of a lot of factors, out of which high emphasis is given to a single dimension of a business and it is out of sync with all the other operations.
Some of these problems could be hiring too fast, high focus on early adopters, spending too much, and more. The combination of these points could eventually lead to failure.
5. Failure to make it easy to use the product
When you launch a new product, it is important to ensure that your customers can use it without any hiccups. While a lot of priority is given to the main product, companies fail to create a supporting ecosystem around it such as billing, onboarding, and provisioning.
If you choose to carry out provisioning manually or do not offer a trial for your product, it will be difficult to get the initial traction.
Find different ways to boost the usability of your product right from the start. Having said that, you should not lock your customers to using your product through non-flexible pricing plans.
Your priority should be on retaining customers for as long as you can. The entry of SaaS has transformed the software business landscape. Today, this model largely relies on customer loyalty and retention. This is why SaaS companies should focus on product development along with offering frictionless support and customer service.
6. Poor management
Last but not the least, sub-standard management and decision-making will affect the growth of your company. The management should be able to avoid the first five points and also formulate the best strategies to scale your product after it is completely developed.
The management is also responsible to determine the most effective marketing strategies to boost adoption after you roll out your product. Although the technical and the development team will create the product for you, the managerial team is responsible for other aspects of your business. Some of these include customer acquisition, finding the target market, implementing growth strategies, and more.
Build a successful SaaS startup
Now that you have figured out the top reasons why SaaS startups fail, you can work your way around all these points to run a successful SaaS business. While product development is important, you should not overlook other factors such as customer onboarding, pricing, integrations, and other factors.
Today, customer experience is one of the key differentiating factors among SaaS companies. Hence, you should create and implement strategies that focus on product adoption along with customer retention.
We hope this article was insightful. Leave your comments below and tell us what are the other reasons why SaaS startups fail.
SEE ALSO: SaaS vs Paas vs IaaS: What is the Difference & Which Model is Best for Your Company?
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