How To Start a Series A Fundable SaaS Business
A guide to acquiring customers and reducing churn early on
Software as a service (SaaS) is its own kind of drug.
Companies and individuals sign up for free trials and are instantly hooked.
For B2B customers, this is especially true. Most businesses hate change. When the ball is rolling, the last thing you want is to overhaul the entire new system. You stick with what’s working, the easy solution. Even if it means a few more dollars.
Time is money to these guys, and saving days, weeks, or even months by switching software is usually a no-brainer. If your product solves a pain point for companies and customers, you’re in business.
Software Is Eating the World
These companies don’t have physical assets. What they provide and sell is a service — a SaaS product.
These are some of the most valuable and powerful companies in the world. They don’t focus on physical products. They aren’t buying real estate. They don’t invest in cars, gold, or bitcoin. They build businesses others need to have and are willing to pay for.
The beauty of SaaS lies in the margins. Once a piece of code is built, it costs almost nothing to run and maintain a SaaS. You can scale servers and bring on more devs, and the costs never balloon out of control. They stay very small and manageable — a low percentage of the actual price.
And more and more, companies are moving toward these models. The reason: revenue. Recurring revenue is king. It’s the thing all investors and VCs look for. It’s the mark of a healthy business.
How consistent is your cash flow? That’s business basics 101. Money in versus money out.
So let’s talk about what you need to know to kill it with SaaS.
Part 1: Acquiring Customers
In its simplest form, acquiring customers is a must for every business. How do you get individuals or organizations to pay? That’s the big question.
And for every business, this is different — not the approach, but the end result.
To get customers, you need to get in front of prospective customers. You need to show the value of your product and explain how it will make their lives better, easier, and etc.
(For the sake of argument, let’s say you have an awesome product. If not, please stop reading and go talk to your customers. Figure out what the heck they want and would pay for. Find their pain and fix it.)
OK. So assuming you have a good product, how do we get you users, customers, and etc.?
The strategy depends on the product, the market, and the price point. The higher the price, the more touchpoints you’ll need with prospective customers, and the harder it will be to get impulse buys or downloads.
Let’s cover the strategies and pros and cons of each.
Ways to acquire SaaS customers:
- Paid Ads
- Social Media
- Content Creation
1. Referrals aka word-of-mouth
This is the best, most popular, and scalable way to build a business. When your product or service is epic and people love it, they talk about it. Every new user they bring is gold. There’s a $0 Customer Acquisition Cost (CAC).
But building a referral engine is really goddamn hard. Things don’t just go viral. There’s a science and a bit of luck involved.
Net Promoter Score, or NPS, is the best way to measure virality. It involves polling customers to find their thoughts and affinity towards your brand/product and how likely they are to share with a friend.
There are a lot of ways to increase NPS — the most obvious are a great product and killer customer service.
But virality can also be engineered.
Airbnb offers a free stay for any friend you refer. Groupon gives great deals for large groups. Facebook has an obvious network effect — the more users on the platform, the more valuable it is for you.
How can you engineer something like this into your own product?
That’s the question. In most cases, it’s the difference between greatness and obscurity.
2. Paid ads
Paid traffic is the fastest and most predictable way to grow. It allows for consistent traffic and specific targeting to grow your customer base. But it also costs money and is very challenging for all but the most experienced marketer.
Whether it’s Facebook, Google, Pinterest, Bing, or YouTube, there are tons of options for running ads. The problem is that it’s all about optimization. You need to lose money to fine-tune the process.
But it also allows for rapid scaling and testing. How else can you get hundreds or thousands of eyeballs on your offer the day after launching?
Paid traffic is great early on for testing offers and saving time. As a long-term strategy, you want to replace as much as you can with more sustainable, low-cost options.
When advertising, be sure to track CAC and LTV (cost of acquisition and lifetime value of customer). Many startups scale with unsustainable unit economics and never realize until it’s too late.
You can sell $1 for 50 cents all day, but no amount of optimization or VC funding will make it worth your while.
3. Social media
Friends and followers are a great way to get the ball rolling. Whether it’s an app or a B2B business, odds are you can get some early adopters, testers, and traction by starting early with social.
Find groups and forums related to your product and ask for advice. Get feedback. Never push your product unless it’s awesome. Otherwise, people will call you a spammer.
Instead, offer special early adopter deals, share your story and goals, and try to earn a little love with the community. Grassroots growth can build a viral movement.
Unfortunately, it isn’t fast. Building a social media following works, but it takes time. Start early and be consistent. Then, perhaps a loyal Pinterest or Instagram following will propel your business in the future.
However, giveaways with email options could work, but make sure the prize is relevant to the product or service you are offering. If not, you’ll end up with a bunch of irrelevant leads and no interest in your product.
There are many types of affiliates. The most prevalent and important are CPA affiliates and content creators. These are very different business models.
Content creators are your traditional blogs, YouTubers, and publications with product images or reviews on their site. When readers are interested, they click through to your offer. For every sign-up, lead, or sale they generate, they earn a commission. This is a great way to build your profile, get links, and grow your distribution.
CPA affiliates, on the other hand, are mercenary advertisers. They run paid traffic to offers and receive a commission on every result. If you find your average LTV is $100, you could offer affiliates a $10–$50 commission for every new user they bring in. The affiliates would advertise for you, trying to spend less than the commission to build a cash cow for themselves.
Affiliates remove the ad spending from your company, but they can also expose your startup to less than stellar clientele, depending on the affiliates you work with. To learn more check out ClickBank and CJ.com. These are both great marketplaces for connecting with affiliates.
5. Partnerships and JVs
Businesses are simpl — they just want to make money. Use this to your advantage. How can you help an existing company or organization add to their bottom line?
For example, Slack-based companies need task management systems, email marketing, and a whole list of other tools. Well early on, before becoming bigshots, Slack might have been able to partner with Asana, Trello, MailChimp, or AWeber to grow together. Some possible arrangements:
- They could offer exclusive Asana-only deals for companies.
- They could offer Asana $100 per organization that signs up for Slack.
- They could do a joint raffle where each company offers free services and they all drive traffic to a giveaway option. Then, they share the email list and all the benefits…
HubSpot built partnerships with marketing agencies who act as resellers of its core product. This revenue stream accounts for 40% of its total business.
The opportunities are endless.
The point is, look at how your company aligns with others in the industry (both large and small). Perhaps you can help each other win and grow faster by working together. It just takes an idea and one cold email, and then everything might change.
Pro Tip: Find tons of companies with similar concerns and goals and cold email all of them. The best way is to spray and pray. One or two might just come through.
Most products have relevant marketplaces. Amazon and eBay do physical products. The App Store and Google Play sell apps. Shopify even has its own store for add-ons.
The point is, most marketplaces are valuable. They have a network of users that drives traffic to your offering early on.
Optimizing for each marketplace will be different, but most are similar enough. Based on my experience selling on Amazon, SEO and rankings are all about relevancy, reviews, sales/downloads, and conversion rate.
Every marketplace wants to show the best, most relevant offers to the user. Relevancy is all about SEO. Find the critical keywords and include them in your listing. Google Keyword Planner is a great place to start.
For reviews, ask friends and family. If it’s a good product, you’ll start to get more reviews as you onboard users.
For sales/downloads, always start with a lower price. Lower prices get the ball rolling and boost conversion rates, which marketplaces love to see. The higher the conversion rate, the surer they are that the customer got what they wanted. If your conversion rate is 10% and another is 2%, eventually you will outrank them.
Give the customer what they want. That is how markets make money — on transactions fees. Help them make more money and they’ll help you.
7. Content creation
Content is king, or so they say. In my opinion, this is bullshit. Good content combined with good marketing is the answer. Without marketing, content is meaningless noise that never gets on people’s radar.
That said, content is great for lead gen. From blog posts to podcasts, videos to Instagram, the more good stuff you put out there and promote, the more you’re able to position yourself and your company as experts and people worth taking note of.
Content is slow, though. SEO takes forever to deliver results. It’s not a short-term solution. It won’t drive great traffic and sales overnight. It’s worth investing in, though.
And content, like referrals, is a great and cheap way to get users. But it requires planning and a long-term commitment. You need a long timeframe to succeed. Most startups don’t have the time or money for this early on.
A better way: Make one or two killer articles or videos and share them everywhere. Use these for lead gen and scream at the top of your lungs. If they’re great, they’ll start to get some traction and can be used in the sales cycle. I would recommend explainer or sales videos without really selling — just demo and excite. That is the kind of stuff people will share, not sales pitches.
Part 2: Retaining Customers
There are two ways to build a bigger business: acquire more customers or increase the lifetime value per customer. The best businesses do both. Churn is the biggest problem SaaS companies faces.
In case this is new to you, churn refers to customers leaving your service. This can be deleting an app, opting out of Netflix, or canceling an account.
Either way, it spells disaster. You work to acquire customers, and so you better be able to keep them. You spent time and probably money for that user and, like a bad relationship, it’s over.
If you haven’t recouped your costs, you lose. Even if their LTV is greater than the cost of acquisition, you’re still missing out on money. And in business, every dollar counts.
Churn happens. There’s nothing you can do to completely stop it.
But, there are plenty of ways to minimize churn. And these are just as valuable, if not more so, than acquiring new customers.
Ways to retain SaaS customers:
- Make onboarding easy
- Offer incredible customer service
- Build an awesome product
- Continually improve your offering
- Keep your prices competitive
- Increase customer engagement
- Make your product mission-critical for companies
- Incentivize longer contracts
1. Make onboarding easy
Every phase of the relationship is key to keeping customers. The most important is early on. Whether customers pay upfront or get a free trial, you need to get users hooked on your service from day one. That’s hard to do.
Most powerful products require a bit of explanation to get the full benefit. Do whatever is necessary to get users going.
Usage guides and tutorial videos are huge. They allow users to learn and get started at their own pace. Plus, they’re incredibly scalable from a cost perspective, both for reducing churn and decreasing customer service issues.
A few tips, though. The higher the price point, the more hand-holding may be required. For high-value customers, it may be smart to offer onboarding assistance if needed (and economically viable). Webinars work great as well. Webinars are a scalable one-to-many way to help users.
Record these sessions, and add them to your FAQs. It will make your life easier.
But keep it systematized.
If the system is somewhat complex, consistent email reminders and tutorials can take the hassle out of getting started.
Customer engagement should be a KPI. Remember that and reduce your churn.
2. Offer incredible customer service
This should be obvious, but many founders mess this up. Don’t do what the big corporations do. Dinosaur companies get by despite awful service.
Treat your customers like kings and they’ll stick around:
- Respond quickly to questions
- Have a sense of humor and personality
- Add a personal touch to interactions
- Have FAQs and guides easily accessible on your website
- Apologize when you screw up
- Underpromise and overdeliver
- Constantly survey customers and focus on your net promoter score
3. Build an awesome product
If your product sucks, no one will stick around. Again, under-promise and over-deliver.
4. Continually improve your offering
SaaS is great because it’s constantly getting better. Better functionality, more features, greater usability… these are the things customers love and a reason SaaS is eating the world.
There’s no more one and done. Now, you can’t just win your customers over once — you have to wow them over and over again. Customers can quit anytime.
Competitors are constantly innovating, constantly pushing new updates. That’s the beauty of software — it can be quickly changed, upgraded, and improved.
For a startup, that means always pushing code. You should have a set tempo to your dev schedule. If you’re not releasing updates or enhancements every quarter at least, you’re under-delivering.
Pro Tip: Wufoo does this wonderfully. They timestamp updates and inform users on changes and improvements since they last visited. That company cares about me and is constantly making my subscription more valuable. Steal that strategy. Show customers a Since You’ve Been Gone status update, and they’ll see you’re working to wow them.
5. Keep prices competitive
Scaling software doesn’t take much. With some set costs and small variable fees, you can easily grow a business with big margins.
But who’s your ideal customer? That’s the question.
High-end and mass-market are two very different animals. Either offer the best or offer the rest — there’s little middle ground. Either way, you need to stay competitive to compete.
How does your service compare to your competitors? Overpriced? Underpriced? If you’re not sure, find out.
If you’re first to market, you set the standard.
Ask prospective customers about pricing and what matters to them. Is it cost, usability, support…?
Every company has a different focus. Find your users’ focus and align your pricing and offering accordingly.
Introductory pricing: Many businesses offer introductory low prices to attract users, which works well.
From a user perspective, however, it attracts the wrong type of clients. Companies constantly looking for the best deal churn faster. There’s always a cheaper offer.
Plus, upping the price on a customer feels wrong. Whether they agreed to it or not, contracts like this incentivize the wrong things and misalign startups and their users.
Instead, focus on value and free trials. Fully functional free trials allow customers to play before they pay. This gets them hooked on your product or service and drastically increases conversion rates. Most will stay on after the trial is over, assuming they are engaged.
6. Increasing customer engagement
Every product has a turning point. Users that reach this rarely quit, and those that don’t are bound to leave.
It’s different for every company.
For Facebook, it was the newsfeed. Once users had 10+ friends, stories would show up daily and they were hooked. For Pinterest, it was similar. When a user had over X number of interesting categories, you had a user for life.
But what about B2B?
Just a couple of employees need to join Slack before the whole company decides to join and take control.
And everyone knows Dropbox and Box for cloud storage. Upload your first file and share it with a colleague, and you’ll never go back. Multiple versions of spreadsheets floating through email threads… no thanks.
The examples go on and on.
Every startup has a turning point. In the beginning, every interaction with new users should push them toward that pivotal point.
Figure out what this is for your business and find how to help users get there.
7. Make your product mission-critical for companies
People hate pain. We avoid pain and discomfort more than we work toward health and happiness. That’s just human nature.
How can you make a breakup painful? That’s the question.
Companies that embed themselves in customers’ operations are irreplaceable. Irreplaceable = incredibly valuable.
How do you help your users? What value do they get from your service? What would losing your service mean for them?
Ecommerce sellers use Paypal and Stripe. They help small businesses get paid. Lose that, and their business is bust. These companies have to have their payment provider or they’re screwed.
Hosting. Email Marketing. Advertising. All of these are integrally linked to a business. Any one of them is critical to company success, and losing it would spell disaster, at least for a while.
And there are tons of others just like them. Booted from AirBnB or Uber…so long side income.
Kicked off Amazon — shit.
All of these are examples of mission-critical services. Users almost never leave. Churning would be suicide.
This is the ultimate addiction. Build your business towards this, and you’ll be successful.
8. Incentivize longer contracts
Cash is king. Money in the bank means you can grow and scale without worry. For now, at least, your startup is safe.
One way some companies create value is through longer contracts. Look at mobile carriers. AT&T and Verizon built mega empires around cell phone contracts. Sign up for 24 months and get a free phone! And a better rate…
That’s the key, the better rate. Not all companies have sexy bonuses for extended contracts, but all startups can offer a deal. And a deal is often ideal for you. It means upfront cash, even if a user decides to leave.
The key is to focus on LTV, or lifetime value of a customer. Set your plan to outlive your average customer retention and LTV.
For example, if an average customer sticks around for seven months at $100 per month, that’s $700.
But what if you offered a yearly price at 25% OFF. That’s a huge discount. And it’s also $900.
How many potential users would take you up on the bargain? Probably a lot. It may even improve overall conversion rates.
That means $200 more than your average user. And it means more money now.
These type of extended incentives drive profits. Plus, your fixed costs hardly change, which means increased LTV. But that’s not all.
More users probably means more referrals
If a user sticks around and benefits for an extra five months, that’s five more months that they might promote your product. Any extra referrals are icing on the cake.
It’s a win-win for you and your users.
SaaS is King
Low fixed costs, near-infinite scalability, and an addictively attractive recurring revenue model have made software the sexiest thing since sliced bread.
Around the world, SaaS companies are starting, growing, and raising around the idea of recurring revenue. The competition is fierce, and the rewards are enormous.
Ideas are worthless, execution is everything
Again and again and again, it comes back to this. You have your ideas, and now you need to execute.
Nothing else is important. Do that, and VCs will come knocking.
You know what to do. Now, go make it happen.