How to Start and Grow a SaaS Company

by francine Hardaway on April 5, 2012

I’ve just learned everything you need to know about starting and scaling a SaaS company from NetSuite ‘s Jim McGeever, its 15th employee, and the morning keynote of OnDemand12, Tony Perkins’ conference about the Cloud. Since most of the companies I deal with are SaaS, I always think about the opportunities presented to startups, by cheap infrastructure costs. But Jim, a former E&Y guy, thinks more in terms of challenges.

The Challenges: The obvious challenges are sales, renewals, and customer retention. But there’s another one: recognizing revenue. Since the various financial reforms, revenue recognition has become more and more complex.

Cash is king:, McGeever reminded us that Salesforce spent like a drunken sailor on customer acquisition to define its market in the early years, after also spending on expensive infrastructure. Now that the infrastructure costs have gone down, the sales and marketing investment to grab that initial recurring revenue has gone up because of competition for cloud-based applications.

For a business to business offering, the best way to keep revenue growing is to sell 2-3 year contracts with annual billing. That will result in less churn and more predictable revenues than either annual or monthly subscriptions. Salesforce actually made the mistake of offering a first year free, and got only a 15% renewal rate. Big lesson about the perceived value of “free.”

Of course it helps if your product has lock-in as well, and creates high switching costs by accumulating and manipulating sensitive information and/or lots of data (as NetSuite does).

Who You Sell to Matters: A decade ago, when Netsuite started, it was easier to sell SaaS in the SMB market, and a longer, more difficult sell to the enterprise. Most early products moved up, from small business early adopters to the enterprise, but now should sell to both from the outset –although with different offerings and messages.

For SMBS the sales cycle must be low cost, online, self-service, and packaged. It helps to become an expert in online marketing On the other hand, when you sell to the enterprise, sales strategies are high touch, on site, longer and more complex. But most of the early SaaS companies have moved upstream to the enterprise by now. Why?

Don’t Sell to Very Small Companies: companies with 1-10 employees reguarly fail, and too many of them going out of business will cause too much customer churn. Even if they don’t fail, they’re stiill too expensive and difficult to support to be cost effective. Complex apps aren’t good for very small customers, because support costs will kill you.

Churn stranges SaaS growth: Most SaaS exits seem to be in the $25m range. Why do companies stall out at $25m and have to look for a buyer? Here’s a good insight: If implementation is 25% of your revenue, and you have even a small amount of churn, you lose 40% of your revenue. In a case like that, any bleed off your Installed base can be a disaster. So you must constantly monitor Revenue from new customers; Upsell from current customers; Downsell from current customers; and Churn to see how you are doing. McGeever says you must always have something to up sell your existing customers, and have account managers mine them to see how much they are using the product and what you can up sell them. The more data they put into the product. The less likely they’ll leave. Other key metrics can include QTD billings v QTD Y/oY revenues and trends in the average selling price.

Things that help with existing customers include Twitter accounts, user conferences, and an app platform your customers can use to make their own extensions of your product.

These products are not as simple was we originally thought they’d be to make a good business out of. Like every other entrepreneurial venture, they’ve been a roller coaster.

Leave a Comment

Previous post:

Next post: