Selling a new SaaS product isn't easy.
Many of the challenges faced in the day-to-day seem impossible to overcome, but the great companies march forward anyway.
They keep executing, breaking each impossible challenge down into smaller, solvable problems.
Successful SaaS products typically follow a similar playbook, and go through 4 distinct phases: pre-traction, initial traction, initial scale and scale.
In today's post I explain how those stages are defined, and what they mean for your sales & marketing strategy.
Pre-traction is the phase of a SaaS product's journey that people imagine when they think of a start-up company. Less than a handful of dedicated people working around the clock to first get their product out the door, and iteratively improve it.
These people have a hypothesis (e.g. the market needs a CRM system for small-medium sized estate agents) and they build a product in an attempt to prove that hypothesis. As time goes on they adjust their product and/or hypothesis until they have built something that solves a real problem the market has, in a way that is much better than currently entrenched solutions.
This pre-traction phase is typically defined by revenues of £0-2m, and most founders will agree it's the hardest phase of the SaaS product growth cycle. Securing customers when you have an underdeveloped product, no credentials, no press mentions, no case studies and no references feels impossible.
At this stage you're typically selling your product to tech enthusiasts. These people don't care that you lack all the things aforementioned, and just want to be the first people to get their hands on new tech. You should focus your marketing on trying to attract as many tech enthusiasts as possible in the most cost effective way.
Highly targeted paid advertising can work well during this stage, bringing results quickly, which is vital for pre-traction companies trying to quickly find product-market fit. It's also worth reading through the attract stage of our 87 Must-Try SaaS Growth Hacking Strategies, to see if any of these could quickly generate the rapid awareness you need to grow and secure funding.
Initial traction doesn't really feel that different to the pre-traction phase, at least from the inside. You still have to fight tooth and nail for each customer you win, but you are beginning to get some referral business and have a few case studies. You're turning over £1-£5m, and revenue is growing 100%+ year-on-year.
This is the stage where you really need to put the pedal to the metal and scale up your sales & marketing effort. Many companies under-invest during this stage, resulting in stagnation, and difficulties raising further funding. This creates the perfect opportunity for another company to displace you. The companies that don't invest during this stage never achieve greatness, and instead just continue to exist in start-up purgatory.
In SaaS, there's no heavy upfront fees charged to customers. The impact of this can be reduced somewhat by encouraging customers to pay annually, but it still usually takes at least 18-36 months of income from each early customer before the cost to acquire them is recollected. It's therefore early in this stage where many independent SaaS companies think about raising venture capital (Series A), typically £1-5m.
You can see the impact of rapid growth on SaaS cash flow in the graph below. It shows 4 different SaaS products, each with a customer acquisition cost of £20,000, and an average monthly revenue per customer of £2,200. The only difference is that each company invests in sales & marketing at different rates:
- Product A (dark red) acquires 1 customer per month
- Product B acquires 2 customers per month
- Product C acquires 4 customers per month
- Product D (lightest pink) acquires 8 customers per month
Whilst Product A requires the least capital (not going much more than £100k into the red), look out to month 24. Product D has by far the best long-term cash position, and will beat all the other products.
During this stage, you need to develop and execute a comprehensive inbound marketing strategy. It's also essential that you step back and think carefully about your sales process, and how that integrates with your inbound marketing strategy. Paid tactics, like PPC ads and similar provide a boost to your snowballing inbound marketing effort, but shouldn't be used in isolation.
The people you're attempting to attract at this stage will primarily be visionaries, People who have a dream for their business, and your product. They have a strong idea of what they want your product to be, and will want to have a say in the way it is developed to achieve their vision.
Success in this stage and beyond requires in-depth knowledge of your customers, their needs, problems, and challenges. It also requires subject matter experts, expert copywriters, marketers and designers to work together to produce & promote the content prospective customers are looking for throughout the buying process.
It's not uncommon for SaaS companies to raise another round of investment towards the end of this stage, to keep up their growth pace.
Initial scale is marked by the point where things finally start to feel a bit easier. You can clearly see the direction your product is going, have £5-£20m in annual revenue, and should have an exceptional senior management team in place.
You have a market-leading product, a brand that's getting recognised within the industry as a disruptive force, a stream of new leads coming in each week, a growing customer base, and you're beginning to enjoy the compound revenue growth that the SaaS business model brings.
During this stage you need to buckle down on what's working, and experiment with new techniques to accelerate your growth. Your business has a strong enough brand that it's not just going to dissappear, which was a very real risk earlier in the product lifecycle.
Particular focus during this phase will go into keeping churn down; developing product improvements which will increase customer lifetime value; and creating/acquiring additional products to sell to your customer base. To give an example, this is the stage when HubSpot (a SaaS marketing automation company) acquired Performable, and developed Signals (now Sidekick), a real-time tool sales reps could use to track what their leads were doing online.
As you move into initial scale, you'll need to focus on beginning to convert pragmatists into customers. These people are more conservative than the visionaries you've been trying to convert to date, and your marketing strategy needs to reflect this. Focus on case studies, and proving the real business benefit organisations have acheived with your software.
You have a steam train with momentum. It's now all about shovelling coal into the furnace to keep it accelerating, and overcoming any problems you experience on the journey. Companies usually raise additional venture capital at this stage to further expand, and may consider opening their first foreign office.
Achieving scale is the holy grail of SaaS. You're generating well in excess of £20m in annual revenue, and have a brand everyone in your industry knows. When you speak to people, they no longer say "Who?" when you tell them where you work.
If you're wise you'll probably begin thinking a lot about strategic partnerships with other SaaS companies, running an annual conference, encouraging user advocacy and firmly establishing yourselves as the market leader, both in perception and product.
On achieving scale, focus is on optimising process and entering new markets (e.g. if you've focused primarily on the US and Europe to date, you might move into Asia). Perhaps you'll make a few strategic acquisitions, and start to think about becoming a public company in the not-too-distant future. If you've reached scale you already have a well developed sales & marketing machine, but you're always looking out for new opportunities to grow faster.
Big sales & marketing wins can be had from better aligning your teams, scaling content production efforts, developing more granular lead nurturing strategies and A/B testing everything.
As your company reaches scale it's also fundamental that you have a formal agreement between sales & marketing identifying roles and responsibilities throughout the sales funnel, from when someone first becomes a lead, takes up a free trial and finally buys your software. Without an agreement like this, and rapidly growing teams in both departments, the buying experience will suffer, and cost you.
At this size, investing heavily in training and educational material for your customers pays off in dividends. Things like training webinars, eBooks, eGuides, online courses and similar go a long way to improving customer retention and hitting customer lifetime value targets.
This is especially true as you begin to move into the latter half of the mainstream market, and begin attracting conservative customers. These customers will be less tech savvy than your early customers, placing a high value on training and professional services.