Don’t over-estimate the market of your SaaS product

Just less than a year ago, the market was abuzz with the crazy valuation of SaaS companies – such as Slack for example. Now it seems that the “experts” have overvalued these companies, as many fail to justify the high cost of customer acquisition, and worse, customer retention despite having superior features on their platforms.

Many SaaS companies just can’t believe why customers are turning them down. Here are our thoughts:

Rate of adoption and superior distribution beats features

Many pundits actually think that superior technology behind the SaaS company determines its success, and therefore justifies the hefty valuation. It is not usually the case, as adoption is always the key. Turning back the wheels of history, we do not need to go far. One can recall easily that Microsoft became the standard operating system (beating out IBM and Apple), because it had superior distribution channels (the makers of clone personal computers). In the process, Bill Gates became a multi-billionaire and the rest is history. It was not due to superior product, but rather superior adoption.

Scalability of product determines SaaS success in B2B

Our experience working with many marketing SaaS companies has helped us shed some understanding in this space. It is quite common that after a certain size, businesses usually stop using certain services due to scalability issues, and cost savings (of running it in-house). Take for example marketing services that help you invest your marketing dollars in return for better results. These SaaS companies usually take a percentage of the marketing spend. It makes more sense to run an in-house team once the marketing spend expands.

As an SaaS company what should one be doing?

• Ensure cost of moving to another product is higher

Many customers operate using a set of KPIs and “numbers”. It would be entirely wise to try and find out their “numbers” – such as their acceptable cost to acquire one customer. If you manage to not only increase the amount of customers acquired, but keep the costs within the “acceptable range”, this customer will stick with you for a long time.

The key is to make the perceived costs of switching to another service much higher. If your service is already bringing in thousands of customers each month within the acceptable cost range, it would appear as quite a risky move to shift to another service. It might be cheaper, but any business leader can tell you, a bird in hand is worth two in the bush.

• It’s in the relationship (account manager and customer)

Customers like to be cared for, and to be listened to. This goes without saying. Any relationship (yes, including business relationships) need to be watered like a plant. While it may not appear to be rewarding enough when the plant seem so small, it will one day turn into a giant tree bearing you fruits. Customers are also the best information source to learn about how to improve your product, and how to make it better.

• Continuous innovation in product offerings (most often with no extra cost)

Finally, SaaS companies must continuously improve on their product offerings. A company we know, who’s in the marketing business, recently pivoted into another product for another marketing channel, after having run email marketing as their main bread and butter for a long time. This was done as part of the evolution of their business, as ultimately all marketing channels are interconnected.

Customers’ needs are ever-evolving, and it is quite common to find customers who seek  for an all-in-one provider for easier implementation and coordination. Just like how Amazon evolved from being a company selling only books, to selling CDs and DVDs, then datacenter services and now to selling streaming TV and music subscriptions. It’s all because their customers wanted it, we should also realize that SaaS companies are on the same evolution trajectory.

Continuous innovation is done out of necessity, otherwise customers will find greener pastures.