SaaS, or software as a service, is a delivery model that web providers provide. Some popular SaaS products include Microsoft 365, Google Workspace applications, and Salesforce. With SaaS products, users can usually access and use the products and services through a web browser, such as Google Chrome or Mozilla Firefox. The provider or business owner then manages and keeps the infrastructure and security up to date.
SaaS business models have many advantages over traditional business models. For example, SaaS is more inexpensive when compared to traditional software models. This is because SaaS business models allow companies to bypass purchasing and managing physical software and hardware infrastructures. Everything is kept digital.
Another advantage of SaaS business intelligence models is that SaaS is quick to implement, and users can jump right into using the software with little to no training. This allows SaaS businesses to focus on other areas instead of dealing with training resources.
However, despite these advantages, SaaS business operations aren’t without their challenges. Any new SaaS business will be met with several unique challenges that it must overcome to flourish.
Common Challenges Among SaaS Businesses and How To Solve Them
Let’s examine some of the most common challenges that SaaS businesses face and ways to overcome them.
The first problems that many SaaS businesses encounter are during the sales process. From unrealistic pricing models to free trial users who never convert to long-term paid users, sales present an array of challenges in the SaaS business world and can waste companies' money, resources, and time.
Some of the most common sales challenges SaaS companies face include:
An Impractical Pricing Model
Most SaaS businesses operate on a subscription-based pricing model, which can create some SaaS subscription billing challenges. SaaS businesses use several different pricing models. It can be difficult to know which is the best, and choosing the right one depends on the company and its structure. The choice of pricing model can cause a product to succeed or fail — it's not a one-size-fits-all decision. SaaS businesses must price their products accordingly or risk upsetting potential customers.
Some of the most common pricing models include:
- Contract (per item): Contract, or per-item, pricing models are consumption-based, meaning that they count how much customers use. Contract SaaS products charge per unit. For example, MailChimp would charge units as contacts in mailing lists. Per-item units are usually created in tiers that include a number of units that depends on the tier purchased. The contract strategy is usually simple and allows customers to understand what they’re paying for. However, the disadvantage of this payment model is that the company’s growth relies on the customers and how well they succeed in their business dealings.
- Flat subscription: Flat subscriptions are some of the most popular, and are simple for both the user and the company. A flat subscription offers one price for one product. Most of the time, the price is charged monthly or annually, but there are some instances where a flat-rate subscription is just one payment. Flat subscriptions are transparent and have no hidden costs. There is no need to choose which features you want — you get exactly what you pay for, and it’s listed in simple terms. While this benefits customers, it can prove disadvantageous to some businesses. With flat subscriptions, businesses can’t upsell. Finding a good price point is also hard because it needs to be low enough to attract customers but high enough to let the SaaS business feel like its products are bringing in the revenue they deserve.
- Freemium: Freemium is a popular SaaS pricing model. It allows customers to have access to the base product and limited features. Any additional features can be accessed through a monthly or annual payment. Some examples of this model include Canva and Spotify. With Canva, users can create simple designs with free features, but more elaborate features like access to the entire photo and element libraries and a background remover require a paid subscription. On Spotify, users can listen to free music every month with ads. Users must subscribe to their monthly plans to get rid of those ads and to download music for offline listening. However, many users are fine with having access to the free versions of the programs and may not turn into paying customers.
There are many more pricing models to consider, but these are some of the more popular ones. Consult with your sales teams. The pricing model you choose can affect churn rates and cash flows, so choose wisely and ensure that you have good subscription management in place.
A Faulty Marketing Funnel
Marketing is an essential part of most businesses, but especially for new SaaS startups. There are plenty of marketing and sales strategies that can be used, but still, many SaaS firms fail to implement the right marketing techniques. Without good marketing, a SaaS company may end up failing.
To combat SaaS marketing challenges, SaaS companies can hire a marketing agency to help them create a strong marketing strategy. However, some companies prefer to tackle marketing on their own. To be effective in marketing and sales, any market strategy must focus on the goods and services offered. This should include the advantages that the software or product has and what makes it better than competitors.
Free Trial Users That Don't Convert
Unfortunately, not all users who try out free trials will convert to paying customers. This can be a devastating loss for SaaS companies. The most common reasons for free trial users not converting includes your product not meeting expectations, customers not understanding what makes your product special, and your pricing model.
To solve these issues, you must work on communication efforts. Share any valuable and positive feedback your product receives, and be transparent with results. Also, communicate with your potential customers about what makes your product unique and why they should invest in your services. Engage with them and show them the true value of your products and what they can accomplish with them.
Test different price points to see which one works best for your products and services. Offer tiered plans and see which ones do well and which ones don’t. Make sure that you track everything from conversion and churn rates to average deal sizes and lifetime value.
High Customer Churn Rates
SaaS businesses face a significant issue with high target customer churn rates, meaning that they often struggle with customers who end up canceling their subscriptions or failing to renew them. Churn is an expected part of subscription-based business models, but it’s best to keep those rates low. According to Cobloom, SaaS businesses see an average churn rate of 5% to 10%. The lower end of that range is acceptable, but 10% is somewhat high.
To avoid these higher churn rates, businesses must aim to keep customers happy. This includes providing customers with good customer service, offering them loyalty programs and discounts, and keeping your product or service up to date with exciting new features. Another idea is to offer customers who are about to cancel a discount to remain subscribed.
Growth is another area where SaaS companies struggle. Running and managing any business can be difficult, but SaaS businesses often have ineffective business processes, low customer retention, and poor management.
Let’s discuss these growth challenges in more detail and discuss steps to effectively overcome them.
Ineffective Business Processes
Ineffective business processes, especially those that require employees to jump through hoops or use outdated technology to get anything done, can hurt a business in the long run. Startups may use ineffective business processes to cut corners, or maybe they’ve heard of other businesses using these processes. Even some established businesses will use ineffective and outdated processes to make do because of the time and effort involved in adopting new methods.
Some examples of ineffective business processes include poor system integration, bottlenecks, and redundancy. In the end, these issues can cause a loss of operational performance.
The solution? Adopt new processes and be open to new solutions. Be willing to stop, reconsider, and change course. Keep an eye out for processes that slow down your business, and eliminate them. You want to actively pursue ways to advance and improve your business, not hold it back.
Low Customer Retention
SaaS companies must develop a well-designed strategy that brings awareness to customers and piques their interest. To do this, SaaS businesses must provide potential customers with:
- Free trials: Access to free trials allows customers to test the waters. It allows them to see how the product works, if it’s easy for them to use, and if it meets their needs.
- Valuable content: Offering your customers valuable content will help them solve their issues and build trust between you and your clients. It’ll also help show your clients that you’re experienced in your field and understand what you’re doing.
- Engagement: Your brand and product or service need to be engaging. You want to draw your customers in and hook them. You want to make them feel like part of your community.
- Feedback and customer needs: For your product to succeed, you must actively listen to your customers. Their feedback is essential. Ask, listen, and implement. Your customers' needs should be a top priority.
Focusing on these three areas should help any SaaS business with its customer retention issues.
Increasing Development Costs
With any business, but especially for startups, it can be difficult to keep up with increasing development costs. Tactics to manage these costs include:
- Reducing expenses: Reducing expenses can be done by cutting unnecessary costs and renegotiating contracts. Try streamlining marketing expenses, relocating to a cheaper office, and negotiating vendor contracts.
- Outsourcing work: Outsourcing can be a great way to reduce costs. Not every type of work can or should be outsourced, but you can outsource customer service and social media campaigns with few issues. This will help you and your in-house employees focus more on your core business values while the menial tasks are getting done by your outsourced workers.
- Automating tasks: Invest in automation software to automate and control tasks such as invoicing and billing. This can help you save money and free up time for you to focus your efforts elsewhere.
- Investing in risk management: A good risk management system is crucial, but how does it help with your development costs? Risk management will allow you to identify, evaluate, and prioritize risks that could hurt your business and product, everything from not meeting compliance to financial forecasting and even virtual threats.
Poor Team Management
The management team is the backbone of any company. But sometimes, tech companies, including SaaS businesses, overlook the value of a robust team management system. Startups may have a vision of a casual, egalitarian work environment but actually just have weak management, or none.
SaaS companies need to invest in a management team system and employ individuals with the appropriate training and experience to oversee the company’s daily operations. These individuals must be able to create specialized plans that will offer the business proper direction to grow and succeed.
Technical issues are common for technology businesses, including SaaS providers.
Not Keeping Up With Technology
It can be expensive to stay up to date with the latest technology, but it’s necessary if SaaS companies want to stay in the race against their competitors. Especially for startup companies, keeping updated with current technology and software is essential to compete with companies that are already established in the market.
Since SaaS is based on technology, adopting the latest technology is especially important — to provide value to customers, to offer the best features and services, and to create confidence in your tech expertise.
Inadequate Integration Capabilities
SaaS integration challenges are easy to ignore at first. It doesn’t sound like a very important problem, so why invest in it? However, seamless integration is crucial — customers want to be able to use programs that work well with what they already use.
For example, if you have an e-commerce customer who is building an online store through Shopify but using other SaaS applications to run their storefront, these applications need to work well with Shopify, or it may drive the customer to find another SaaS provider.
Integrations are expensive to create and manage, but they’re necessary. Your own programs should also integrate easily with other programs that you use to create a seamless experience for your employees.
Test the waters with your products and determine which integration methods work the best for you.
Team Members Lacking Technical Expertise
As SaaS businesses grow, hiring new employees becomes necessary. With growth comes additional responsibilities, and the employees who worked for your company before may not be able to handle the increased scope of their duties. As SaaS businesses scramble to fill empty spaces, they may end up hiring team members who lack necessary technical expertise.
This can be avoided by taking time in the search, screening and hiring process. Post job ads across social media platforms, job boards, and other online resources, and ensure that the job description covers all the responsibilities and experience needed for the job. Plan interview questions beforehand to make sure your questions cover all the right bases and your testing gets an accurate picture of their skills and knowledge. Hiring the right candidates from the get-go will save your company time in continuing your search down the road if the other candidates don’t work out.
Finally, the last problem that SaaS business structures face is security. Security is a must for any technological business. When you have a company and users accessing your company’s products and services, you must ensure that your data and their data are protected from virtual threats.
Unfortunately, virtual threats are always growing. Besides these threats, it’s also important to ensure risk management and that your data remains compliant.
SaaS data compliance, a term that includes all frameworks and requirements, can be challenging to adhere to. However, if done correctly, it allows you to open your doors to new markets, attract sales more quickly, increase your business’s security measures, and build rapport and confidence between you and your customers. Many SaaS businesses feel compliance management should be a top priority.
When a company fails to be data compliant, it often results in a failure to properly manage data, which could incur significant fines. In contrast, data compliance makes your company future-proof and can help you grow and succeed in international markets. SaaS data compliance is especially difficult because SaaS companies offer multiple products and services, including their own rebates, bundles, discounts, and individual pricing — but the hassles are worth it.
Like with most software products, malware is a real problem. Malware can encompass various virtual threats — viruses, worms, trojans, ransomware, adware, spyware, and more. For tech businesses, it’s crucial to ensure that your customers' data is protected.
To protect your users' data, invest in the appropriate security measures. This could include firewalls, secure web gateways, cloud computing and cloud services protection, and other applications. Additionally, put a good incident response plan in place, and make sure your employees are prepared and trained to handle threats.
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