You’ve seen our articles about building a SaaS business and why it works. Now, the question is, if you’ve started a SaaS business, how do you grow it?
And that’s a very important question, especially when you consider that SaaS companies are some of the fastest growing software companies in history.
So, how do you grow a SaaS business? Here, we’ll delve deeper into this question to give you the answers you need.
The Fundamental Equation of SaaS
Fundamentally, the SaaS business model is based, at its core, on the fact that revenue over time is the number of customers times the average lifetime revenue per customer.
The number of customers is simply a product of the acquisition, or how many customers you attract, and the conversion rate, or the percent of customers you attract that become paying customers.
The average revenue per customer (ARPU) is the average revenue for an account over a specific period of time and churn is the percentage of customers who do not continue using the product.
This simply means that, to grow a SaaS business, acquisition, conversion, or ARPU should be increased, while churn is decreased.
When looking at the above principles, there are some considerations that should be taken into account.
- Improvements to a SaaS business are mutliplicatively effective. This means, for example, that a 10% improvement in acquisition and a 10% improvement in conversion will result in a 21% improvement in revenue.
- Improvements to a SaaS business are leveraged. This means a 1% improvement in conversions, doesn’t mean a 1% increase in revenue, but a 1% increase in the value of the business.
- Price is the easiest way to improve a SaaS business. Acquisition, conversion, and churn are often complicated to improve. Pricing, in contrast, is simple and an increase in it brings about an immediate increase in revenue.
- SaaS businesses eventually plateaus. When acquisition, conversion, and churn remain constant, a SaaS business will eventually hit a plateau. So, if a business stops to improve these metrics, it will eventually cease growing.
- SaaS businesses are capital intensive. SaaS businesses have many front loaded costs which means that they will almost always spend more money in a specific period than they can collect from their customers.
- Margin’s don’t matter. SaaS businesses spend less than 5% to 10% of their marginal revenue per customer on delivering their service. This allows SaaS business owners to ignore almost every expense apart from customer acquisition cost.
- SaaS businesses take time to grow. SaaS companies take time to optimize their product marketing approaches, and sales approaches before they start to work very well.
- Growth expectations vary. Company growth varies and depends on various factors like whether the company is funded or bootstrapped.
Although a SaaS business is based on a simple core equation, but scaling and growing the business can be complicated. Despite this, it can be done.
If you need more information on building a SaaS company and why they work so well, be on the lookout for our other articles in this series.