There’s a saying that many founders of B2B SaaS (Software as a Service) companies come to know all too well: “Grow fast, or die slow.” This mantra has led many startups down a challenging path, fondly referred to as the “SaaS Valley of Death.” This is a critical juncture in a startup’s journey, characterized by an inability to find a profitable model despite having raised funds. Many startups fail to balance the crucial aspects of Total Return on Investment (TROI), Customer Acquisition Cost (CAC) payback period, and a reasonable Customer Retention Cost (CRC). They often find themselves sold too early or, worse, going out of business.
I’ve seen it in my journey of over two decades of entrepreneurship and venture capital investments, running a B2B SaaS company and investing in others, including Wix, WalkMe, TailorBrands, and more. From this wealth of experience, I’d like to share insights on how to navigate the treacherous terrain of the SaaS Valley of Death.
Understanding the Valley
In the SaaS landscape, B2B companies that haven’t been able to generate at least $50K in annual recurring revenue (ARR) per customer often struggle to achieve profitable unit economics. This is unlike their B2SMB (Business to Small-Medium Business) counterparts, who have leveraged no touch / low touch models to generate substantial revenues, with unit economics amounting to hundreds, even thousands of dollars, and up to $10K per year.
The challenge for B2B companies lies in the CAC payback period, TROI, and CRC. If any of these metrics falter, it could send the company spiraling down the Valley of Death. It’s not enough to have an excellent product; maintaining solid unit economics is crucial for survival.
Navigating the Valley
So, how can B2B SaaS companies avoid this perilous journey? Here are a few strategies to consider:
1. Iterate Your Product:
Continual iteration of your product based on user feedback and data is vital. Implement a robust feedback loop with your customers to understand their needs and problems better. This helps ensure your product stays relevant and competitive
2. Understand and Optimize Your Sales Model:
Understanding the sales model is crucial for any SaaS business. Whether it’s a no touch / low touch model or a high touch model, the goal is to optimize the sales process to achieve better unit economics. For instance, if a high touch sales model isn’t yielding the expected revenues, it may be time to pivot towards a product-led growth model that can reduce the CAC and improve TROI or use Channels Sales as main GTM.
3. Focus on Customer Success:
Investing in customer success can significantly reduce CRC. A happy customer is more likely to renew their subscription, provide referrals, and even upgrade their plan. It’s cheaper to retain an existing customer than it is to acquire a new one. Make sure to focus on improving the customer experience and delivering value at every touchpoint.
4. Innovate Pricing Strategy:
Pricing strategy can make or break a SaaS company. It’s vital to continually innovate and find pricing models that can attract a wide range of customers while still maintaining healthy profit margins. Experiment with different pricing tiers, upselling and cross-selling opportunities to find what works best.
5. Monitor Key Metrics:
Understanding and tracking key SaaS metrics like Monthly Recurring Revenue (MRR), churn rate, Customer Lifetime Value (CLTV), and CAC is essential. These metrics will give insights into the company’s performance and indicate if the firm is heading towards the Valley of Death. Constant monitoring can provide early warning signs and allow the company to pivot or change strategies.
6. Experiment and Adapt:
Startups must be willing to experiment and adapt in response to market conditions and customer feedback. Whether it’s tweaking the product, revisiting marketing strategies, or adjusting the sales approach, the key to avoiding the Valley of Death lies in a startup’s ability to learn and iterate quickly. Adopt a culture of continuous improvement and encourage team members to propose and test new ideas.
7. Build Strategic Partnerships:
Strategic partnerships can be a significant boost for B2B SaaS companies trying to increase their customer base. By collaborating with companies that complement your offerings, you can reach a broader audience, improve your product, and even share customer acquisition costs, thereby improving unit economics.
8. Plan Financial Management:
Finally, sound financial management is a significant aspect of avoiding the Valley of Death. Businesses should always strive to have a clear view of their financial position, including revenues, expenses, cash flow, and runway. By keeping a close eye on the financials, you can anticipate problems and take corrective action before the company falls into the Valley of Death. Use financing tools smartly- Funding rounds for investments and nondilutive instruments for working capital.
A Case Study
Let’s look at a hypothetical company, AssetGo — a real estate brokers’ CRM SW.
Data:
· 3 yrs old company, raised $4Mil, last year ARR $1.5Mil, XX customers
· Avg. ACV — $7K
· TROI — 12mo.
· CAC payback — 18mo.
· Churn — 35%
· CRC — $3K
· GM — 66%
· Growth rate this year — 50%
Now let’s analyze their numbers:
Although on its face value, it looks like an OK business, a Unit Economics analysis reveals the actual situation — the more they will sell, the more they will continue to lose.
However, the Unit Economics also hint at the opportunities:
1. ACV — increase in ACV (adding value / going upmarket) will improve the UE, as It will increase the GM
2. CRC — can not be revoked as churn is already high, however moving upmarket will allow to invest even further and reduce churn.
3. PMF — at this stage, the fit isn’t optimized, as the customers do not appreciate the price/value and the hefty investment in CRC doesn’t pay back. A further dive into product & product positioning is required.
Summary
AssetGo should move upmarket, as its product requires high touch and it should optimize its PMF.
Conclusion
The SaaS Valley of Death is an ominous prospect for any B2B SaaS company. However, with careful planning, a deep understanding of your business model and unit economics, and a commitment to continual learning and adaptation, it’s entirely possible to navigate around it. The journey may be fraught with challenges, but those who can adapt and persevere have the potential to emerge stronger and more resilient.
While the fear of the Valley of Death is real, it shouldn’t deter entrepreneurs from pursuing their ambitions. After all, every challenge faced and every failure endured is a stepping stone towards success. The key lies in understanding your company’s metrics, listening to your customers, iterating your product and strategy, and always keeping a keen eye on your financials. With these strategies in place, the SaaS Valley of Death becomes less of a threat and more of a learning opportunity on the path to growth and success.
