Software as a Service (SaaS) is a software delivery model in which the software is hosted and maintained by the provider. The customer licenses the software, typically on a subscription basis, and accesses it over the internet by using a web browser. SaaS solutions have proliferated given that they are accessible and cost-effective for the consumers and businesses that purchase them, while also featuring a predictable revenue stream and scalability for the companies that develop and launch them.
While SaaS is a critical backbone of modern business and an attractive business model, starting a SaaS company is challenging, for example due to the highly competitive nature of many SaaS markets, the complexity of hiring and managing highly skilled teams, and the investment in marketing, sales, and customer success required to succeed. This article will serve as an overview of how to start a SaaS company, including steps required to validate, plan, build, and launch a SaaS product. Here at SaaS Mastery, we call these steps “The Eight A’s of Starting a SaaS Business.”
Affirmation: Creating and Testing Your Value Proposition
The first step, Affirmation, centers on developing a rich understanding of your target market and their problems, their current alternatives, and how your product can better solve their problem(s).
Market research strategies, including interviews, surveys, focus groups, monitoring discussions on online forums and social media, and conversations at trade shows and other industry events, are used to understand your target market and develop quantified buyer personas for relevant segments. These personas include a buyer profile that describes each buyer’s role, needs, motivations, and pain points, most and least valued product features, how much they are willing to pay for a solution, and estimates of their Customer Acquisition Cost (CAC)and Lifetime Value (LV). Competitor analysis should also be used to list and describe your competitors in terms of their product features, pricing, buyer types, marketing strategies, and customer feedback.
The culmination of this research should be the value proposition for your SaaS product. Value propositions are statements in the form of “My SaaS system solves [PROBLEM] for [as specific a group as possible].” The value proposition should take into account the competitive landscape and differentiate your SaaS offering.
The last part of this step involves testing your value proposition. If possible, work with a UX designer to create a set of wireframes or other prototypes that illustrate the way the Saas product will achieve the value proposition. Interviews and surveys with the target buyers can then be used to test whether the value proposition resonates with them and gather their feedback on the prototypes. Further, it is highly recommended to create a board of advisors composed of members of the target market. This board can advise you every step of the way, and their feedback at this stage can be invaluable. Further, a Saas startup can create a landing page and use a test paid media campaign or other methods to drive the target market to the landing page. On the landing page, interest can be gauged by gathering email addresses of people who wish to be notified when the product is launched.
Appraisal: Creating Your Pricing Strategy
Consider the needs of your target market when deciding between these non-mutually exclusive pricing structures:
- Free Trial
The SaaS is free to use for a limited period of time, after which customers must pay to continue using it.
A basic version of the software is offered for free, while more advanced features are locked behind a paywall.
Customers pay a recurring fee (typically monthly or annually) to access the software.
Customers are charged based on their usage of the service. The more resources, features, or capacity they use, the higher the fee.
This structure offers several packages at different price points, each providing a different level of features or services.
- Perpetual License
Customers pay a significant upfront fee to access the SaaS product for an unlimited time, although ongoing support or updates may require additional payments.
- Custom/Enterprise Plans
The SaaS pricing is not fixed and is tailored specifically to each client based on their unique needs, such as the number of users, volume of usage, required features or integrations, and level of service and support needed.
Once a pricing structure or hybrid structure is selected, a Van Westendorp Price Sensitivity Analysis can be used to determine the price points. This is a survey in which respondents from the target market enter four price points:
- Product is too expensive and would not buy
- Product is expensive but would consider buying
- Bargain price – great value for the money
- Product is too cheap and would question the quality
Once defined, your pricing strategy should be tested by again gathering feedback from your target market and board of advisors. The landing page from the previous step can be elaborated to include a pre-sale option, allowing interested buyers to purchase the SaaS product before it is launched. A/B testing can then be conducted to determine how different price points impact the percentage of site visitors who pre-purchase the SaaS offering.
Acquisition Planning: Creating Your Sales and Marketing StrategySaaS distribution channels are the various methods and platforms through which SaaS products are marketed, sold, and delivered to customers. A key aspect of planning a SaaS business is identifying distribution channels for your SaaS offering. Without this crucial step, it is impossible to create accurate financial projections or otherwise evaluate the feasibility of the business. Here is a list of potential distribution channels, which should be selected based on fit with your target market and product:
- Direct sales
- Particularly if your SaaS product requires an enterprise level sale, you will need to develop a sales strategy and implement a sales team.
- SaaS marketplaces and app stores
- SaaS marketplaces (e.g., Capterra, AppSumo) and app stores (e.g., Microsoft AppSource) offer centralized platforms for discovery, comparison, and purchase, thereby increasing visibility and accessibility to potential customers.
- Channel partners
- These include partnerships with companies such as managed service providers, system integrators, value-added resellers, and non-competing companies in your industry, who work with you to sell your SaaS product.
- Social media
- Organic social media promotion as well as paid social media advertising can be used to spread the word about your SaaS product.
- Influencer collaborations
- SaaS companies can leverage the reach and trust of influencers willing to endorse and promote the SaaS product to their followers.
- Content marketing
- Content marketing involves creating blog posts, guest posts, webinars, podcasts, white papers, e-books, videos, or other content of value to the target market, with the goal to attract and ultimately convert target buyers.
- Email marketing
- Email marketing can include newsletters and drip campaigns for lead nurturing, in addition to cold email outreach.
- Public relations and events
- SaaS companies can build brand reputation through media coverage and presence at events (e.g., trade shows, conferences) where they can demonstrate the product to potential customers.
- Paid media campaigns
- Paid media, such as Google Ads, can place promotional content directly in front of target buyers who are actively seeking solutions.
- Community engagement
- Fostering relationships with target buyers through online discussion forums, professional associations, and networks can drive word-of-mouth referrals and build a stronger brand reputation.
- Integration partnerships
- Creating integrations with complementary SaaS products can both expand product functionality for users and potentially reach new customer segments within partner networks.
- Customer referral programs
- Incentivizing existing users to promote the SaaS product within their networks can be a powerful way to acquire new customers.
Accounting: Financial Forecasting
Once the pricing, sales, and marketing strategies have been defined, it is imperative to create a thorough financial model to project revenue and assess the break-even point and return on investment.
The model should take into account the cost for all the planned distribution methods, the estimated minimal viable product (MVP) design and build budget, personnel costs including customer support, customer success, product management, and leadership, and operational costs such as hosting, sales, marketing, and analytics tools, ongoing development and QA, and legal services. The assumptions of the model should be clearly defined and easily adjusted–for example, what cost of acquisition and churn rate is expected? What growth rate is expected and how will expenditures such as customer support need to ramp up accordingly? Is an adequate timeline allotted for efforts such as search engine optimization (SEO) to yield results?
Multiple scenarios should be considered to prepare for various outcomes. For example, it is wise to model a best case, worst case, and most likely scenario. It is also vital to update the model regularly as real data becomes available and circumstances change.
Application Design and Build
If the results of the financial forecast are promising, it now makes sense to proceed with major financial investments such as the design and build of the SaaS product. This will involve a decision on whether to hire a chief technology officer (CTO), designer(s), development team, and QA’s, or whether to partner with an agency. You can also choose a hybrid approach, for example, by hiring an in-house CTO to oversee the technical side and partnering with an agency to perform the actual development work. Hiring an in-house team has the benefit of increased control over the development process, as well as the potential for increased flexibility and loyalty. On the other hand, partnering with an agency can be more cost-effective particularly in the short-term, as they bring with them expertise, management, and established workflows.
In addition to outsourcing or establishing a development team, a SaaS product management team or resource should be brought on to guide the build and evolution of the SaaS product. Given the results of the market research already conducted regarding needs of the target buyers, as well as a review of legal and regulatory requirements that apply to your product, a list of functional and non-functional requirements should be created to guide design and development of your MVP. From there, an iterative design process can begin where feedback from the target market can be gathered to refine a set of wireframes or other prototypes, and next a full design of the application. Once the designs are well-received by the target buyers, development of the MVP can proceed using an Agile development process to improve the efficiency and effectiveness of the development process.
While the MVP is being developed, thoroughly tested, and deployed, the SaaS company can prepare for product launch and implement the customer acquisition plans that were created above. A comprehensive SaaS launch plan should be a collaborative effort involving product management, marketing, sales, and customer support. This cross-functional team should be responsible for crafting the narrative about your product and devising tailored messages for each of the buyer personas.
The next steps will depend on the distribution channels that were previously selected as appropriate for your target market and product. For example, the messaging could be conveyed via a combination of blog posts, email marketing campaigns, social media updates, and webinars or online demos. Alongside this, generating buzz about the product prior to its launch is essential. This can, for example, be achieved through a well-thought-out public relations strategy that might involve issuing press releases to relevant media outlets, arranging interviews or features with key team members, securing guest blogging opportunities, or providing exclusive previews to influential industry figures or bloggers. Utilizing such strategies can help build anticipation and drive initial user sign-ups upon launch.
Activation: Engaging Customers through Onboarding, User Communities, and Customer Success
Activating customers from the moment they sign up is vital for SaaS success as it can significantly impact customer retention and satisfaction. A well-designed onboarding process is a crucial first step, making the user feel welcome, informed, and capable of navigating the product. This could include interactive walkthroughs, tutorials, or product tours that showcase the key features and demonstrate the value of the software. Such user-friendly tours can help customers understand how to effectively use the product, reduce the learning curve, and ultimately increase product adoption.
Furthermore, building user communities can foster an environment of shared learning and support. These communities can provide a platform for customers to share experiences, solve problems collectively, and suggest improvements or new features. Such engagement not only aids in building stronger relationships with customers but also generates word-of-mouth marketing, as satisfied users are likely to recommend the product within their networks.
A third crucial element in SaaS customer activation is the formation of a dedicated customer success team. This team’s primary role is to ensure customers are gaining maximum value from your product, which drives customer loyalty and reduces churn. From the onboarding process onward, the customer success team proactively supports users, answering queries, resolving issues, and providing personalized guidance. This can lead to higher product adoption and satisfaction rates. Moreover, customer success acts as a liaison between the customers and the company, gathering customer feedback and insights which can be invaluable for product development. As part of their role, the customer success team can organize webinars, training sessions, and other resources to empower users to get the most out of the product. By building a customer success team, a SaaS company invests not just in immediate problem-solving, but also in long-term relationships and customer-centric growth.
Analytics: Measuring KPIs, Tracking User Behavior, and Optimization
Leveraging analytics to measure Key Performance Indicators (KPIs) is instrumental for a SaaS business’s growth and customer satisfaction. KPIs for SaaS businesses might include metrics such as Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Lifetime Value (LTV), churn rate, and customer satisfaction scores. These indicators provide a snapshot of business health, customer behavior, and the profitability of the SaaS business model.
To glean deeper insights into user behavior, tools like Mixpanel and Hotjar can be used to track how users interact with the product, pinpointing where they spend the most time and where they encounter difficulties. Analyzing user feedback, along with these behavior analytics, helps identify areas of user friction or dissatisfaction. This paves the way for ongoing optimization efforts, allowing businesses to make informed decisions on where to invest in product enhancements, UI/UX design changes, or feature development.
Furthermore, data-driven decision-making extends to operational aspects such as implementing and managing customer support and success teams. By monitoring metrics like response time, resolution rate, and customer satisfaction scores, SaaS businesses can gauge the effectiveness of their customer service and identify areas needing improvement. This, in turn, helps create a more proactive and efficient customer support framework that contributes to overall user satisfaction and retention. In essence, SaaS analytics play an integral role in driving business strategy, enabling continual improvement, and delivering a superior customer experience.
Venturing into the world of SaaS can be challenging, but the eight A’s framework offers a comprehensive and pragmatic approach to navigate the complexities of starting a SaaS business. From affirmation to analytics, each phase plays a pivotal role in validating, planning, launching, and optimizing your SaaS product and business model. The intricacies of this journey can seem daunting, but remember, the beauty of SaaS lies in its scalability, recurring revenue, and the potential to solve problems for customers globally.
For aspiring SaaS entrepreneurs, don’t let the complexity deter you. With the right planning, the right team, and a continuous focus on customer value, you have the potential to build a successful business. Leverage the wealth of online SaaS courses and resources to deepen your knowledge, skills, and understanding of how to build a SaaS business.
Looking towards the future, SaaS continues to be a booming sector with vast opportunities for innovation and growth. Technological advancements and the rising trend of remote work only strengthen the demand for efficient, cloud-based software solutions. This suggests a promising outlook for SaaS companies in the coming years.
So, if you’ve been contemplating starting a SaaS company, now is the perfect time. Harness the power of SaaS to transform your innovative idea into a reality, and be a part of shaping the digital solutions of the future. Good luck on your SaaS journey!
What are some common mistakes to avoid when starting a SaaS company?
To avoid common mistakes when starting a SaaS company, do not build a SaaS product until you have conducted market research to confirm product value, planned the sales and marketing strategy, and created detailed financial projections to evaluate required funding and ensure return on investment.
How important is customer feedback in developing a SaaS product?
Customer feedback is essential throughout SaaS product development, from ideation through scaling and expansion. Feedback from customers and target buyers will enable your product to deliver value, stand out in the competitive landscape, and evolve with the market.
What are some key metrics to track for a SaaS company?
A SaaS company should track several key metrics including Customer Acquisition Cost (CAC), Lifetime Value (LV), CAC Payback Period, Monthly Recurring Revenue (MRR), churn rate, Net Promoter Score (NPS), and Annual Growth Rate (AGR).
How do I determine the right pricing strategy for my SaaS product?
Determining the right SaaS pricing strategy involves evaluating your product’s value to target buyers. First select a pricing structure that meets the needs of the target buyers. Next, use price sensitivity analysis to find optimal price points, and then test your strategy for effectiveness.
What are some key legal considerations when starting a SaaS company?
When starting a SaaS company, seek legal counsel regarding applicable privacy (e.g., GDPR, CCPA) and security regulations (e.g., PCI), company structure, terms of service and other legal contracts with users and third-party services, employment laws, and safeguarding your intellectual property.