Software-as-a-service (SaaS) has been taking the business world by storm. With minimal barriers to entry and the allure of multi-million dollar acquisitions, SaaS seems like a goldmine to anyone looking to venture into the software business.
However, much like any other startup business, SaaS failure rate is also incredibly high. It is estimated that around 92% of SaaS startups cease to exist within the first 3 years, according to McKinsey insights.
So why do SaaS companies fail?
In this article, we’ll dive into the main reasons behind the high failure rate in the SaaS industry and explain what you can do to remain competitive. Without further ado, let’s get to the reasons why SaaS businesses fail.
1. Lack of a Market
Yes. You probably expected a lack of funds or poor marketing strategies to be the topmost reason why SaaS businesses fail. Far from it.
Most SaaS companies fail simply because they don’t have a product-market fit. In layman’s language, they fail because they are not solving any existing problem. Others attempt to solve a problem that consumers don’t want to be solved.
Without a proper product-market fit, major investments in technology, marketing, and customer service are premature.
Why?
No amount of investment, marketing, or efforts can sustain a product that no one needs. The only way to overcome this problem is to gather enough market intelligence before starting your business. This can give you insights into what the users want and how you can address their needs.
2. Cash Flow Problems
While the lack of a product-market fit is the key reason behind the high failure rate in the SaaS industry, it’s not the only culprit. Some factors within the control of the business can stifle growth if neglected. For example, lack of finances can be a huge impediment to SaaS growth.
To start a SaaS business, you’re going to sink in some funds upfront. Once your business is established, you’ll need a constant inflow of cash to sustain the business. Big money is often spent on branding, marketing, road mapping, and design before and after the product has established a footing in the market.
Dominant SaaS players invested a huge chunk of cash into building their brands. For instance, it took $61m for Salesforce to go public, $126 million for NetSuite, and $32 million for Mint to get acquired by Intuit for $170 million. The solution to cash flow problems is to first understand your capital requirements, then look for viable financing options.
3. Higher Churn Than Growth
For a SaaS business to thrive, the churn rate (the rate at which customers stop subscribing to a service) must be kept as low as possible. Successful SaaS companies keep an average churn rate of 0.58%.
According to Totango, more than 66% of SaaS companies experience an annual churn rate of 5% or higher. If the churn rate is higher than growth, the business will fail.
However, the churn rate can be tricky to control because, at times, it arises from factors that are outside the business control. For example, a customer’s preferences may change, making them opt for different services.
However, some factors that contribute to churn are manageable. For example, offering good customer service can increase customer satisfaction, making them less likely to switch to competitor services.
What other factors do you think contribute to SaaS business failure? Share with us in the comments section below.
