How To Build A Highly Successful Software as a Service Business

By Ian Frost | 8 July 2020

Tags: SaaS, business strategy

Software as a Service (SaaS) has been a hot trend for a while now for would-be start-up founders.

  • Relatively low barriers to entry.
  • Enticing recurring subscription revenues.
  • Extremely low operating costs.
  • Insanely high valuation potential.

No wonder the internet has become flooded with a range of software solutions for every problem imaginable.

If you have a killer idea that you think would make a valuable software product, you might be in for a surprise at what you ACTUALLY need in the modern digital age where anyone who can write code (or hire coders) can develop a new software product relatively quickly.

Building the product is the easy part.

Do you deeply understand:-

  1. The exact problem you are solving, for what exact audience
  2. The size of market opportunities, competitor offerings and consumer behaviour
  3. How to market and sell that solution

If the answer is no, then your product will never gain enough traction to drive a successful business and you will simply waste your funds building software that will sit on the shelf.

As someone who has spent most of my career building software products I was shocked to learn first hand that most serious investors don’t even want to look at your product at first.

They want to know what your business model is, what talent you have in your founding team and how you are going to acquire and retain customers.

All they want to know how viable it will be to get a return on their investment dollars.

I am going to save you a lot of time and money by focusing you on what matters most for building a successful software as a service business before you get a single line of code written.

frustrated

The secret sauce

  1. Being hyper-focused on the real-world highly valuable problem you are solving, ideally in a very specific niche
  2. Understanding exactly who you are solving it for, what pain points they care most about and how much they would pay to solve those pain points
  3. Getting as many of those people as possible in your target niche to try prototypes of your solution and give brutally honest feedback
  4. Iterating on your prototypes based on that feedback until people start offering to pay for it
  5. Proving demand and perfecting your marketing strategy with test campaigns and building a list of beta customers ready to buy

If you haven’t nailed these 5 things before you commit to a large scale build of your software, you risk a failed launch on building a product the market doesn’t need.

Unless you’ve got extremely deep pockets, you won’t get that many shots at it.

So how do you get it right?

Ideas are not that important, execution and innovation is everything

It hurts to hear because we all value our own opinions, but it’s a fact you need to face if you are to become the victorious hero of your start-up founder story and build a successful software as a service business.

Every idea you can come up with has, at some point, been thought of by someone (probably smarter than you or I) who has looked into it and decided not to pursue it. This is especially true if you stumble across something that “no-one has ever done before” - there is a reason for that!

I would go so far as to say that if you genuinely cannot find an example of someone doing your idea already, that is a massive red flag.

wrong way

What you want is to find a new, growing market with established competitors who are already doing the difficult job of informing people about the problem & need for the solution via expensive marketing.

You then want laser focus on either:-

  1. An under-served niche within that market with different needs from the typical user
  2. An innovative feature or pricing approach that the existing competitors are missing

The biggest success stories are not the pioneers, but the ones who innovate and scale a better adapted solution to a rapidly growing market. Think Facebook, Apple, Tesla, Microsoft. They all achieved market domination by taking a solution that was already in the market and making it more popular, feature-rich, easier to use, cheaper (or sometimes are able to charge much more for a premium product).

Having the right idea is still worth barely anything at all.

I always encourage people to freely talk about their idea and get feedback.

get feedback

The feedback is way more valuable than your idea, and everyone worth pitching your idea to is way too busy to spend time stealing your idea anyway.

Execution and innovation are the qualities that matter.

What do you mean by execution?

To successfully execute your strategy in building a successful software as a service business boils down to three critical things:

  1. Talent
  2. Funding
  3. Focus

Talent

Being able to attract the best and brightest people to become passionate about the problem you want to solve is incredibly important. The best performers aren’t just 2x as good as the average professional at what they do, they are often 10x better. They are highly innovative because they have the experience and intelligence to think about different approaches or new opportunities.

elon musk

Be prepared to give a meaningful chunk of equity to potential co-founders, you want them to have skin in the game and the potential for a life-changing upside if the business grows.

Their passion and dedication is a huge factor in whether you succeed or fail.

Never cheap out on key strategic talent, only consider low-cost outsourcing for the easy bits that don’t require any experience, innovation or strategy.

Funding

Simply put cash is the main resource that determines how much you can get done and how fast you can go.

Cash is also hugely important for capturing market share and being able to out-spend your competitors on customer acquisition.

big wad of cash

Of course, you can always find cheap, innovative ways to build software or gain customers, but if you also have enough cash you can get even better results from those smart development and marketing strategies.

But don’t worry if you’re not super well funded at the beginning of your start-up, because it does not require a fortune to validate an idea and prove demand.

It is that demand and market opportunity that attracts investors, who will be tripping over themselves to gain equity in your company if you have already proven demand.

The further you have gotten by self-funded bootstrapping and validation, the better equity terms you will get for the cash you need to scale, which means a bigger slice of the ownership pie left for you and your founding team.

Focus

Every start-up has limited resources.

A team can only get so much done during the day and a limited cash reserve they can spend.

It is critically important what you choose to use your resources on.

focus on what matters

You need to find ways to cheaply validate your ideas and progressively invest in the winning ideas that are gaining traction.

Most software products can be validated with the following steps:

  1. Interviewing as many buyers in your target audience as possible to deeply understand your market and the problem you are trying to solve
  2. Testing solutions with interactive design prototypes and iterating based on the feedback to eliminate any friction to adoption
  3. Running test marketing campaigns (before you build any software!) to refine and prove a customer acquisition strategy by signing up users
  4. Being able to show evidence of the financial metrics that prove you can build a viable business

The metrics that matter

You should be able to provide evidence of the following based on your validation efforts.

  1. Total Addressable Market (TAM)

How big the market is for people who would buy your solution, in dollars spent per year on the problem. The market might be global, local, niche specific. This gives you an idea on the maximum possible revenue you could ever earn. Remember it’s extremely unlikely you will capture a massive market share - 1% of the market is much realistic than 50%.

  1. Lifetime Value (LTV)

Simply work out the average revenue that a customer could bring in for your solution and multiply that by the average time that they might stay with your solution. This metric can be a bit vague, so err on the side of conservative. Software subscriptions might be in the 12-36 month range.

  1. Customer Acquisition Cost (CAC)

This is the average spend required for marketing, advertising, sales support to win a single customer. If your CAC is higher than your LTV, you do not have a viable business and need to find a new strategy to win customers, raise prices or sell additional valuable services.

If you focus on being able to do the product and market testing to prove these metrics before you build any software, you may be able to secure seed investment to get it built. If the metrics are good. And if they are not, then you need to re-evaluate your strategy anyway and you just saved yourself the expense of building software that isn’t valuable.

You are not the customer (even if you are)

It takes courage and visionary thinking to become a software as a service start-up founder.

Most people don’t want to tackle the risks and hard work involved to have a chance of success.

Often founders have experienced the problem themselves, which is what inspired them to try to solve it with software in the first place.

But never forget that the moment you start working on the solution to that problem, you are forever biased - because you fundamentally believe that it is valuable. Or you wouldn’t be working on it in the first place!

The customers that you need in order to build a highly successful software as a service business have no such bias.

They are busy, bombarded by marketing and likely have a solution they already use that is “good enough” or they would have already replaced it.

too busy sign

They have huge hurdles to implement a new solution, such as budget, time commitments, influencing change with their colleagues and end-users.

Never underestimate how significant these forces can be and how much better than the alternative your software needs to be worth even considering!

In short, your judgement about how valuable the proposed solution is can be a trap because deep down you want it to succeed and humans are highly prone to optimism bias.

You must always rely on a balance of intuition and objective market feedback to evaluate progress.

Understand your stage of business

The best piece of advice I can give about where to invest your limited resources is to do things that don’t scale and solve scaling problems only when you have them.

There are three significant stages of “fit” you must achieve to build a successful software as a service business.

And they are all about proving that the business can be viable before moving onto the next stage.

Problem-Solution Fit

You have identified your ideal customer, what type of jobs they are trying to do and where they struggle with pain points.

To achieve Problem-Solution Fit, you test solutions that address these pain points and achieve repeatable confirmation that your solution would significantly improve the problem for the customer.

This is where you do your market research, design thinking, prototype testing and building a limited MVP (minimum viable product)

whiteboarding research

At this stage, it is all about maximising the rate of learning about what will create the most value for your customers.

All the software you are creating should be seen as disposable and temporary until you have achieved Problem-Solution Fit.

Product-Market Fit

At this stage, you are building working software with a solid core set of features and you are hyper-focused on validating your marketing, sales and growth strategies.

You are starting to gain traction with your chosen market and it’s clear you have a solution which creates value.

This is where you prove your assumptions of what you sell (value proposition) and how you sell it (marketing & sales strategy).

buying with credit card

Your software product probably needs significant enhancements to better serve that focus. Now is the time to add additional features to your core MVP to better serve your market niche.

Don’t worry about global scale or building the world’s most complicated tech stack yet.

It’s OK and normal for there to be significant gaps in your capabilities.

If you are moving as fast as you possibly can, that is a guaranteed side effect.

Focus on demonstrating the value you create and what you need to do to grow your customer base faster.

Business Model Fit

This is where you start to scale a profitable business model.

Your product is validated, you know how to market and sell the solution and you are starting to have growing pains with customer support or technical debt.

Now is the time to start working on those scaling challenges one by one and to think about raising additional funds to scale faster and capture more market share.

funding round

Notice how it wasn’t until you’ve proven the business model and marketing strategy that you worry about scale or long term investment in technology?

It’s not until you have already achieved Product-Market Fit that you should worry about these things. Otherwise, you are likely to be wasting your efforts.

Final thoughts

This is a huge topic to cover, but hopefully, you have taken in some of the most important parts.

  1. Know who you serve and what problem you solve for them before you work out a solution
  2. Get the right people in your team as early as possible and reward them well for success
  3. Test and validate design prototypes relentlessly before you build a single line of code
  4. Build the bare minimum amount of software required to solve the problem and let the market tell you what to add next
  5. Only try to solve scaling problems when you are scaling up with a proven business model and successful product

If you want to discuss any of these topics at length or want some help working out how to get started, don’t hesitate to get in touch and we can give you some valuable feedback and lay out a plan that will help you maximise your chances of success.

But remember, it’s not the idea that matters.

It is the talent, tenacity and execution of the team that form the backbone of any highly successful software as a service business.