How To Build A Highly Successful Software as a Service Business
By Ian Frost | 19 August 2020
By Ian Frost | 19 August 2020
Software as a Service (SaaS) has been trending for a while now with would-be start-up founders.
This is because of:
No wonder the internet has become flooded with a range of software solutions for every problem imaginable.
Do you have a killer idea that you think would make a valuable software product? You’ll be in for a surprise when you realise 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.
For your product, do you know:
If the answer is no to these questions, then your product will never gain enough traction to drive a successful business. Without proper product and market knowledge you will simply waste your funds building software that will sit on the shelf.
If you want your product to do more than sit on the shelf, you need investors to help your product stand out in the market. As someone who has spent most of my career building software products I was shocked to learn first hand that most investors don’t even want to look at your product initially.
Why? Because investors want to know what return they will get on their funds before they invest.
They will want to know:
What is your business model
What talent does your founding team have
How will you acquire and retain customers
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.
If you haven’t nailed these 5 things before you commit to a large scale build of your software, you’ve risked a failed launch. This means wasted time and money on building a product the market doesn’t need.
Unless you’ve got extremely deep pockets, you won’t get that many shots at this.
So, how do you get it right?
Knowing that your ideas are not necessarily important can hurt, as we all value our own opinions.
Yet as much as you don’t want to hear it, this is a fact you need to face. If you want to become the victorious hero of your start-up founder story and build a successful software as a service business you need to have flawless execution and an innovative team.
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.
What you want is to find a new, growing market with established competitors. These competitors 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:
The biggest success stories are not the pioneers, they are the ones who innovate and scale a better adapted solution to a rapidly growing market. Think of Facebook, Apple, Tesla or 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 and cheaper (or sometimes are able to charge much more for a premium product).
Having the right idea is still worth barely anything at all if you haven’t got the right tools.
To build on this, I always encourage people to freely talk about their ideas and get feedback.
Getting feedback is more valuable than your idea and anyone worth pitching your idea to is way too busy to spend time stealing your idea anyway. Getting an honest opinion from an unbiased source can help you find the flaws in your idea so you can reconcile them before getting too far ahead.
Remember Execution and innovation are the qualities that matter.
For a successful execution in your strategy to build a successful software as a service business, you need three critical things.
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 at what they do, they are often 10x better. You want people who are highly innovative because they have the experience and intelligence to think about different approaches or new opportunities.
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 take the cheap option on key strategic talent. Only consider low-cost outsourcing for the easy bits that don’t require any experience, innovation or strategy.
Simply put, cash is the main resource that determines how much gets done and how fast you can do it.
Cash is also hugely important for capturing a market share and being able to out-spend your competitors on customer acquisition.
Of course, you can always find cheap, innovative ways to build software or gain customers. Although if you also have enough cash you can get even better results from those innovative development and marketing strategies.
Don’t worry if you’re not entirely well funded at the beginning of your start-up. It doesn’t require a fortune to validate an idea and prove demand.
But never forget, it is that demand and market opportunity that attracts investors. These investors will be tripping over themselves to gain equity in your company if you have already proven how you can convert that demand into paying customers.
Also, 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. This means a bigger slice of the ownership pie left for you and your founding team.
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 on the project.
It’s important what you choose to spend your resources on.
You’ll need to find ways to cheaply validate your ideas and consequently invest in the winning ideas that are gaining traction.
Most software products can be validated with the following steps:
You should be able to provide evidence of the following based on your validation efforts.
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 or 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%.
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.
This is the average spend required for marketing, advertising, sales and support to win a single customer. If your CAC is higher than your LTV, you don’t 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 investments to build on if the metrics are good. If the metrics don’t add up, then you need to re-evaluate your strategy and you’ve just saved yourself the expense of building software for a business model that isn’t viable.
It takes courage and vision for someone to desire to become a software as a service start-up founder.
Most people don’t want to tackle the risks or hard work involved to have a chance of success.
The qualities that are present in people willing to make this leap often predispose them to believe in their judgement over others, and to take a risk in trying something new.
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 from the moment you start working on the solution to that problem, you are forever biased - because you fundamentally believe that it’s valuable. If you didn’t you wouldn’t be working on it in the first place!
However the customers that you need to win over in order to build a highly successful software as a service business have no such bias.
Your customers are often busy and bombarded by marketing. They likely have a solution to the pain point that they already use and is “good enough” or they would have already replaced it.
Customers 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 need to rely on a balance of intuition and objective market feedback to evaluate your progress.
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” that you must achieve to build a successful software as a service business.
These stages are all about proving that the business fundamentals are viable before moving onto the next stage of business and increasing the resources invested.
You have already identified your ideal customer. You know what type of jobs they are trying to do and where they struggle with pain points.
To achieve a Problem-Solution Fit, you test solutions that address these pain points and achieve repeatable strong signals that your solution would significantly solve 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).
At this stage, it’s all about maximising the speed of research and learning about what will create the most value for your customers.
You should look at all the software you’re creating as disposable and temporary until you have achieved Problem-Solution Fit.
At this stage, you’re building a working software product with a solid core set of features.
You’re hyper-focused on validating your marketing, sales and growth strategies.
You’re starting to gain traction with your chosen market and it’s clear you have a solution which creates value.
You’re now at the point where you prove your assumptions of what you sell (value proposition) and how you sell it (marketing & sales strategy).
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 completely normal for there to be significant gaps in your capabilities.
If you’re moving as fast as you possibly can, it’s a guaranteed side effect.
Instead, focus on demonstrating the value you create and what you need to do in order to grow your customer base faster.
This is where you start to scale a profitable business model.
Your product is validated because you know how to market and sell the solution and you’re 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. You also need to think about raising additional funds to scale faster and capture more of the market share.
Notice how it wasn’t until you’ve proven the business model and marketing strategy that you need to worry about scale or long term investment in technology?
Until you’ve already achieved your Product-Market Fit you shouldn’t worry about these things, otherwise you are likely to waste your time and effort.
This is a huge topic to cover, but hopefully you’ve taken in some of the most important parts.
If you want to discuss any of these topics in further detail 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’s the talent, tenacity and execution of the team that form the backbone of any highly successful software as a service business.