4 Keys to Building a SaaS Company that Won’t Go Down the Drain

What does preparing the perfect bath have to do with SaaS success? Discover the four keys to sustainable growth for your software-as-a-service business.

When you think about the essence of what it takes to create a truly valuable software-as-a-service (SaaS) company, the formula is relatively simple: Acquire as many high-quality customers as possible, do everything you can to retain those customers, and develop systems or processes that allow you to add new customers quickly and cost-effectively.

In that sense, it’s a lot like filling a bathtub. If you want to take a hot bath, you need a water source, a mechanism to heat up the water, a tub large enough to hold that water, and a drain plug to ensures the water stays in. Have all of those things, and you will be in business. Of course, the quality of your experience will vary depending if you have enough water to fill the tub, you have a plug to keep the water in, and if the water is warm enough.

There are plenty of scenarios where you could take a bath, but not all of them are going to be ideal or enjoyable.

See where I’m going with this?

4 Secrets of Sustainable SaaS Success

In a perfect world, every SaaS business would be able to create a scenario in which their metaphorical bathtubs were perpetually full, warm, and free of leaks. Unfortunately, the process for doing so isn’t as easy as simply turning a valve and waiting for the tub to fill up.

At a high level, building a successful SaaS company requires a lot of strategic legwork, including four relatively basic — but very critical — steps:

1. Identifying market segments that are plentiful enough to deliver a seemingly endless supply of monthly recurring revenue, or MRR (i.e., filling the tub).
2. Implementing account management systems that limit churn and allow the business to hold on to the MRR it has (i.e., clogging the drain).
3. Expanding the value of existing MRR by nurturing and upselling current customers, or increasing product usage (i.e., heating up the water that’s in the tub).
4. Acquiring new customer MRR to make up for customer attrition and drive scalable revenue growth (i.e., adding water to the tub to top it off).

At a bare minimum, your SaaS business must be able to accomplish the first two things if it hopes to survive longer than a couple of years. Once you have successfully gotten past those steps, you can begin to focus on creating a perpetual heat source that maintains and grows existing MRR and product usage. If you are successful in doing that, you can start to focus on acquiring more customers to grow into a great, flourishing business.

But you have to be aware of — and constantly measure — your effectiveness at all of those things. Because if you don’t know how much water you have available to you, how quickly it’s draining, and whether you have the capability of heating that water up, you are in serious trouble.

Is There Such a Thing as Too Many Customers?

Admittedly, the one flaw in this analogy is that, generally, none of us would find an overflowing bathtub very enjoyable. We’d be scrambling to shut off the water and clean up the mess.

In SaaS, however, you can never have too much customer MRR flowing in — unless your business is incapable of managing it. As long as you can keep the water warm and the drain firmly plugged, an overflowing tub can be a great thing. But what if you don’t have the staff and processes in place to manage all of the new customers? Then you will likely have to borrow resources from somewhere else. And if those resources come from account management or customer service, your ability to cultivate or nurture existing MRR will suffer. When that happens, a higher churn rate is likely to follow, and you will ultimately end up saturating or exhausting your market too quickly.

Then there is the issue of economics.

For instance, while an overflowing supply of customers might seem great, what if it’s costing you more to get those customers than the actual revenue they bring in? In that circumstance, what value does an overflowing bathtub really provide?

If Nothing Else, Remember This

At the end of the day, the way in which this bathtub analogy applies to your business will largely depend on a host of factors — namely, your economic model, your market, your internal and external resources, and your growth rate.

That being said, the core foundational ideas of the metaphor should apply.

Your SaaS business must be able to identify a source of customers that is large enough to tap into, and it must be able to implement strategies for drawing MRR in and making sure it stays there. If you can’t do that, chances are slim that your company will develop into a big, scalable business — let alone survive the startup phase.

Photo by: David Blackwell.