10 Tips for Building a Successful Software Business

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As more companies prepare for cloud-based services, the software-as-a-service industry continues to grow rapidly. Gartner’s CRM Guide, released in March, predicts, for example, that by 2015, for the first time, more than 50% of customer relationship management deployments will be SaaS-based, and that by 2025 , this number will exceed 80%.

As Mark Andreessen would say, “Software as a service is eating the world.”

Related: Thinking of using “SaaS”? What do you want to know

Consider these 10 tips for building a successful business in this booming industry:

1. Follow KISS (keep it simple, stupid)

SaaS products are often self-service and as such should be self-explanatory, simple, clear and highly intuitive. Sales and marketing materials should highlight value, ROI, and usage streams, not features and technology.

2. Offer several packages

The entry-level SaaS offering should almost always be free, but limited in volume of use, features, and/or time. It is recommended to then offer two to three paid packages adapted to different customer segments with different ergonomics, return on investment and willingness to pay.

3. Define, measure, analyze, improve, control

In their actions, SaaS users share with us valuable information about their use of our products, their needs and their behavior. The data reveals which features are popular or unused (and therefore should potentially be omitted according to the KISS principle), and also helps to segment users and define packages. It is important to continuously define tests (where possible with A/B tests) and to monitor the actual improvement after making changes.

4. Cultivate an ecosystem

High-performance products are wrapped in open and flexible APIs that allow easy integration with third-party software. The best ones also gather around them a community of developers, and/or offer a plugin marketplace that allows the development and promotion of third-party plugins. Interoperability increases product value and also introduces an ancillary revenue stream from referrals, resell opportunities, and agreements with equipment manufacturers.

5. Offer the right amount of professional services

Professional services are a double-edged sword. On the one hand, they increase revenue and stickiness and reduce churn rates. On the other hand, they increase the deployment time and the cost of sales, and reduce the margin.

Related: Want to Join the “Unicorn Club”? Here’s what 3 companies did to make it happen.

Professional services are typically between 10-20% of annual new contract value (ACV) and their gross margin is typically 20% (compared to 80% for recurring revenue). These proportions generally add up to a mixed gross margin above 70%, which is an important threshold for maintaining good valuation multiples.

6. Commit to your customers’ success

In addition to recruiting new customers, the main objective of a SaaS company is to defend and grow its recurring revenue from existing customers. Typically, the goal is for upsells to constitute between 10 and 25% of new reserved CAV, and for the company to maintain a gross monthly churn rate of less than approximately 1% (excluding upsells) and a net monthly rate negative churn (upsells above gross churn).

To achieve this, a customer success team should continuously monitor their customers’ usage levels, send them product updates and satisfaction surveys, and invite them to Customer Advisory Board sessions, among other things. . The customer success team must also be trained and able to sell.

7. Monitor your dashboard

SaaS companies must constantly monitor their key performance indicators (KPIs). The most important metrics are Monthly Recurring Revenue (MRR), Churn, Cash Flow, Customer Acquisition Cost Ratio, Customer Lifetime Value, ACV/MRR Pipeline, and ACV/ Average MRR per seller.

8. Align incentives

It is crucial to create incentives and define compensation plans aligned with KPIs. For example, sellers should be compensated differently depending on customer type (new vs upsell), booking type (recurring vs non-recurring), contract length, payment terms, etc. be compensated for reducing gross churn and maximizing upsells (or combined, reducing net churn).

9. Growth is king

For a SaaS company with typical gross margins above 70%, the valuation depends primarily on the annual revenue growth rate. The average SaaS business grows around 25% year-over-year and is typically valued at around four to five times its revenue over time. Conversely, a company whose revenue increases by about 50% year over year would be valued at about double.

The message is clear: if you can afford it, you need to invest heavily in growth.

10. Show a path to profitability.

Most SaaS companies are unprofitable because they invest their resources to fuel growth. That said, good SaaS companies must show a path to profitability – essentially prove that the business model is fundamentally sound (per the KPIs above) and that they plan to be profitable within the next couple of years, or can at least do so while maintaining average or higher growth rates. The best way to demonstrate this is for companies to achieve profitability every two years before investing again in higher growth.

Related: Want to stand out from the crowd? Know your unique value proposition.

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