Companies offering software as a service (SaaS) are also known as application service providers or service in the cloud companies. In 2008, barely 12 percent of companies used cloud-based applications; now, over 70 percent are looking to migrate their applications to cloud service.
Now, it's no longer a dialogue of "if," it's more of a "when." If you own a SaaS business and are looking to claim a significant market share, you will probably need a revolutionary idea. However, some SaaS companies, like Dropbox, adopt easy and applicable ideas to grow their numbers.
One such idea is offshore outsourcing. Hiring offshore developers speeds up productivity and is also cost-efficient. Here at Cloud Employee, we work with a number of SaaS companies and we’ve seen immense improvement in the operations in terms of workforce efficiency.
That being said, we run you through some other secrets to achieving high-growth in your SaaS company.
What is meant by high-growth in SaaS companies?
The SaaS market is a fast-growing one, with revenue projected to reach around $144 billion in the next two years. However, if you are not a major player like Google, Dropbox, and Salesforce, you’ll notice that growing your business isn't a walk in the park. Most SaaS business owners wonder what their revenue growth rate looks like to investors or potential acquirers who come knocking.
In other words, how do SaaS companies make money? Neeraj Agrawal, a partner at Battery Ventures, came up with a phrase known today as the T2D3 factor, i.e., Triple, triple, double, double, double. It describes the pathway of fast-growing businesses looking to achieve a billion-dollar valuation in five years.
This T2D3 premise is presently the guide for revenue growth for SaaS companies. For a SaaS organization, the following are the standards for a high growth rate.
- The SaaS company has to find a product-market.
- Reach an annual recurring revenue (ARR) of $2 million
- Grow the revenue by the T2D3 factor and get to an AAR of $144 million with five years
Let's face it; how much do saas companies make on the average if you don’t consider the few ones with skyrocketing profits? The truth is, very few companies reach the pass mark, the figure is less than 5%. Will it be ideal to go with this almost impossible feat? Let's look at what is regarded as typical for SaaS companies.
Typical Growth Rate for Saas Companies
Combining data from a SaaS Capital (a study of 950 private SaaS companies) and KeyBanc Capital Markets (a survey of 385 private SaaS firms), the following was observed as a typical growth rate for many SaaS companies.
- As revenue increases, there's a decrease in percentage growth in revenue. For example, the average growth rate of companies with less than $1M revenue was approximately 60%, while companies that had grown to over $50M in revenue had around 27% growth rate.
- Venture-backed SaaS companies reached $1M AAR(4 years) faster than many bootstrapped SaaS organizations (7 years). Altogether, It took most companies an average of six years to achieve $1M ARR.
- Only the best among SaaS companies could achieve around 80% of the previous year's growth rate(companies with ARR above $10M).
The summary is, the large ARR numbers are not totally impossible to achieve but getting the wheel spinning is no easy task. While investors would love to go for the high-fliers, if you are around an ARR of $10M-$50M, you are not doing badly at all.
There's no standard SaaS growth strategy when it comes to achieving growth. The research above mentioned the importance of upselling and cross-selling, which added an average value of 34% for all companies. With that in mind, let's look at some other strategies you can adopt as a growing SaaS business owner.
1. Outsource software development
Outsourcing entails allowing an external team of developers to handle some of your software development operations. For many SaaS companies, outsourcing to the Philippines and India is a cost-effective move, especially when the aim is to achieve more within a short period. However, going offshore is killing two birds with one stone. You’ll simply get more for your money.
2. Adopt a customer-focused operation
The SaaS business niche is a game of numbers. You cannot generate more revenue than customers. Being customer-centric is one strategy that will continuously give you the edge you need in the SaaS business world. You see, maintaining a great relationship with your customers will save you from many hassles and will keep them hooked.
At the end of the day, you are not the only one offering a service. What's stopping your customers from going elsewhere? Operating a customer-focused business provides tremendous benefits, including retaining your customers and expanding your customer base, which is a SaaS growth lever. Finally, it helps you get to a point where your customers become your marketers.
3. Set the right goals and measure your performance
This point usually sounds like a cliché, but many business owners fail on this front. Once they can secure funding, spending and taking action is dependent on when the need arises instead of following established plans and goals. For a SaaS company to grow and stand the test of time, there need to be set goals that comprise the following yardsticks.
- Goals must be specific.
- They must be measurable and trackable.
- They must be realistic and achievable.
- Your goals must be relevant to your business; i.e., they must add value to the company.
- Your goals must have a time limit. While some goals may take years, they must be splittable into milestones to be achieved periodically, e.g., quarterly, yearly, etc.
4. Set performance indicators
If you want to set up a SaaS growth model, the right method of measuring performance must be put in place to ensure you reach your goals. Here are a few KPI’s to guide your SaaS business.
- Churn rate:
The Churn rate is a classic performance indicator in SaaS business operation. It has several versions; however, the most important is the churn MRR. This refers to the fraction of your monthly revenue lost to canceled subscriptions. Monitoring this metric helps you step up your game and lets you know when to put out promotional offers.
Another churn measurement metric is customer churn. It's the measure of the number of customers who don't renew subscriptions. This metric is one of your SaaS growth levers, so keeping it low is crucial to your business' survival.
- Annual Growth Rate (AGR) & Annual Recurring revenue (ARR)
While this metric says annual, you can't afford to track this once a year. Your annual growth rate, which also goes with your Annual recurring revenue (ARR), must be calculated monthly as your business progresses. You can calculate your ARR using 12 to multiply your monthly MRR gains minus the downgrades/churn. For AGR, compare your previous year's ARR to the present figures.
- Natural Rate of Growth (NRG)
NGR is a reasonably new metric that helps businesses understand their product's impact on driving growth. In other words, if your marketing and sales team achieved zero business for the month, NRG will tell you how much you'll grow. NGR= AGR x Percentage of organic channels signups.
- Cash Burn Rate
This metric isn't SaaS-exclusive; it's vital to many business types. It's a measure of the capital your business burns per month to keep it operational. The metric doesn't only help management but also helps you work towards being liquid to keep the lights on.
5. Offer free trials/Freemium
You can call it whetting the appetite or testing the waters; freemiums are one of the open secrets used to increase customer base. Based on Accenture's research, about 80 million Millennials have a combined purchasing power of nearly $600 billion. Here's the catch, millennials like freebies.
Introducing a free plan has been found to attract millennials. Because they are always online, free adverts can bring them into your revenue stream. Free trials also help to keep you in continuous communication with your customers via email marketing. As such, you can reach out to them for exclusive deals even if the free trial is over.
6. Introduce a referral program
Let's do this one by the beach numbers. Dropbox set up a referral program that pushed its customer base from a mediocre figure of 100,000 to 4 million in just a little over a year. The referral offered half a gigabyte worth of space for any user who brought in a friend. Evernote also adopted a referral program, which grew its user base by 1 million in 446 days.
7. Use your company to set an example
Do you want to sell a cloud-based service? Then demonstrate your software service's value by showing the growth indicators it has achieved through your product. This way, you'll not only boost the confidence of potential customers, but you'll also display the functionality of your product.
8. Create a partnership network
One of the biggest strategies for high growth is partnering. Don't just rely on your marketing strategies; initiate a partnership with other businesses. Note that you are not actually partnering with your competitors but running a different business operation in the same SaaS niche.
It's not something to rush; check out the growth level of potential partners; after all, you aim to increase your customer base. Please make sure the business you are partnering with is relevant to yours so that customers who patronize them will see a need for yours. It’s also a symbiotic relationship, so make sure you work your details of the partnership. It may be a shared revenue arrangement or simply a situation where you offer your product to the partner.
After designing a flawless and useful product, one of the most basic and essential SaaS growth strategies is adopting a customer-centric operation with your SaaS marketing strategies. You need your customer’s patronage to keep the revenue rolling. While a revolutionary idea is necessary to take a business to unimaginable heights, sticking to the basics may be the only card you have to play. Altogether, that may not deliver the giant leap you desire, but it’ll undoubtedly offer you a consistent inflow of revenue.
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