Beyond the Pitch

SaaS Kryptonite

Saas

I used to run a SaaS business. In its first year, recurring revenue grew from nothing to about $80,000 a month.

Sales were pretty easy, and the growth was exciting. We were business geniuses, and everybody loved us!

Then something terrible happened.

Monthly recurring revenue started to stagnate. We couldn’t get the top line to grow, even though we were signing up new customers like crazy. Before we could say bottom line, we were business failures, and nobody loved us anymore!

The problem became apparent after a few months. Even though we were growing new customers at about 5 percent a month, we were losing almost the same number of existing customers over the same time.

Some software is a good fit for a SaaS model; some is not.

If a SaaS business has significant customer attrition, it will grow to a point, but then growth just stops. That’s not the way to learn that you have a problem. Instead, SaaS businesses must monitor attrition just as closely as sales. It is also critical to delve beneath the figures and learn why customers are abandoning the product.

In our case, while customers liked our solution, they were often using our software for discreet projects. When a project ended, the need for the software ended. Our solution wasn’t an integral part of daily business, so maintaining a license when the software wasn’t being used became an unnecessary business expense.

That fundamental problem with our business model was difficult to fix and one that we should have identified and resolved before we went to market.

If software performs a crucial business function or if it is the repository for key customer data, it can become integral to the customer’s business. Then it is more difficult for the customer to cancel or replace that software without a very compelling reason.

However, even when software satisfies these basic requirements for being a good candidate for SaaS, attrition can still be a problem.

Be alert for warning signs:

  • Grumbling—about speed, function, usability, or any other aspect, especially from people who may have been using another product or process before they were directed to switch to yours.
  • Individual logins decrease, especially if the individuals logging in less are critical to the value proposition, key influencers, or decision-makers.
  • Overall usage across the customer’s organization starts strong, and then fades, coming down to a group of hard-core enthusiasts. Collaboration SaaS products are often susceptible to this pattern.

Be proactive at the first hint of attrition.

With ready access to usage information, providers of SaaS solutions are in a unique position to identify potential employee adoption and usage problems before they become irreversible.

  • Regularly review the user stats. Are there people who need more training or better training materials? Is the learning curve steeper than you thought? Are there usability problems with your software or response time or availability issues with the Internet connections people are using? Are there times of the day or week when usage peaks or falls off?
  • The customer’s staff will often give a head’s up that there could be a potential problem before it becomes evident to the customer’s decision-makers. Pay attention.
  • Hard work on growing adoption and usage within the customer can make a renewal more likely and a reduction in the number of seats less likely. It may even produce some professional services revenue.
  • Find out from departing customers themselves why they are ending their subscriptions. A live conversation with a customer will almost always give more useful information than an online survey after the fact. Many problems are fixable, once you know about them, but the only way you’ll ever know is to engage customers in an intellectually honest discussion.
  • Attrition is bad news, and no one likes bad news, but the CEO and board of every SaaS business should know in real time what the business’s attrition level is. The company dashboard should highlight attrition just as prominently as revenue and other key metrics.

A subscription-based business model can be a beautiful thing. Large and growing recurring revenue produces far more robust company valuations than many other business models. But monitoring customer usage and attrition are critical to every SaaS success.

Attrition is the kryptonite to a great SaaS superhero.

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