Every SaaS company aspires to be the next HubSpot, Zendesk, or MobileIron – successfully completing the journey from small startup to a more than $1 billion valuation, and an IPO.
Of course, that is much easier said than done – that type of journey will be fraught with setbacks, challenges and obstacles to traverse. And to help you navigate that difficult journey, we recently hosted a webinar – along with two other successful SaaS companies, Dyn and Datanyze – to share some critical lessons in scaling a SaaS company. Heading up the webinar were:
And the three SaaS professionals were particularly excited to share their lessons and experiences in the SaaS world, for one primary reason – the opportunity to succeed in today’s SaaS climate is immense. The overall industry is projected to generate more than $106 billion in revenue in 2016; that’s a lot of pie, and emerging SaaS companies want their slice.
But how can they make sure they carve out as big a slice of SaaS pie for themselves as they can? With a three-pronged approach that includes:
- Being the most intelligent player in and about your market
- Being laser-focused on performance
- Measuring the effectiveness of your efforts
Be the Most Intelligent Player in your Market
According to one of the world’s foremost SaaS experts Jason Lemkin, it’s going to take you about 2-3 years, at minimum, to really understand the size and scope of your market. And that’s ok! This doesn’t mean you should put it off though – in fact, it only heightens the importance of scoping out your market from your first day as a startup entrepreneur. no matter what type of SaaS startup you have:
- One that attacks an existing market with a differentiator. Think Wistia (disrupting a market dominated by Youtube and Vimeo) and MailChimp (competing with Constant Contact)
- One that introduces a relatively new concept, where the size of your market might be unclear, or even nonexistent.
Whichever type of SaaS startup you have, the keys to uncovering intelligence about your market remain the same.
First, you have to shop your product around. Reach out to anybody who might be a potential user and dip your toes into the water, to see if there would be any actual interest in your product – if you’re getting a lot of tepid responses, you’re probably not going to find great product-market fit. Take notes on all possible use cases and keep an open mind – you never know what type of productive iterations you will find from this early outreach.
To give an example of what shopping your early-stage product around entails, Ben shared the first cold email that Ilya Semin, the founder of Datanyze, sent to him way back when. Ilya put himself and his product out there, thought that Ben might be an ideal user and solicited his feedback.
Second, you have to scope out the competition. This can range from companies that sell a similar product to more broadly, companies in a similar industry. For example, a SaaS startup that sells a click-to-dial product might be closely competing with other telephony companies, but more broadly competing with all sales enablement vendors. Scoping out the competition entails:
- Talking to your competitors’ customers – how are they currently solving the problem? Are they satisfied with the solution?
- Identify opportunities to differentiate – putting out a glossier version of the same product that is already in the marketplace isn’t going to get you to a $1B valuation.
- Improve the product – as you scope out the competition, you might find ways to iterate your product that you had not previously thought of.
- Find your target market and start reaching out to prospects – as you narrow down the most likely buyers of your product, it’s time to start selling!
Ben stressed that whenever you get your first customers signed and onboard, it is absolutely critical to WOW them through service. This is a principle that Zappos, one of the more compelling business success stories in recent years, stressed and grew to prominence on. Wowing through service means responding to customer queries within seconds – not minutes – being open-minded enough to iterate your product based on customer feedback, and to actively seek out referrals.
If you can take the above steps, you’re well on your way to fully understanding your market in an intelligent way. Which takes us to the next step of scaling your startup:
Focus on Performance
The best product and all the marketing intelligence in the world won’t matter a lick if your go-to-market, customer happiness and account management teams don’t perform. That’s Steve’s main priority as the VP of Sales at InsightSquared, and performance for an early-stage startup typically boils down to two things – creating awareness, and then building loyalty. Those two tenets of the Go-To-Market supply chain can be measured against three lifecycles.
It starts with the marketing cycle. At this stage, it’s about developing thought leadership and attracting customers to you via an inbound process, helping them realize their pain and your solution and drawing them to you. For SaaS startups, this typically means developing relevant and helpful content that educates the market, telling stories that are worth telling. Once you have those stories, you want to make sure they get in front of the right people – that’s where your delivery system through the relevant channels and your distribution strategy to the relevant personas comes in.
Once you’ve built that initial awareness, it’s time to start selling some product! By pulling the right levers, you can really be disruptive in the market and start striving to see if you can engage people earlier in the sales cycle. Some of these right levers include:
- Hiring more reps – The more reps you have, the more quota coverage you can have.
- Improve conversion ratios – Through keen data analysis, you can figure out where your team can be more efficient and improve your downstream conversion ratios, getting more output from your input.
- Shorten sales cycle – As you understand your target personas and their buying processes better, you can take them through the journey much quicker and move on to the next potential customer.
- Increased ACV – Many SaaS companies sell on a per-license basis; the more licenses you can sell on each deal, the higher your Average Contract Value, the more revenue you generate from each customer.
But it’s the third aspect of the supply chain that is ultimately the most critical for SaaS companies. After all, SaaS customers can be easy-come-easy-go. It’s not just about new logo acquisitions and upsells, but also about renewals and retention. It’s all about extending the Lifetime Value (LTV) of the customer and making sure they extend their contract with you whenever possible.
“We will be defined by our customer experience,” said Steve. “We spent a lot of money acquiring customers and we want them to stay with us for a long time. We have to focus on wowing people in the beginning, we have to win them, and then we have to wow them again.”
Whichever part of the Go-to-Market supply chain you’re working on, it’s all about executing with rigor and delivering top performance at all times, from all levels of your organization. The results you want are a byproduct of the performance you put in, so make sure you do the things you need to do to get the results you want. Make sure you’re delivering top performances in your rep activity levels, your pipeline creation and your downstream sales funnel conversions, and your sales forecasts will look robust.
Measure your Effectiveness
Finally, no SaaS company can be truly successful at hitting its goals if they’re not measuring every level of their performance, and the effectiveness of these efforts. No matter what your goals are – be it to acquire new logos and customers, growing those existing accounts, and ensuring a happy and satisfactory customer experience – there’s a metric that should be applied to benchmark that success.
Check out this table to figure out some key questions that SaaS leaders ask themselves, and what the associated metric to measure that success is:
When measuring your success through sales and SaaS metrics, it’s also important to evaluate where you stand compared to industry unicorn benchmarks. If you want to scale to and achieve a $1 billion valuation, some good numbers to shoot for are:
- Average annual account expansion = 40%
- Customer retention = 90%
- Gross margin = 75 – 80%
If you can achieve those benchmarks, you should see your negative churn rate at around 115 – 120%. That is a great number! With that, you will soon find your annual recurring revenue approach $40 million, putting you on the trajectory of a high leverage financial machine that fuels SaaS scaling.
Know the in’s and out’s of your market, be laser-focused on performance from both customer acquisition and customer happiness, and measure your effectiveness at every step. Do these things, and you’ll soon be well on your way to scaling your SaaS company to a $1 billion valuation, and a potential IPO.