Even with such promise, the industry has witnessed the rise of a SaaS purgatory where once promising businesses fall flat. This is in part because while growing monthly recurring revenue (MRR) at 15% – 20% month over month is awesome, doing so with little regard for growth efficiency can result in expensive habits that become increasingly difficult to shake in subsequent years.
Why is it hard for SaaS businesses to reach profitability? Their greatest strengths can also be their greatest weaknesses. SaaS businesses have high upfront acquisition costs reflecting, sales and marketing, research and development, hosting infrastructure and customer support. On the flipside, SaaS earns revenue over the lifetime of the customer. Therefore, SaaS is typically unprofitable for the first 12 – 24 months of operation and, in four years time, produces only a small fraction of revenue as profit.
So how do we change the math, and unlock the value that SaaS promises? It’s simple; consider the following customer acquisition-related best practices I learned at online SaaS startups like Zendesk, Autopilot, and Codesion, companies that found efficient growth and eventual industry success.
1. Start Simple and Minimize User Friction
Begin with a low friction offering, such as a freemium (e.g. Slack) or free trial-based (e.g. Zendesk) model. High initial costs will scare off potential customers, while a complex product requires expensive sales and support resources right off the bat (beware the SaaS graveyard). With a free or low-cost offerings, online SaaS opens the door to a broad range of first-time customer types, and is most successful when addressing a large, horizontal market of motivated users. Remember that 100 raving fans can be more valuable than 10,000 “users”.
Insider tip: Early word of mouth success means 80% or more leads come from organic (non-paid) sources. B2B companies like Atlassian drive huge top of funnel interest with charitable cause campaigns – requesting a $10 donation to get credit card details, filter out unqualified users, and make upgrading easy.
2. Create “Aha” Customer Experiences
Successful SaaS companies map out their customers’ buying and growth journeys, and obsess over how to optimize the experience. This in turn drives up platform adoption, conversion rates, and customer satisfaction. An “aha” onboarding experience that produces satisfied customers, as reflected by high Net Promoter Scores, will drive referrals, high conversion, and repeat purchases.
So how do you this? One approach is to micro-analyze the hurdles and buying decisions faced by a user, then deliver personalized in-product, email, and direct touch points to guide a user through their journey towards “aha” or magic moments. As a rule of thumb, get a new user to an “aha” moment within 30 seconds of signing up, and you earn 3 more minutes of attention. Deliver another “aha” after 3 minutes to earn 30 minutes, and 30 minutes will earn you three days. Most SaaS trialists are emotionally bought in (or bail) after three days. Intuitive, attractive design decorated with on-voice copy (including infamous 404 pages) can help differentiate a SaaS business and drive social shares and forum chatter.
Insider Tip: Focus on maximizing your activation rate, or the percentage of signups that lead to conversion. For example, Dropbox focuses on how to increase the percentage of daily users who achieve a certain number of file updates over the trailing 28 days, as they know heavy users tend to upgrade.
3. Build an Efficient, Light Touch Conversion Engine Early
Build a repeatable, light-touch sales model to drive down customer acquisition costs while maximizing sales growth. Onboarding customers one at a time is lengthy and costly, so figure out what works manually, then automate those best practices to delight your small and large customers alike.
Do so by creating “swimming lanes,” or clearly defined sales channels owned by distinct sales or success onboarding teams. Assign leads using automated routing rules, and evolve standard processes for each. Doing this from relatively early on will help focus on how to be efficient, and continuously drive down your company’s customer acquisition cost to lifetime value ratios. You’re winning if you have a customer payback periods of one to two years, plus you can drive this down further as you scale.
Insider Tip: Online (self-service) approaches are best for customers paying up to $50 per month, semi-automated “1:Many” approaches (think Apple Genius bar) suit customers paying $50 – $250 per month. Meanwhile, customers who pay more than $250 will expect direct inside sales as well as customer success and account management.
4. Scale Fast With Automation and Real Time Dashboards
Growing fast while ensuring that lead and customers aren’t slipping through the cracks is easier if your growing list of activities are automated, and you have up-to-the-minute insights. Use marketing automation to ensure all customers, large and small, benefit from your best practices, by delivering attractive blog posts, ebooks, videos, and emails, in personalized customer journeys. To codify your swimming lanes, define your automated journeys, and early-diagnose what’s working and what’s not, you’ll need to tune your customer engagement technology stack.
The marketing stack for high-growth SaaS is (relatively) painless and inexpensive to develop today using best-of-breed tools. Start out by centralizing as much customer data as you can by connecting CRM to marketing automation. Add subscription billing, then incorporate in-product events (via Salesforce APIs or Segment) to personalize messages and early-diagnose conversion or churn signals. Integrate your business-intelligence software to combine usage, revenue, activity, and billing data into dashboards, enabling your teams to monitor and react in real-time.
Insider Tip: Ask for company size (e.g. number of employees) on your signup form to automatically assign large company leads to direct sales and success reps, and small companies to self-service or 1:Many channels. This improves the customer experience by focusing time and expert “heavy touch” resources on the power users who need it most, while ensuring you can attain your efficiency goals.
5. Offset Cancellations through Upgrades
While new monthly recurring revenue (MRR) is the lighter fluid that ignites a SaaS business, successful long-term growth comes from expanding existing customer MRR faster than cancellations occur. This is known as attaining “net negative churn,” which can be achieved in two ways.
First, commit to continuously improving the customer experience by regularly measuring satisfaction levels with a Net Promoter Score (NPS) survey. Loyal customers are more likely to renew, expand, and refer friends. Second, SaaS pricing and packaging can make or break future growth. Whether your SaaS pricing strategy is based on multiple editions, users, or functionality, as customers grow and mature, seamlessly upselling them to higher level plans is critical to offseting cancellations. Doing so is easier if you hone a value-based pricing path that minimizes upgrade friction, reduces discount requests, and guards against competitor switching threats.
Insider Tip: Aim to deliver a 10X increase in value for each doubling in price. For example, Zendesk customers pay a bit over double to upgrade from “Regular” to “Plus” plans, largely to access an advanced reporting package that can be worth far more to an organization’s management teams.
Wrapping it all up
While these techniques should come as no surprise, many SaaS companies still have yet to fully embrace them. By incorporating steps like: starting simple, creating “aha” moments, building a conversion engine, automating the customer journey, and offsetting cancellations through upgrades, a SaaS company can achieve high revenue growth, predictable performance indicators, and long-term profitability.
This week’s guest post is from Guy Marion, CMO of Autopilot.
Autopilot is marketing automation software that helps SaaS businesses automate the customer journey, visually. Check out Flight School, Autopilot’s recently released community training platform for marketers who want to grow faster online.