Why Do SaaS Companies Fail: 7 Most Common Pitfalls & How To Avoid Them
Did you know that more than 90% of all SaaS startups fail? What’s more, only 35% last for more than 10 years. And out of those survivors, only 40% ever become actually profitable.
Now, these statistics can definitely be daunting if you’re trying to start up a SaaS company, or even if you’re one of those that have already passed the 10-year mark.
But why do SaaS companies fail in the first place? And more importantly, how can you avoid it?
In this article, we’ll discuss the most common reasons why SaaS companies fail and what you can do to overcome them.
1) Lack Of Product-Market Fit
Unfortunately, many SaaS companies fail because they don’t have a good understanding of their target audience.
So they end up developing SaaS products that don’t really have a significant demand in any market. As a result, the product fails to gain traction, and the company tanks altogether.
So how do you establish product-market fit? Here are a few pointers:
Do Your Market Research
One approach to starting a SaaS business that can help you establish product-market fit is the “market first, product second” approach.
As you may guess, the idea is to focus on your target market first before really drilling down on developing your SaaS product.
And you can start by conducting market research to understand the needs and wants of your target audience.
Aside from any secondary research you may find online, it’s also best to do your own.
You can launch surveys, conduct interviews, hold focus groups, or whatever activity that would give you more insights into your target market’s current needs.
This will help you determine what type of SaaS product would give you the best chance for success.
Know Your TAM, SAM, & SOM
Another important aspect of market research is understanding your Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM).
Let’s take a deeper look at what they are.
Total Addressable Market (TAM)
Your TAM is the total potential demand for your SaaS product. It’s the entire market or audience that can benefit from your SaaS solution. In other words, TAM comprises ALL the customers you could have if you had unlimited resources and zero competition.
For example, let’s say you’re developing a customer relationship management (CRM) system. Your TAM would be all the companies in the world that need to manage interactions with their customers (which is almost all of them, if not all).
However, you can’t realistically have every business in the world as your customer. That’s why you also need to look at your SAM and SOM.
Serviceable Available Market (SAM)
Your SAM is the portion of the TAM that you can focus on serving well with what your SaaS product does best. Your SAM is the segment of the TAM that would benefit the most from the unique capabilities that your SaaS solution offers.
Let’s go back to the CRM software example. Let’s say your product’s biggest selling point is its ability to create customized sales pipelines and reports. Your SAM would be all the companies that need a CRM system with an emphasis on customization.
Serviceable Obtainable Market (SOM)
Your SOM is the subset of your SAM that you can actually acquire as customers, given your current resources and competition. But more importantly, these are the potential customers that are likely to buy your SaaS product.
Again, sticking with our CRM software example, let’s say your SaaS platform can accommodate businesses of any size. However, you currently lack the resources to support larger enterprises. In this case, your SOM would be all the smaller companies that need CRM software and have the budget for it.
Understanding your SOM can help you develop your SaaS product in a way that satisfies the biggest needs in your target market. This can help ensure that you have a solid product-market fit.
Offer A SaaS MVP
A SaaS MVP or minimum viable product is an early version of your SaaS product that you can put out in the market to validate your target market’s demand for it.
It’s a good way to test the waters before investing a lot of resources into building a full-fledged SaaS platform.
This is especially helpful for startups and small businesses that don’t have a lot of capital or technical expertise.
The MVP gives you an idea of how well your target customers respond to your SaaS product. If a lot of people are interested in buying it, that’s a good indication that you have the potential for success.
What’s more, a SaaS MVP also helps you determine if there are any gaps that need to be filled or features that have to be tweaked. This way, you would be able to smooth out all the kinks before launching a full-fledged SaaS product.
2) Poor Management
Author and leadership expert John Maxwell says that “Everything rises and falls on leadership.”
So it’s no surprise that any company with poor management is bound for failure. And for a SaaS startup, this may include poor planning, inadequate communication between teams, and mismanagement of resources.
And if you have unmotivated or subpar people in managerial positions, it will only trickle down to the rest of your team. This can lead to unnecessary delays and elevated costs in product development, marketing, or customer service.
The obvious way to overcome this problem is to make sure that you are hiring the right people. Invest in the right training and management programs to ensure that your team is well-prepared, motivated, and capable of managing resources efficiently.
3) Cash Flow and Financial Issues
Starting a SaaS business takes a lot of time, effort, and resources — especially resources. If you fail to obtain and manage the capital you need to get your SaaS company off the ground, your chances of succeeding are going to be very slim.
So how do you make sure you’re above board in terms of finances? Here are a few tips:
Seek Venture Capital
Finding investors and venture capitalists is one of the fastest (and most common) ways for SaaS businesses to raise capital.
This usually starts with a seed funding round, which helps acquire the necessary funds to perform market research and build a SaaS MVP.
Then it’s followed by Series A, Series B, and even Series C rounds of funding aimed at raising the necessary capital to fund growth and product development.
The thing about having these types of investors is that you have to give away equity in exchange for their money, which could end up leaving you with less control than you expected.
But hey. If your SaaS company turns out to be worth (tens or even hundreds) of millions of dollars in the future, that’s really not a bad trade, eh?
SaaS startup bootstrapping is when you use your own resources to get your new company up and running.
This means that instead of getting external investors, you’ll be paying for everything out of your own pocket and/or the initial revenue you generate with your SaaS product.
To be honest, this is risky if you don’t have deep pockets. If you do, good for you. But if you don’t, you could easily belong to the 90% of SaaS startups that don’t make it.
However, there is a way to still raise significant capital just from your SaaS product’s revenue. And that’s through offering a lifetime deal (LTD).
An LTD is essentially an affordable offer wherein your customers can purchase a product license once and then use your product for a lifetime.
Sure, it requires sacrificing a bit of recurring revenue you would have otherwise gained from your customers. But if done right, not only will an LTD raise funds quickly. It may also boost brand awareness, leading to more customer acquisition down the line.
And besides, with the right upsell strategy, you can still convert LTD users into subscription plan customers in the future.
Stay On Top Of Your Income Statement
It’s all too easy to become preoccupied with product development and marketing. But if you don’t have a good eye for what’s going on in the financial side of your business, it won’t be long before cash flow problems arise.
That is why it’s best to stay on top of your SaaS income statement at all times. This will help you spot any irregularities in your expenses (such as unnecessary spending) and make sure you’re paying taxes correctly.
Doing this regularly also gives you more insight into where money needs to be allocated, allowing you to adjust your budget accordingly.
4) Poorly Implemented Marketing Strategy
You can’t just throw money at marketing campaigns and expect to get a return on investment. Your marketing strategy must be planned out thoroughly and implemented intelligently — which is why it pays to have a qualified marketing team.
Let’s talk about some best practices for SaaS marketing:
Identify Your ICP and Buyer Personas
An ideal customer profile (ICP) is a detailed description of the customers that would benefit the most from your SaaS product.
If you have a business-to-consumer (B2C) SaaS product, this profile should include relevant demographic and psychographic information about them, such as their age, gender, location, and interests.
If your SaaS solution is more for a business-to-business (B2B) market, it has to include the necessary firmographic and sometimes technographic information about your ideal customer.
Firmographics include their industry, company size, and others. While technographic data involve the technology they use, how they use it, and why.
SaaS buyer personas are semi-fictional representations of certain individuals in your target audience.
They represent the specific people you are targeting with your marketing efforts. It could be the executive, the manager, or any team member in the company.
Understanding both your ICP and buyer personas is the key to creating a highly targeted (and therefore relevant) marketing strategy. Knowing their motivations and preferences helps you craft messages and use marketing channels that resonate with them the most.
Focus On Inbound Marketing
The SaaS business model relies on having long-term relationships with customers, which leads to recurring revenues over a long period of time.
So, your marketing strategy should be oriented toward prospects that will likely subscribe to your SaaS product for a long time.
This is where inbound marketing comes in. Inbound marketing focuses on creating content that attracts, engages, and educates potential customers.
The goal is to create an educational journey for prospects that will first educate them about their current pain points. As they grow more familiar with your SaaS brand, you can target them with more aggressive content, convincing them why they should choose your SaaS product over the competition.
In other words, inbound marketing doesn’t just sell a product. But it also builds relationships with your potential customers, which is very crucial to the growth of a SaaS company.
Create A Content Calendar
When it comes to executing a marketing strategy, consistency is key.
Creating content on an as-needed basis will not help you reach your goals — no matter how good your content pieces are.
You need to have a plan in place that outlines when and where you will be publishing your content, who will write it, what topics it should cover, and so on.
That’s why having a content calendar is essential for the success of your SaaS marketing campaign. This document will help you visualize (and track) your content strategy better and create customized content that targets specific customer segments more effectively.
5) Churn Is Higher Than Growth
Churn is a bitter reality when it comes to SaaS businesses and other types of companies with a subscription-based business model. But if it overpowers your company’s growth, that could lead your company downhill to an untimely demise.
That’s why for a SaaS provider, customer retention is more important than customer acquisition.
Of course, if you’re starting up a new SaaS business, you would first focus on growing an actual customer base to retain. But as your business grows, customer retention will be of utmost importance.
So how do you prioritize customer retention for your SaaS businesses? Let’s look at a few best practices:
Provide World-Class Customer Support
Today’s customers are more likely to stick with a SaaS product if they feel like their concerns are being heard and addressed as quickly as possible.
What’s more, you also need a well-built knowledge base so your customers can quickly find answers to their questions even without talking to a customer support rep.
Prioritize Customer Success
Another huge factor in customer retention is product adoption and whether or not your customers are successfully achieving their goals with the help of your SaaS solution.
And that’s what customer success is for. A customer success team helps your users get the most out of your product. That includes your onboarding process and whatever additional training you may provide.
What’s more, it’s best to monitor your customer’s usage of your SaaS platform so you would know which specific areas they need the most help with.
6) Weak Pricing Strategy
Pricing can also make or break your SaaS business.
If you price it too high, it wouldn’t be very attractive to potential customers. If you price it too low, you might not generate enough revenue to grow your company or even maintain your daily operations.
That’s why you need to come up with a pricing strategy that is attractive enough for customers while still giving you a considerable profit margin.
The best way to do this is by using a value-based pricing strategy. Instead of basing your prices on competitors’ rates or industry standards, why not ask your target market how much they’re willing to pay for their desired features?
This obviously involves a lot of research and experimentation. But once you find the sweet spot, it could pay off big time.
7) Low-Quality SaaS Product
Sometimes, the reason why SaaS companies fail is just plainly because their products simply aren’t good enough.
This is why it’s essential to make sure that your product is top-notch before launching it in the market. You need to conduct comprehensive testing, get feedback from potential users, and come up with innovative features and solutions that will set you apart from competitors.
A low-quality SaaS product can quickly lead to bad reviews, which can be very damaging in terms of brand reputation and customer retention.
So make sure that you are delivering a well-built SaaS platform that exceeds your customers’ expectations.
Final Thoughts: Avoiding Common Pitfalls For SaaS Businesses
As Grandmaster Yoda once said, “Failure, the best teacher is.”
But it doesn’t necessarily have to be your failure.
While learning things the hard way is indeed a good way to grow, it might be more efficient (and convenient) to just learn from others’ mistakes.
By avoiding the common pitfalls that most SaaS companies fail to anticipate, you can ensure that your business will remain afloat even in the face of adversity.
Looking for more guides to help you grow your SaaS business? Check out our blog site here.