Five red flags to watch out for in your SaaS / subscription business
Jun 14, 2022 | By Roy Barak On Forbes.com
By 2025, the market size of the global digital subscription economy is forecast to reach $1.5 trillion, according to UBS. On the one hand, Software-as-a-Serve (SaaS) companies belong to an industry growing at an enormous rate with mind-boggling potential for success. On the other hand, it’s a tricky and competitive game, and realizing revenue is the furthest thing from easy.
I am fortunate enough to speak to dozens of professionals and partners in the subscription industry every day. I hear a lot about the daily challenges that companies face — challenges that are both unique to the SaaS/subscription business model and are shifting rapidly as the market grows and matures. It’s important to know how to adapt and what to do, but it's also equally important to know what not to do and which obstacles of which you should be aware.
1. You’re too focused on acquisitions.
An acquisition is just the first step of a much longer and larger customer journey in the subscription world. If you find that all or most of your internal discussions are focused on the acquisition, then it’s as if you are giving up the race as soon as you start running. An acquisition is just the opening; retention is the key to successful subscriptions. For every week, month or year that you keep customers connected to your subscription, increase their lifetime value and maximize your potential revenue stream. Don’t get caught up in acquisition because it is only a fraction of the story. Shift your focus to retention to get the full picture of customer usage and their ongoing journey with your subscription.
2. Your CAC is trending higher and higher.
As the saying goes, “speculate to accumulate.” Getting new customers onboard is going to cost money. Testing new approaches, campaigns and messaging is part and parcel of customer acquisition and requires measurable investment. But beware: If you find that your customer acquisition cost (known as "CAC") is trending upward with no sign of respite, it could be a sign that you are beginning to reach market saturation. Everyone who might have signed up is already a subscriber.
What should you do? Shift your efforts to enhance your subscription experience for existing customers. Assess your offer, see where it can be updated or improved, look into personalization so you can create exciting bundles and journeys for different users, and perhaps explore a collaboration with another subscription-based company whose offering complements your own. Look for ways to make your offer more compelling and optimize revenue from your current customer base.
3. You have a fragmented business strategy or no strategy at all.
When it comes to creating a business strategy, there is something worse than disagreement, and that’s having no agreement. For subscription companies, there must be one internal mindset and understanding of the business strategy, product development and distribution channels, all of which should reflect a deep understanding of the market and target audience.
How are you reaching clients? How do you navigate the competition? Do you offer free and/or paid subscriptions? Where is the product mostly sold, on social media or mobile-first? Understanding all these questions and more must extend beyond the executive boardroom across the entire organization, from product development to marketing and sales. If this is not happening or your strategy is somewhat disjointed, it’s time to return to the drawing board.
4. You’re sprinting, not running a marathon.
A business runs on sprints — big spurts of focused activity to reach short-term goals — but at the same time, you’d better make sure to prep for a marathon. Ideally, you need to have a roadmap covering 18 months into the future. This roadmap should include signposts and milestones. Think of your SaaS business as a long-distance sprint.
Consider the analogy as it applies to research and development. If you don’t have your tech development map planned out at least a year in advance, along with the dedicated budget, then you will not realize your product dreams. Without product innovation, why would people subscribe or stay subscribed? If you can’t give them a reason to stay, folks may sign up for the few weeks they need and then cancel. Or they might prefer to go with a competitor that can provide a perpetual offer or one-time product. This cuts to the bone of a satisfying subscription: Your product must be evolving to continue to excite your customers and continually reinforce the value proposition.
5. Your pricing is too complicated.
Take a look at your latest cellphone bill. It's likely nice and clean. Do you really want to go back to those days when charges were X cents per minute, but after 6 p.m., it was 40% off (except weekends, which were 50% off), unless you were abroad, in which case … let’s not even go there. The moral of the story: Don’t make your pricing so difficult to understand that your customers get riled up or tune out.
For your SaaS offering, consider that only Fortune 5000 enterprises would invest the time in understanding ultra-complicated pricing models. Even then, they’d probably prefer to go with a competitor that offers a simpler, straightforward model. To broaden your potential customer base, ease of doing business is key. Keep it simple and you’ll see the rewards.
The bottom line is an SaaS subscription business is full of challenges but will be significantly easier if you avoid or mitigate these common flags. And if you’re successful at addressing these barriers, you will be well-positioned to maximize the growth engine that the subscription economy can be for your business.