Today, SaaS businesses are on the rise thanks to their cost-effectiveness and ease of entry. That’s why more and more entrepreneurs are trying to launch new cloud startups. However, very few SaaS startups are successful, statistics show that 92% of them cannot operate for more than 3 years regardless of capital source. So how to be successful? In this Tech Town article, we’ll show you the main reasons why SaaS startups fail, along with advice on how to avoid mistakes and successfully build a profitable SaaS company. collect.
The market lacks demand
One of the top reasons most SaaS startups fail is lack of market interest. CBI Insights reports that about 42% of cloud startups stop working due to this reason. So make sure your customers really need your product.
Rate of reasons why startups SaaS fail:
● Market without demand: 42%
● Budget shortfall: 29%
● Teams that don’t match: 23%
● Uncompetitive: 19%
● Price/cost issues: 18%
To verify market demand for your SaaS product, it’s a good idea to launch a basic solution first. Building an MVP will help startups not waste resources unnecessarily. And of course, don’t rely too much on early adopters.
According to research, only the first 20% of customers are still using the product for 2 years. So, when startups’ products scale, you need to focus on a larger market audience.
Bad timing can also cause a drop in market interest. That’s why Rubica – a SaaS software company that specializes in providing advanced security tools for remote work, has to close down in 2020. The reason is that their target customers are individuals. and small businesses. During the last year, these segments had to significantly cut their spending due to the Covid-19 crisis. So this promising SaaS startup failed.
That’s why you need to be careful with your market targeting. There are special metrics that startups can rely on to gauge their market size:
● Total Addressable Market – Geographic size of the market (TAM);
● Serviceable Available Market – Serviceable Marketplace (SAM);
● Serviceable Obtainable Market – Serviceable Obtainable Market (SOM).
It is important that you target SOM to determine the number of leads. Because if the product is spread too widely, startups run the risk of failure. Of course, an urgent idea doesn’t guarantee success with your SaaS startups by targeting the wrong market.
Not enough budget
Running out of money is the second most common reason most SaaS startups fail. Therefore, the failure rate of startups due to this factor has increased to 29%. That means entrepreneurs misidentified the cash flow plan needed when their cloud startups were growing.
To avoid that situation, startups should plan cash flow in phases. Especially forecasting the capital needed for important milestones such as:
● Seed stage.
● Product beta testing phase, customer confirmation.
● Sale phase for the first users.
● The stage of adjusting the product to the market.
● The product stage is accepted and profitable.
● The startup stage needs more investment to develop more products.
Likewise, Tech Town advises you to note the following points to avoid mistakes in SaaS startups:
● Don’t underestimate a churn rate.
● Plan additional funding for product improvements.
● Don’t overestimate future sales.
These tips will help startups avoid running short of budget until your SaaS startups hit the next big step.
The number of SaaS startups that fail due to poor management will amaze you. In fact, a quarter of cloud startups have stopped working because of team problems. Therefore, management plays an important role in the well-being of a SaaS startup.
Along with the work of the developers, the management also has to perform important tasks including determining the right direction for the startup. Accordingly, market research, customer acquisition strategy and growth technology implementation are three of the priorities to help strengthen SaaS startups.
Recruiting new employees at the right time is equally important. You should strictly follow the recruitment process to tighten the salary flow for employees, helping startups not get stuck in the early stages.
Unclear leadership is another reason why startups fail. Therefore, the co-owners must share the same direction of developing SaaS products, allocating individual areas of activity for each person to manage.
Finally, managers need to cultivate a sense of unity together to prevent the failure of SaaS startups. According to the Harvard Business Review, groups with high professional qualifications but moderate to low level of cooperation, competition is still weak.
Wrong business model
A common mistake for owners of SaaS startups is to underestimate the churn rate and the associated maintenance costs. In practice, they are always higher than estimated. Furthermore, entrepreneurs often choose the wrong pricing structure while their cloud startups are scaling. Therefore, an inappropriate business model is one of the reasons most SaaS startups fail.
In order not to make that mistake, you should rely on two key metrics for modeling your project. That is:
● CAC (Customer acquisition cost – customer acquisition cost).
● LTV (Customer lifetime value – customer lifetime value).
LTV = ARPU/churn rate.
APRU here is average monthly revenue per user/customer, while churn rate is the number of users who stopped using your SaaS product in a given number of months.
CAC=Total monthly sales and marketing expenses/Number of new users in 1 month.
CAC must be lower than LTV. In other words, startups should spend less money acquiring customers than they will generate for you. So you’re better off restoring your CAC in less than 12 months. To that end, you should find ways to increase LTV while keeping CAC low. Startups need to find ways to increase customer acquisition without spending too much on it.
Notably, a domestic marketing strategy can help startups achieve this goal. This approach is based on delivering value at any stage in the customer journey. It can include helpful blog posts, well-timed chatbots, advanced tech support. That way, startups can build long-term relationships with customers and reduce churn rates.
Wide-ranging pricing structures can also help startups boost their business models. Different payment options will make your SaaS more attractive to businesses of different sizes. They may include:
● One-time pricing.
● Usage-based pricing.
● Tiered pricing.
● Quantity pricing.
● Combined pricing.
Therefore, to avoid the failure of SaaS startups due to the wrong business model, you should realistically evaluate CAC and LTV. It is also important to find an effective retention strategy to prolong the value to the customer.
Product problems are another common reason SaaS startups fail. According to CB Insights, the rate of startups that fail due to not being competitive is 19%. This happens if your product is not user-friendly enough compared to other competitors in the same niche.
So startups should aim to build a better service than others. Especially, if you have an innovative product idea, competitors can take advantage of your solution, present it in a more intuitive, usable way and surpass you.
It is important that referral and support processes are well established. Fast bug fixes, customer support, and clear payments are crucial to improving customer loyalty and strengthening your SaaS startups position in the market.
Also, stay in regular contact with your customers. Regular surveys, calls and interviews will help startups identify product flaws in a timely manner. Accordingly, you will be able to prevent failure. Otherwise, startups run the risk of being abandoned if they fail to meet customer expectations.
Ultimately, you need to be forward-thinking to make your project a reality. It is important to make sure that you will be able to execute your product idea and profit from the business.
We have answered for you the reasons most of the SaaS startups fail. It helps you derive a holistic approach to business to lead your cloud startup to success.
It should be noted that good market research, good management, and the right business model are important factors for SaaS startups to avoid midway failure. It is important to manage your team well and provide a customer-friendly product.
If startups need help, Tech Town’s experienced experts will help you turn your SaaS idea into a secure, reliable, and scalable cloud solution.
Please contact us to discuss your ideas.
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