Why most SaaS Businesses Fail

The success of many SaaS companies is one of the reasons why many entrepreneurs are looking towards the business.  Just like “there is a tool for that”, we are likely to soon have a scenario of “there is a SaaS product for that”.

However, behind the news on Techcruch of successful SaaS companies, VC funding rounds and acquisitions, very many SaaS businesses do not take off or simply fail miserably. And no, the problem is not too much competition.

Fundamentally, running a SaaS business requires a shift in metrics that founders concentrate on. Most people run SaaS like any other online venture and within no time, realize they are not breaking even or getting traction. Below are some of the major reasons why most SaaS businesses fail:

1. Lack of a Market

Yes. 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 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.

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.

2. 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.

Moreover, if metrics like the

lifetime value (LTV) of the customer are not defined, the cost of acquiring customer (CAC), may be higher than the LTV, which essentially means more money is being spent than revenues generated.

With the SaaS business model, entrepreneurs should answer these two questions:

  • Can we find a scalable way to acquire users?
  • Can we monetize these users at a higher level than our CAC?

To have a working business model, SaaS startups need to find ways to increase the LTV while keeping the CAC down. Strategies like inbound marketing can help to improve customer acquisition without necessarily spending a lot on them.

3. Higher Churn Than Growth

For any SaaS business to break even, the churn rate should remain constant as customer growth increases. When churn (customer turnover) is greater than growth (customer acquisition rate), the business will fail. This is why SaaS companies need to focus on keeping churn as low as possible.

In reality, churn cannot be 100% eliminated because of different factors outside the control of the business. For example, a customer’s priority may change, making them opt for another business and even, the customer may go out of business, making them not need your product.

However, some contributors of churn can be managed and eliminated altogether. For example, poor service, disappointment with the product or availability of better alternatives in the market can be avoided by introducing the smallest feature set possible to achieve the highest rate of satisfaction, providing excellent customer support and constantly keeping tabs with your competition. These activities will help to keep your growth rate higher than churn, thus achieving profitability in the long run.

4. First-to-Market vs. Fast-to-Market

Being an early mover in any market and doing things right does not necessarily mean you will be successful. There is such a thing as being too early and the first-mover advantage is proven to be overrated. Even if you are successful with your product, a competing company can see your success and the mistakes you made, and build on those successes while avoiding the mistakes.

If you are an early player in your industry, you need to me more careful. Your business model can be snatched at any time, minus the mistakes, by a competing party. You can easily make losses on your efforts in identifying customer pain, building demand and generating the first product in the market, only for someone else to come and ride on all your development efforts to build a better product.

The best approach for SaaS businesses is to be fast-movers rather than first-movers. The elements that are pertinent to the success of the fast-mover SaaS product include a constantly evolving product, amazing customer experience and unrivalled support.

5. Frustrating Fast Adoption

Making it difficult for customers to start using your product is a recipe to failure. Most SaaS teams concentrate on their core product offering and forget that other supporting systems like on-boarding, billing and provisioning are just as important. If you are doing provisions manually or do not provide trials for your product, getting traction will be difficult from the beginning.

You should make it easy for customers to start using your product with as little friction as possible. In the same way, you should not lock up customers to using your app through rigid price plans. SaaS has changed the way software business is run and the business model relies on the customer being with you in the long term. Therefore, strive to make your customers happy by providing a quality product, fanatical support and minimizing friction to conversions.

6. Poor Management Team

Another reason why SaaS businesses fail is having a weak management team. The management should be smart enough to avoid the five reasons mentioned above. 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 dev. In business, there is a well-known saying that goes” A players hire A players. On the other hand, B players hire only C player mostly because they don’t want to work for other B players. The result is a weak company.

The above are some of the reasons why most SaaS business fail. Are there any other reasons that are particular to the SaaS business model that we have missed? Comment below.