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Common Reasons For The Failure of SaaS Startups

27 June, 2022
7 mins

The concept of creating a SaaS firm is now seen as lucrative by a number of entrepreneurs. The software-as-a-service industry is renowned for its low entry barrier and inexpensive cost. In addition, investors find the cloud model attractive due to its predictable revenue. Evidently, the situation is not as pleasant as it appears. Even with the necessary capital, the majority of the SaaS firms fail, due to one reason or the other. 

SaaS startups

Source: Pexels

We will now examine the primary reasons why SaaS firms fail and how to avoid their plight.

  1. Absence of market need

Surprisingly, lack of market interest is one of the leading causes of SaaS company failure. According to several insights, many cloud-based firms cease operations for this sole reason. Therefore, you must ensure that clients require your service. 

To determine if there is a demand for your SaaS startup’s product, it is prudent to first offer a simple solution. Creating an MVP will save you from wasting unneeded resources. However, you should not rely too heavily on your early adopters. 

A recent study indicates that just a handful of initial consumers continue to use a product after two years. Consequently, although your offering is expanding, you must target a bigger, mid-market audience. You should be aware that poor timing might also result in an unanticipated decline in market interest. In 2020, Rubica, a SaaS software firm that provides in-demand security technologies for telecommuting, ceased operations for this reason. 

Its target market consisted of people and small companies. Due to the COVID-19 issue, several sectors have drastically reduced their spending over the past year. As such, it was a letdown that this prospective SaaS firm failed for this reason. 

Consequently, you must also be cautious with your market targeting. There are certain measures you may use to determine the size of your market: 

Serviceable Available Market (SAM); Serviceable Obtainable Market (TAM) (SOM). 

Market-defining metrics for your SaaS startup 

Importantly, you must target SOM in order to ascertain the number of conceivable clients. Otherwise, by spreading yourself too thin, you risk becoming simply another unsuccessful SaaS firm. 

Consequently, a proven product-market fit is crucial for the success of your SaaS firm. Yet, an urgent product concept cannot ensure the success of a SaaS firm if the incorrect customers are targeted.

  1. Running out of cash

Lack of capital is the second most common reason why most SaaS firms fail. Consequently, the startup failure rate due to this component increases by a huge percentage. Typically, it indicates that the founders miscalculated the required cash flow for the cloud startup’s growth. 

To avoid joining this unfortunate group of SaaS firms, you should arrange your cash flow in stages. Specifically, estimate the cash required for such critical milestones as: 

a. Advancement from the Seed round value. 

b. Product’s beta testing, consumer validation. 

c. Marketing to early adopters 

d. Resolving product-market fit issues. 

e. The company concept is accepted and profitable. 

f. Additional funding is required for specialized software development. 

g. To prevent the failure of a SaaS startup, you should also consider the following: 

h. Don’t underestimate the turnover rate; provide more funding for product enhancement; don’t overestimate future income. 

i. This tip will prevent you from running out of money before your SaaS firm reaches the next growth phase. 

j. Given the percentage of businesses that fail as a result of this element, you should carefully estimate your cash flow volume. During the growth of your SaaS firm and okrs program, it is crucial to prevent unnecessary expenditures.

  1. Improper management

You may be shocked by the number of SaaS firms that fail to owe to ineffective management. In fact, nearly one in five cloud firms ceased operations due to team problems. Therefore, management is crucial to the success of your SaaS firm. 

In addition to developers’ labor, one of the most important responsibilities of management is determining the business’s path. Therefore, market research, client acquisition methods, and deployment of growth approaches are among their top considerations for bolstering a new SaaS firm. 

Recruiting new personnel at the optimal time is also crucial. With active hiring, your cash flow is used to pay employees’ salaries. Therefore, you must closely adhere to a recruiting road map so that your SaaS firm does not become mired in its early stages. 

Additionally, unclear leadership is one of the leading causes of company failures. Therefore, co-owners should be on the same page about the development of their SaaS product. Likewise, they should designate their individual operational regions to oversee. 

To prevent the demise of a SaaS firm, managers must foster a spirit of teamwork and okr tools. Teams with high levels of competence and moderate to low levels of engagement were poorer overall.

  1. Unsuccessful business model 

Underestimating the churn rate and accompanying retention costs is a typical error made by SaaS firm entrepreneurs. In most cases, they exceed expectations. Moreover, while growing their cloud-based companies, entrepreneurs frequently adopt improper pricing structures. Consequently, an incorrect business strategy is another reason why most SaaS companies fail. 

In order to avoid this pitfall, you should base your project modeling on the two most important indicators for SaaS firms. They’re: 

a. CAC (customer acquisition cost); 

b. LTV (customer lifetime value). 

c. Lifetime value is an important measure for SaaS firms. 

APRU refers to the average monthly revenue per user/customer, whereas churn rate is the number of customers that discontinued using your SaaS product within a particular month. The cost of customer acquisition is a crucial measure for SaaS firms. 

The rule of thumb is a basic concept. Your CAC must be less than LTV in order to avoid failing like other SaaS startups. In other words, the cost of acquiring customers should be less than the income they create. Likewise, it is preferable to restore CAC in fewer than twelve months. 

Consequently, you should pursue an increase in LTV while keeping a low CAC. Therefore, you must devise means to increase client acquisition without incurring excessive costs. Notably, the inbound marketing approach might assist you in reaching this objective. This strategy is predicated on delivering value at every point of the client’s journey. It may include useful blog entries, well-timed chatbots, and sophisticated technical assistance. Thus, you may cultivate a long-term relationship with your clients and lower your customer turnover rate. 

A price structure with many tiers can also assist in enhancing your business strategy. Your SaaS firm will be more appealing to organizations of all sizes if it offers a variety of billing choices. The following are examples: 

Combinations include one-time pricing, price based on usage, tiered pricing, pricing based on volume, and hybrid pricing. To avoid the collapse of a SaaS firm owing to a flawed business model, it is necessary to measure CAC and LTV in a realistic manner and use okrs tools. To increase the lifetime value of your customers, it’s crucial that you have a successful retention plan.

  1. Product issues

Product issues are another significant cause of SaaS startup failure. Many startups fail as a result of being outcompeted, according to CB Insights. This typically occurs if your product is not as user-friendly as other products in your industry. 

Consequently, you should attempt to create a service that is well-designed, among other things. Especially if you have an original product concept. It is a typical occurrence for competitors to capitalize on your innovation and provide it with more intuitive and convenient solutions than you. Importantly, onboarding and supporting processes must be optimized. Enhancing customer loyalty and bolstering your SaaS startup’s market position requires prompt problem fixes, straightforward billing, and responsive customer service. 

Additionally, you must maintain frequent contact with your clientele. Regular surveys, phone calls, and interviews will assist you in identifying product defects in a timely manner. Consequently, you will be able to prevent the collapse of your SaaS enterprises. If you fail to satisfy client expectations, you run the danger of being left out in the cold. In order to make your vision a reality, you should also be forward-thinking. You must be certain that you will be able to implement your product ideas and generate a profit from your business.

Create an exceptional customer loyalty program and our software and make it available to your current clientele, and your sales will increase. It may enable you to immediately reach a large number of customers. Identifying these partnerships may be more difficult than it seems. Keep an eye out for businesses that compliment your own, make contact with them, and explore chances to collaborate. For more assistance regarding OKR for saas organization, reach out to us today!