2 Things That Really Successful SaaS Companies Get Right

Why SaaS and subscription-based companies thrive on process & structure

Building a company follows a certain pattern and curve, especially among subscription-based organizations. One of the most highly studied types of companies today is software-as-a-service (SaaS). This focus on SaaS has been led in part by the attention of the venture capital community, who over the last couple of decades has largely funded mostly SaaS companies.

It’s also due to the changing nature of how we as consumers operate. We’ve shifted from owning stuff to renting it. Rather than installing software from a disc in your computer – my laptop doesn’t even have a CD drive anymore – we pay to subscribe to business software in the cloud (hence Software as a Service.) These companies are providing a service to the consumer by licensing use of the software.  Instead of renting movies from a physical location (RIP Blockbuster,) we pay a monthly fee to access a massive library of films and TV shows, anytime, on any of our devices.

We have moved from buying products (a car) to solving a problem (I need to get somewhere and I’m calling an Uber.) We live in a digital economy with a high concentration of entrepreneurs now building and running SaaS organizations. In contrast, think about how many companies have started up in the last 20 years building and selling sneakers. (Not nearly as many.)

Would You Like Hash Browns With That Process?

2 Things That Really Successful SaaS Companies Get Right

Because of this surge of SaaS, there has emerged a kind of template for building a SaaS company. This template is compiled from data gathered on what SaaS companies should look like, how they should operate, and how they should work. As a founder, it may look as though you’re diving headfirst into a deep and dark ocean, but you’re really not spelunking at all. Rather, you’re operating within a world of highly measurable and well-understood patterns that dictate success for any SaaS organization. We’ve learned a lot in this recent era, including the sobering truth that 92% of startups fail[1]. Those that thrive understand the patterns for winning, and build corresponding process and structure. These are the two most critical facets of every high-growth, successful SaaS organization today.

Process is key, not just for SaaS but for companies of all kinds. I live in New England, so I’ll use a local establishment to make this point. Imagine driving up to Dunkin Donuts and placing an order only to find that the visor-clad employees don’t know where to find the coffee, or the eggs for your sandwich. Or, for that matter, where the cash register is. Imagine that every 100th customer at the drive through were short-changed, or changed the wrong amount. Without structure and process, this beloved coffee chain would absolutely fail. Likely, they’d be boycotted. SaaS organizations are no different.

Why Do You Want to Run This Company Like Target? 

I work with many SaaS companies to tackle common issues in finance, growth, and operations. What I’ve seen repeatedly among early-stage SaaS founders is a kind of reluctance to process, structure, or metrics. Often, founders reject these in the spirit of maintaining what they think is “flexibility.” In reality, it’s a competitive disadvantage to ignore the facets of your business that enable growth, and especially attract funding. Process actually allows for flexibility in this world of high-volume transactions, low-ticket items. 

Many early-stage SaaS companies fail to recognize this. They ask me why I suggest they run their company like Target. Process is important to particular types of businesses. If you’re selling diamond rings for $30,000 a piece, then one person, one counter, and one video camera will suffice. But if you’d like to build an organization that sends out 10,000 invoices a month and seeks to collect $5 from each person, you need to ensure you have process in place. You can’t afford to hire enough people to manage individual transactions, customer support, tech support, customer retention, AR, or billing. All of these functions are just structures. And these are the structures that a SaaS company has to be concerned with if they’re selling high-volume, low-ticket items.

The 80-20 Rule Doesn’t Apply

80/20 PrincipleOne of the key premises of SaaS is self-service. The customer interaction is largely remote, and the whole customer care and sales cycle is low-touch, not individualized. How many SaaS tools have you used today that didn’t require you to speak to another human being? I don’t have to call Google to use Google. I pay monthly for Adobe and never call them. For this model to work, it must scale across hundreds, thousands, even millions of users.

In our current business environment , There is a general principle for systems and processes known as the Pareto Principle. It’s also known as the 80-20 rule, the law of the vital few, and the principle of factor sparsity. According to this rule, roughly 80% of the effects come from 20% of the causes. In SaaS, that means you build processes to handle the few. Any system you design should be able to handle 80% of whatever it controls. But when you structure a SaaS company, 80% is not good enough. 20% is too many! Consider a scenario in which you have 10,000 clients. If the exception, 20% or 2,000 customers, call each month with problems, you are quickly overwhelmed with inquiries. What would Dunkin Donuts do if one out of every five coffees were wrong?

The fundamental economic model at play in SaaS is simply not cost effective to deal with a 20% failure rate. Instead, what SaaS founders must do is create process and systems in an internal control environment. You have to strive to be better than average, or the natural average in this instance. You must measure what is happening within that 20% failure, and reduce it further through people, process, and systems. Simply hiring more people to handle that 20% exception is not scalable. 

Red Light – Stop, Green Light – Go

Traffic LightThink of process and structure as the necessary guideposts for your business, giving you the goals and metrics needed to stay focused. When you have an infinite number of possibilities, nothing gets done well or cost effectively. Founders are often easily distracted by all possibilities and opportunities. What process allows for is the chance to play by the same rules everyone else aligns by. It’s the same as traffic laws. You can go 65 MPH on the highway, and you’ve got to stop at a red light. These rules aren’t in place to impede your driving, but rather they prepare you to abide by the same laws governing the rest of the drivers on the road.

If you’re taking external money, say from that big VC firm you’re trying to win over, and you’re unable to explain critical metrics within your business, you’re in trouble. For example, can you list all clients, easily find terms for all of their contracts, explain why you’re only billing half of them, state your acquisition costs, or explain why some aren’t with you anymore? If not, you’re at a disadvantage from your competitors, who likely have this figured out. These are the patterns investors look for. Often, investors will ask you how many clients you have, which contracts you have signed, how many invoices you send out each month, their average value, and more. If your response is “I’ll get back to you,” these investors will be looking for a company who does know. 

Process and structure may seem like two concepts at odds with the bold, brave world of entrepreneurship and innovation. The truth is, in the world of SaaS, the companies who understand the patterns of success are those that thrive.

(The rest should call me.) 


Denice Sakakeeny, our Subscription Insider Guide to SaaS Finance and Growth, is a sought-after operational consultant for nearly 20 years by recurring revenue and high-tech companies, Denice guides organizations through the most challenging parts of their life cycle, solving the most difficult problems related to finance and operations, and removing impediments to growth. (Read full bio)

 

[1] https://s3.amazonaws.com/startupcompass-public/StartupGenomeReport2_Why_Startups_Fail_v2.pdf

 
 

 

 

 

 

 

 

 

 

 

 

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