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One Reason SaaS Businesses Fail

By: Ned Stringham

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The Software-as-a-Service (SaaS) business model, when working right, is a financial analyst’s dream.
Revenue is recurring, customer attrition is low, gross margins usually exceed 70% and the business can scale quickly without adding people. The result is amazing cash generation and valuations exceeding 5, 7 and even 10x revenue. It’s clear why every venture capitalist, private equity firm, angel investor and management team in the software space is in love with software-as-a-service.

So what’s the catch? Are there times that too much focus on delivering the SaaS metrics financial analysts want to see can be bad? The answer is yes. When SaaS companies, in order to maintain slightly better margins and fewer staff, neglect to bundle the additional services that customers need to maximize value from the SaaS solution, they risk the competitiveness of their business.
The reality is that many of these SaaS products need better support, training, integration and add-on services for customers to capture the value they expected at signing. Just look at many of the SaaS products in use today like Google Analytics, Constant Contact, Salesforce, etc. Most customers only use a small sub-set of the features available and few can find the support and training needed to take full advantage of the SaaS products let alone use them in an integrated way with other related solutions. Of course, a SaaS firm should work toward automating every process and service activity possible, but in practice there are always meaningful gaps. That is when others firms, that are focused first on customer value, can enter and steal business away just by providing the lower margin services that the SaaS purists wouldn’t.

The bottom line – don’t let your obsession with achieving the perfect metrics blind you from delivering your customer what they need.

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