The Business of SaaS

Welcome, SaaS entrepreneur!

Whether you’re dreaming of a passive income stream that will let you travel the world, an executive planning on taking your business to the next level, a veteran SaaS operator trying to grow or scale your system, or perhaps a developer or designer thinking that it’s time you turn all these years of learning to code or design into something more lucrative: this book should give you anything from a huge boost to a validation that what you thought was right was, in fact, right.

This book takes you through not just the build of the system, but the ideation, validation, growth, and traction of your concept. It gives you actionable processes and takes you through the mistakes that many SaaS entrepreneurs have made. In particular, this book takes you through the mistakes that I made, lessons I learned, and misconceptions I had while building and growing my businesses over the last twenty years.

What is a Software as a Service (SaaS)?

A Software as a Service (SaaS) is a cloud-based or partially cloud-based computer program that is constantly being added to, improved, and maintained and that users pay for on an ongoing basis. Payments are generally made monthly or yearly, but can also be made in a variety of different ways. These systems almost always require additional business systems such as maintenance, customer service, a knowledge base, ongoing development resources, and more to continue to operate. SaaS systems often require a high initially investment, and often have a high profit margin. Commonly used SaaS systems include:

, Zoom, Harvest, Strava, Spotify, G Suite, Hootsuite, JIRA, and Slack.

  • Salesforce

  • SAP

  • Quickbooks

  • Asana

  • Zoom

  • Strava

  • Spotify

  • G Suite

  • Hootsuite

  • JIRA

  • Slack

What does a SaaS do?

A SaaS system fulfills one of two needs:

  • A knowledge gap

  • An efficiency gap.

This means that it either makes your target market’s job easier by doing something for them that they would otherwise be spending time or money on, or it gives them knowledge that they didn’t otherwise have. In other words, your SaaS company exists to give value to your customers, which is why why they are willing to pay for it.

Every SaaS system does one or both of these things.

Hollywood, TechCrunch, and The Truth About The Business of SaaS

Let's burst some bubbles and be real for just a minute. If you're reading this book, you're probably familiar with our internet overlords at Google and social media giant Facebook. You're probably also somewhat hooked on the Uber dreams and Slack desires. You probably read about how if you pitch the next great idea, raise some money, do some steps which you hope to read about in this book, then boom! Money.

In the words of the ridiculously successful software entrepreneur and overall great guy Waikit Lau, current the founder of RemoteHQ.com, a great rising Zoom competitor, "Techcrunch is Hollywood and Facebook is a one in a billion. Having a business like that is the equivalent to winning the lottery."

Even if you are truly great at what you do, you will almost certainly not become a giant. Not only do you have to be in the right place at the right time, you have to look the right way, have gone to the right school, know the right people, have the right parents, and so much more. If that's you, then you probably already know it. If not, then you're just like the other 7.53 billion of us in the world.

If I'm bursting your bubble, trust me, it's better this way. Now you can get ready to work hard and expect to work very hard for a long time, fail at least a few times before you have some success, and fight day in and day out to be successful. That's just the way it is. I'm glad we had this talk, and I hope you are as well.

Now we can get to work.

SaaS Success Questions

Before we get too far along, let’s go through the basics. Below are a set of questions that you probably need to be able to answer before launching or growing your SaaS.

  • Do you know who you’re selling to?

  • Are you targeting the right people?

  • Do you really know who you’re selling to (personas)?

  • Do you know what they want and where you provide the most value?

  • Have you researched what your competitors are offering?

  • Do you know if people will buy your SaaS?

  • What are you selling and do you have the right value metric?

  • Is your SaaS priced properly?

  • Do you know how to price your SaaS system?

  • Do you know what metrics you should be tracking in your SaaS?

  • Do you know how to grow your SaaS revenue?

  • Did you ask people what is most valuable to them?

  • How do you get the SaaS system built?

  • Does it work? How do you know?

  • Is it easy to use (UX + functionality)?

  • Do you know how your SaaS will scale?

  • What systems will be necessary to support your customers?

  • What systems will be necessary to nurture leads and keep customers coming in?

  • How will you get your SaaS out there to everyone?

  • What is your starting point, and where do you go from there?

As you can see, the majority of these questions are about pricing, sales, revenue, and business. These are the things that should be on your mind if they’re not already.

The 4 A’s of Your SaaS Machine

Now that you've got a few things on your mind about sales and marketing, now it's time to think about the levers you can pull to grow your SaaS.

The four A’s of SaaS are:

  • Appraisement

  • Acquisition

  • Activation

  • Attrition

Appraisement

“The act of estimating or judging the nature or value of something or someone.” - Dictionary.com

Appraisement here refers to setting the price of your system. This is by far the most overlooked lever of SaaS business growth. Most entrepreneurs and companies I’ve spoken to talk all about acquisition and attrition, but spend little to no time on appraisement.

In the section on Appraisement, we will review how to determine who your customers are, what they want, how much they are willing to pay for it, and how to iterate on these ideas.

Acquisition

“The act of acquiring or gaining possession.” - Dictionary.com

Different SaaS businesses acquire users in very different ways. Sometimes it’s about direct sales, meeting people at trade shows and following up with them. Much of the time, it is heavily focused on search engine marketing and ranking for the right keywords; other times it is done through partnerships and affiliate marketing. Every system has a different market, a different problem they’re solving, and a different set of users.

Acquisition goes hand in hand with Appraisement. Once you know who are are selling to and what makes them tick, then you can figure out the best ways to reach them and help them understand the value you present. In this chapter, we will also cover the major aspects of user acquisition associated with web-based businesses as well as tricks of the trade that no one likes to talk about.

Activation

"The action or process of making something active or operative." - The Oxford Dictionary

Getting people to your SaaS and having them take a look at the system is one thing, but it's not enough. How many people have pitched you on a product or service only to have you listen to their pitch ask a few questions then walk away? The same applies to your SaaS. If you don't take steps to help your users starting using your system and getting value from it immediately, they are going to walk away, and probably not come back.

This chapter takes you through processes of helping users flow from being a window shopper to a returning customer.

Attrition

“A reduction or decrease in numbers, size, or strength.” - Dictionary.com

Attrition is essentially how many people leave. This is also known as “churn” in the SaaS world. Conversely, we also talk about “retainment” which is exactly what you think, how many people stay. In our chapter on Attrition, we will take a look at all the reasons people stick around. From the value of the system, to the way you make people feel, to the support you give them and how you keep them engaged in the growth of the company and system.

Understanding the A’s

These are the buttons you push to make your SaaS company grow. There is a simple trick here that you need understand.

You need to know:

  1. How much money you make from the average customer over their lifetime. This is know as Lifetime Value (LTV) which is explained in-depth below.

  2. The cost of acquiring a new customer (CAC).

Obviously, the LTV has to be higher than the CAC, right? But by how much? According to PriceIntelligently.com, it always needs to be higher than 3 to 1, preferably a lot more. That means that for every dollar you’re spending to acquire a customer, you’re making 3 dollars. According to the same source, if you continually optimize your pricing, you can get this up to 11 to 1.

Let’s examine this a bit more because it is really important that this part is clear.