As more and more businesses warm up to cloud-based services, the software-as-a-service industry is continues growing fast. The Gartner CRM Guide, published in March predicts, for example, that by 2015, for the first time, more than 50 percent of customer-relationship management deployments will be deployed as SaaS, and that by 2030 that number will have surpassed till 80 percent.
As Mark Andreessen would say, “software as a service is eating up the world.”
Consider these 7 tips to create a successful business in this expanding industry:
1. keep it simple and stupid
SaaS products are often self served, and as such need to be self explanatory, simple, clean and highly intuitive. Sales and marketing collateral need to highlight value, return on investment and use flows, not features and technology.
2. Offer several packages
The entry-point SaaS offering should almost always be free, but limited in usage volume, functionality and/or time. It is recommended to then offer two to three paid packages fitted to different customer segments with different usability, ROI and willingness to pay.
3. Define, measure, analyze, improve, control
In their actions, SaaS users share with us invaluable information about their use of our products, and their needs and behavior. Data reveals what functionalities are popular or aren’t being used (and should therefore potentially be omitted per the KISS principle), and also helps to segment users and define packages. It’s important to continuously define tests (wherever possible with A/B testing) and monitor the effective improvement after making changes.
4. Cultivate an ecosystem
Successful products are wrapped with open and flexible APIs that enable easy integration with third-party software. The better ones also amass around them a community of developers, and/or offer a plugin marketplace that enables the development and promotion of third-party plugins. Interoperability increases the value of the product, and also introduces an ancillary source of revenue from referrals, resale opportunities and equipment manufacturer deals.
5. Offer the right amount of professional services
Professional services are a double-edged sword. On one hand, they increase revenue and stickiness and reduce churn rates. On the other hand, they increase deployment time and cost of sales, and reduce margin.
Professional services typically make up for between 10 to 20 percent of new annual contract value (ACV), and their gross margin is typically 20 percent (vs. 80 percent for the recurring revenue). These proportions usually add up to a blended gross margin greater than 70 percent, which is an important threshold for maintaining good valuation multiples.
6. Growth is king
For a SaaS company with typical gross margins of greater than 70 percent, valuation is mainly dependent on annual revenue growth rate. The average SaaS Company is growing at about 25 percent year over year and is generally valued at around four to five times its forward revenues. Conversely, a company with similar revenues growing at about 50 percent year over year would be valued at around twice that.
7. Show a path to profitability.
Most SaaS companies are not profitable because they invest their resources to fuel growth. That said, good SaaS companies must show a path to profitability -- essentially prove the business model is fundamentally sound (per KPIs above) and that they plan to be profitable in the next one to two years, or can at least do so while maintaining at or above average growth rates. The best way to demonstrate this is for companies to hit profitability every couple of years before investing more once again toward higher growth.
This article was orginally published on www.entrepreneur.com.
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