11 Reasons Why SaaS Startups Fail and How to Avoid
With the rise of SaaS, more and more entrepreneurs are joining the ranks of those looking to launch successful SaaS startups. In fact, data from 2019 show that there were about 7,000 SaaS companies in the marketing field alone. But what many don’t realize is that for every success story, there are countless SaaS startups that have failed. Within three years, 92% of Saas startups expanding at 20% p.a. ceased to operate.
So what makes a successful SaaS startup? And why do so many fail? Let’s break down the top reasons why SaaS startups fail.
Do SaaS Startups Fail?
SaaS startups have grown in popularity over the past several years, but are they really as successful as some think? The truth is that SaaS startups do fail, but it does not mean that all SaaS businesses will. The success rates for Saas startups are lower than the 10% average for new businesses. There’s a lot of hard work and dedication that goes into creating a SaaS startup, and when those elements are present, success becomes a real possibility.
11 Reasons Why SaaS Startups Fail
If you’re thinking of creating a new SaaS business, or if you’re already running a startup, it’s important to know these 11 pitfalls that may hinder your SaaS startups’ growth. With that said, here are some of the most common reasons why SaaS startups fail.
1. No Market Need
It’s easy to miss the mark when it comes to fulfilling a noticeable market need.
According to CBInsights’ report, 42% of SaaS startups are reported to have failed due to lack of a market need. This makes sense as SaaS businesses rely heavily on users being interested in the product or service they have to offer.
Without a need in the marketplace, SaaS startups will not thrive as there will be no target audience or customer base ready to invest in the SaaS startup’s product or service.
Additionally, SaaS businesses require frequent user engagement and payment for services rendered in order to remain profitable; when there is no demand for those services from a real-world audience, SaaS founders tend to find themselves in tight financial predicaments due to a lack of business volume
2. Lack of a clear vision or strategy
Without a clear vision or strategy, SaaS businesses can easily become disorganized and inefficient as they try to scale. Developing a clearly defined roadmap is integral for SaaS companies to ensure efficient operations, maximize their potential and stay competitive in the long term.
With a core direction outlined and strategic objectives set out, SaaS providers have tangible goals that allow them to measure their progress and stay ahead of industry trends. Establishing this clarity from the outset can enable faster time-to-market and improve decision-making across the organization.
3. Poor marketing and branding efforts
SaaS businesses often suffer from poor marketing and branding efforts, leading to a lack of customers, low-profit margins, and decreased visibility in the marketplace.
Focusing on both marketing and branding is essential for SaaS companies desiring to grow; branding allows SaaS companies to project an image of professionalism and quality while marketing helps them acquire new customers.
Unfortunately, many SaaS businesses underestimate the power of well-crafted marketing messages tailored to their target markets, choosing instead to opt for generic campaigns that garner little attention. According to Broscorp, a poorly executed marketing plan causes 22% of SaaS startups to fail.
SaaS business owners must take the time to research their target audience and craft a story specifically designed to speak directly to them if they desire success.
4. Inability to scale or grow the business
SaaS-based companies often find themselves caught in a conundrum: the inability to scale or grow their business. Many SaaS startups struggle to make the jump from small businesses to large corporations, due to inherent limitations regarding resources, technology, and logistical expenses. Companies can strive to overcome these limitations by embracing innovative SaaS solutions that are compatible with their existing services and infrastructure.
Additionally, SaaS companies can benefit from leveraging mentors or industry consultants who have experience scaling SaaS businesses successfully. While it is difficult for SaaS businesses to rise above the constraints of scalability, with the right strategy, there is potential for SaaS companies to reach new heights and expand exponentially.
5. Not enough capital to sustain operations
SaaS companies often find themselves in a tight spot when it comes to capital. Data show around 29% of cloud startups fail due to not having enough capital. With the SaaS model of highly-customized subscription services and anything-as-a-service, operations can become costly quickly. Even if the subscriptions and services sold are valuable to customers, SaaS companies may still be caught off guard by an unforeseen lack of up-front capital.
Customers prioritize product and service quality over all else, so SaaS companies must invest in people, technology, and resources in order to remain viable and competitive. SaaS businesses need to constantly monitor cash flow to ensure that there is enough money on hand to sustain operations.
6. Founder disputes or lack of team cohesion
SaaS companies are often faced with founder disputes or lack of team cohesion, which can cause a severe setback in their journey. 18% of cases studied by Failory have team problems causing their failures. These issues can be so pervasive that it cripples the SaaS startup from ever achieving success.
What’s worse is that high levels of infighting and interpersonal conflict can have an adverse effect on employee morale as well as company productivity, making it even less likely for the SaaS startup to stay afloat.
Even though these issues may seem formidable to overcome, with the right strategies in place and willingness to work together across all teams, SaaS entrepreneurs can minimize their impact and increase their chances of achieving longevity in this fast-paced industry.
7. Poor customer service or support
Poor customer service or support can make or break SaaS companies. Many customers look to the SaaS they subscribe to as a basis for their day-to-day operations, so if the SaaS doesn’t function correctly — and then customers don’t receive a timely response from customer service when they do encounter issues — then it reflects poorly on the SaaS provider and can lead to an overall drop in customer satisfaction.
SaaS companies need to recognize that good customer support is essential, and invest in it accordingly, in order to make sure customers consistently receive top-notch service no matter what.
8. No Competitive Advantage
The lack of competitive advantage means that a SaaS tool is not unique or differentiated in any way from those being offered by its competitors. SaaS startups need to make sure they have a USP (unique selling proposition) that will make their product stand out from the rest.
SaaS companies need to identify their unique selling point that sets them apart from their competitors and develop features or services around it
By offering something special, SaaS businesses can secure loyal customers and become successful in the long term.
Having a competitive advantage also helps in establishing brand reputation, as well as garnering positive word-of-mouth, since customers have something to talk about when they share their experiences with using a SaaS tool.
9. Unsustainable Growth
Unsustainable growth occurs when a startup grows too quickly and is unable to maintain its current level of growth. This can often lead to cash flow problems and other financial difficulties, which can ultimately lead to the demise of the startup.
SaaS businesses need to plan for growth by establishing a realistic budget and timeline that allows them to manage expenses, identify cost-saving opportunities, and develop strategies to scale effectively.
Additionally, they must also put measures in place to prevent the business from growing too quickly. If not properly managed, unsustainable growth can cause a SaaS startup to quickly lose customers, reduce revenues, and ultimately fail.
10. Poor Pricing Strategy
Many startups price their products too low in an attempt to gain market share quickly. However, this often leads to profitability problems down the road as it becomes difficult to raise prices without alienating customers.
Additionally, some startups price their products too high, which makes it difficult to compete with lower-priced alternatives from established companies.
For a SaaS business to be successful, they need to develop an effective pricing strategy by analyzing their target market and researching what competitors are offering.
Once the ideal price point is determined, startups should ensure that their pricing model incorporates flexibility in order to accommodate different customer needs and budgets. This will enable them to attract more customers while still achieving desired margins.
Additionally, SaaS businesses need to factor in additional costs such as marketing and customer service expenses when coming up with their pricing strategy.
Check out Your Complete Guide To SaaS Pricing.
11. Lack of Execution
Many SaaS startups have great ideas but fail to execute them properly. They may not have the right team in place or may not allocate enough resources to get the job done.
As a result, their businesses flounder and they are unable to achieve their goalsSaaS businesses need to make sure they have the right team in place, with the necessary skills and experience, to execute their business plan.
They also need to invest adequate time and resources into researching new products or services that could help them grow. For example, they may need to conduct market research, develop prototypes and test their products in order to ensure they are ready for launch.
Additionally, they should develop a timeline for execution of their plans and ensure that tasks are completed on time. Without a well-executed plan, SaaS businesses will struggle to survive in the competitive market.
Things to Consider in Order to Avoid SaaS Startups to Fail
1. Have a Clear Vision
Having a clear vision means knowing what your SaaS business is and what it plans to achieve. Without a clear vision, it will be difficult to make decisions or set goals.
Additionally, your team will not be able to work together effectively if they do not know what the SaaS company is trying to achieve.
To ensure that your business has a clear vision, it is important to create a mission statement and set goals that are aligned with your core values.
2. Do Your Research
Doing market research means understanding the market and knowing who your competition is. Additionally, you should have a solid business plan that outlines your objectives and how you plan to achieve them.
To help you develop this plan, you should research products and services that appeal to your target market and create strategies for pricing and marketing these products.
3. Have a Sustainable Business Model
A sustainable business model ensures that your business can continue to operate in the long-term.
To do this, you need to identify reliable revenue sources and have a strategy for cost optimization.
Additionally, you need to ensure that your business is scalable so that it can grow and adapt with changing market conditions.
4. Invest in Your Team
You need to hire people who have the skills and experience necessary to help you achieve your goals.
Additionally, you need to provide them with the support they need to be successful. This can include investing in training and development opportunities and offering competitive compensation packages that incentivize employees.
5. Monitor Your Progress
Monitor your progress and adjust your strategies as needed. You should also measure customer satisfaction and track your financial performance to ensure that you are meeting your goals.
Additionally, you should regularly review your processes and identify areas for improvement.
Check out The SaaS KPIs Master List: 24 SaaS Metrics You Should Track
6. Focus on Your Customers
Focusing on your customer means understanding their needs and desires and creating products or services that meet those needs.
Additionally, you should focus on building relationships with your customers and providing them with excellent customer service. Without a customer-centric focus, it will be difficult for your startup to succeed.
To do this, you should create customer surveys and feedback loops to gain insight into how customers view your products or services. Additionally, you can use this information to develop more targeted marketing campaigns that are tailored to their needs.
7. Execute Proper Financial Planning
Good financial planning is critical for any business. Without a proper financial plan, your SaaS startup may struggle to stay afloat.
To ensure that your business stays on track financially, you should create accurate budgets and monitor your spending closely. Plus, you should consider investing in accounting software to help simplify the task of tracking finances.
8. Plan for Scale
As your startup grows, it is important to plan for scale. This means having systems and processes in place so that you can handle an increase in customers or employees.
Additionally, you should have a plan for how you will expand into new markets or launch new products or services.
Launching a successful SaaS startup requires careful planning and attention to detail – but even with all these things in place, it’s still possible for businesses to fail due to certain challenges like poor marketing strategies, inadequate funding, or lack of focus on customer service.
By being aware of these potential pitfalls beforehand and taking steps to prevent them from occurring (such as investing in digital marketing strategies or providing excellent customer support) you can give yourself a better chance at achieving success with your SaaS startup.
Check out our blog for more tips on growing your SaaS business.