How Many of Us Are Aware of what SaaS is?
(SaaS) or Software as a service is a way through which we provide applications over the internet. This way you can access the software over the internet without going through the hassles of hardware management, software installation, and maintenance. SaaS growth, extensively explored here, is measured through retention and churn.
The SaaS provider is responsible for the performance, availability, security, and access to the application. SaaS applications have different names like hosted software, on-demand software or web-based software.
A SaaS customer has easy access to the application, all they need is an internet connection.
The bank that we all visit gives us an easy understanding of how the SaaS module works. The bank has massive financial data of each customer while protecting the privacy of each customer. We all access our private information through the same technology securely.
What Factors Do You Consider Before Setting Up SaaS Company?
SaaS is a game of numbers, where you grow if you keep your customers. Whereas, churn kills profit, growth and ultimately your SaaS business.
How often have you come across a company head who talks about getting people to the top of the funnel? So what is this funnel?
The journey from being a prospect to a customer
Sales funnel is a system that the organization intends the customer to experience while they travel from being a prospect to a lead to eventually being a customer. The SaaS module works on this process. It is not only about getting people on the top of the sales funnel, it is about retaining people you already have. Reducing the people who back out or cancel your subscription directly impacts the growth of the company, also known as churn rate.
“There is a reason why customer churn rate is the enemy of growth while retention is a growth accelerator”
MRR (Monthly Recurring Revenue)
This is the most important metric that a business using SaaS tracks. This is the amount each customer pays per subscription.
This excludes one time payments and discounts.
MRR = SUM( Total number of customers paying monthly)
There are different kinds of MRR
New Business MRR – This is when the MRR of the customer from lead is counted only for the first time.
Contraction MRR – This is when a customer decreases the quantity or downgrades to a lower plan.
Expansion MRR – This is when a customer increases the quantity or upgrades to a bigger plan.
Reactivation MRR – This is when the customer who previously churns out comes back into a paid plan.
Churn MRR – This is when a customer fails or cancels an existing plan.
ARR (Annualized Run Rate)
It is the total sum paid by a customer throughout the year.
ARR = SUM( Total number of customers paying yearly)
ARPA (Average Revenue Per Account)
It is the average revenue the company makes per user every month.
ARPA = MRR (Monthly Recurring Revenue) / total number of customers.
ASP (Average Sale Price)
It is the average MRR of new customers at the time they convert to paid accounts.
It measures the effectiveness of the sales team at driving new customer deals higher.
ASP = MRR (Monthly Recurring Revenue) in a period / New paid customers in that period.
CAC (Customer Acquisition Cost)
It is an estimate of how much the company spends to acquire a customer. This calculation can be done once the company attains a certain level of experience in the market.
CAC = Sum of all the sales and marketing expenses / Total number of new customers.
CCR (Customer Churn Rate)
It is the rate at which customers cancel their subscriptions.
CCR = Numbers of customer churned in a period / Number of customers at the start.
LTV (Customer Lifetime Value)
It is the average total value of a customer from sign up to churn.
LTV = ARPA * Gross Margin% / Customer churn rate.
The biggest roadblock for a company before hitting the right growth numbers is that they don’t keep enough customers. Which means all the effort they put into acquiring new customers is replaced by the churning out customer which hampers their idea of growth rate.
Which means for every customer that churns out because of cancellations or nonrenewals, the company has to acquire a new customer to break even. But if the company is looking to grow they have to acquire two new customers. This ideally means we need 2 customers just to grow by a single customer.
Once companies start plugging in the funnel which stops the customers from dropping out each customer they acquire is a growth accelerator.
Every company has its own idea of growth, some measure it by revenue expansion, some by growth in registered users and some by the total number of customers. Each company should measure its metrics based on its own idea of growth.
One effective way of acquiring new customers is to spend time on interacting with them asking them to try our free trials. Once they sign up, spend at least 5 minutes each day in calling them. Once you have good numbers signing up the numbers just keep multiplying. Retaining customers for a long time increases their life time value. The longer they stay post-CTA more the profit and subsequently more growth.
It is not very easy for potential customers to understand your product at the first go, neither can we demonstrate our entire product. This is where Webinars help us give such customers a glimpse of our application in action.
example of win back email
The above example of Shopify clearly shows us how the company is actively trying to keep its customer in the sales funnel by offering him an extension after the initial trial period ended. Although he/she isn’t a customer yet he could become one anytime, this is a great example of customer acquisition,
As soon as the business show signs of success, companies should start investing aggressively to increase their growth rate.
In the SaaS module, it is essential that you grab the entire market share in your domain or there is always a risk of losing the business.
There Are Two Kinds of SaaS Businesses:
- Ones with monthly subscriptions where they focus on MRR.
- Ones with yearly subscriptions where they focus on ARR.
The above picture shows us how there is a change in MRR and the factors which lead to that change.
In a SaaS start up Churn isn’t a huge problem in the early days. Imagine having 100 customers and losing 3 every month, you can always replace them by adding 3 new customers. But once you have an established business you have more customers and the same 3% will damage your company’s growth considerably.
You can always negate churn with a simple solution, your expansion revenue from existing customers should always be more than the revenue lost from churning customers.
While we talk about churn we need to understand that we need to track both customer churn as well as revenue churn. Imagine having 5 small accounts paying 10$ each and 5 big accounts paying 100$ each. Now we have 10 accounts with an MRR of 550$. Now imagine losing 2 customers we have a customer churn of 20%. However, if both the accounts are small we have a revenue churn of less than 5 %.
Now that we understand customer churn impacts business growth, Wouldn’t it be great if we could predict customers who might churn out?
There are a few key guidelines for SaaS start up’s
So How Do We Do It?
HubSpot was one of the first companies to come up with a concept named “CHI” (Customer happiness index). This score helped them understand how engaged their customers are with their SaaS application.
Companies need to have key score calculators at specific places which customers visit, based on the overall score they can predict which customers are more likely to churn out.
- Vertical SaaS – Provides with software for specific areas like healthcare, education, and finance.
- Horizontal Saas – Serves countless industries which need online software.
Companies choose their approach based on their needs and specifications. Vertical SaaS is very new to the market and has a moderate presence in the market. They need to educate the market to consequently move from traditional solution to the new ones.
On the flip side, horizontal SaaS has a huge presence in the market, growth is slow in this approach but certain.
SaaS expenditure in 2015 (Better Buys)
According to a SaaS report by Better Buys 85% small industries are set to spend money on SaaS products in the coming decade.
SaaS Growth Statistics For The Year 2017.
India is the leading country driving SaaS for Research and Development.
U.S is the leading country driving SaaS for Sales and Marketing.
Of all the companies founded post-2013, 73% of them focused on vertical SaaS.
The SaaS concept works on give and take policy where you will do well as a SaaS start up until you keep customers happy.
There were days where IT could mandate which tools to be used and where to be used, these are times where people just want to work as effectively as possible, wherever and on any device.
The SaaS idea is tied to resolving customer specific issues, each customer is different with their issues. Ultimately resolving comes down to customers first and then the sales. Few of the most successful SaaS businesses are the ones which focus on how their products have helped customers in resolving their problems and not on promoting their brand name and image on different platforms.
SaaS helps in implementing data effectively by financing, boosting and helping utilize data in such a way that companies are able to provide customers with customized services and products.
Most businesses employ SaaS because it is easy to use and very streamlined. Traditional software is impossible to access remotely, expensive and time-consuming.
So here’s the list of the top 5 SaaS providers in the world
SaaS help online businesses thrive and make a fortune in the process. Everyone right from small businesses to big ideas and big entrepreneurs has found a way to take the big leap because of SaaS.
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Todays’s market is full of opportunities, both for the small as well as the big players. SaaS has opened a whole new range of possibilities for all kinds of business owners. The small start up’s can now streamline their productivity just like the big players.
Thanks to SaaS all you need is a device with an internet connection.