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Why Saas Startups Fail

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Understanding SaaS is important for success.

Understanding SaaS is important for success.

Why SAAS Startups Fail?

The number of SaaS businesses have increased in the past 10 years as a result of significantly low barriers to entry and cost-effectiveness. As such, entrepreneurs are always striving towards launching new startups in the SaaS business space.

However, very few SaaS startups actually become success stories. Statistics highlight that about 90% of them shut down within 2 years of operations, regardless of funding. There are a multitude of reasons behind this and for budding entrepreneurs understanding them is important.

Lack of a market

One major reason behind a SaaS businesses failure is the founders limited understanding of the market’s needs. Due to low-entry costs, founders get into the space believing they have the perfect product and that their product solves a fundamental problem. However, they soon realize that the problem they set out to solve, either users do not want to be solved, or nobody seems to care about their app.

A Failing Business Model

Companies within the SaaS space also presume that it is easy to acquire customers when in fact, it is the most difficult. A common mistake startup owners make is underestimating the churn rate and related retention costs. At the same time, mistakes in the pricing of their products significantly affect the company’s ability to scale. Thus, an improper business model is another key reason to why most SaaS startups fail.

Two key metrics that are important for any SaaS startup: CAC (customer acquisition cost) and LTV ( customer lifetime value). Any SaaS startup wants to ensure that growth (customer acquisition rate) is greater churn (customer turnover), only then, the business will succeed. However, this seems not to be the case with many new SaaS startups, thereby, ending up as failures

Poor Management

Another key reason most SaaS startups fail is due to weak management. With regards to the importance of the development team at a SaaS startup, the management also plays a key role in defining the direction of the company. A weak management often fails on strategy, understanding the target market, executing customer acquisition strategies, and implementing growth techniques. Hence, . limiting growth within any SaaS startup.

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Additionally, recruiting new employees at the right time is just as important. Hiring ties up the company’s capital towards paying the staff. Thus, SaaS startups need to have a clear roadmap for hiring and not get carried away in building a team even if the startup is not ready.

Finally, poor leadership is another cause behind the failure of SaaS startups. Poor leadership diminishes the organizations’ ability to provide direction, coaching, and motivation for staff, organizational culture, and morale, thereby creating a high attrition rate and weak management.

Product Issues

SaaS businesses more often than not place a great deal of emphasis on creating the perfect core offering but fail to create adequate support systems. By not establishing an ecosystem, the product may end up as being not user-friendly for customers, when compared to other competitors products in the same sector.

A user-friendly SaaS product is one where support systems like onboarding and supporting processes are well-tuned. Prompt bug fixing, client support, and billing are clear to enhance customer loyalty and strengthen the company’s core offering. Additionally, most SaaS companies fail to keep in touch with their clients constantly, and understand their issues, thereby reducing customer lifetime value (LTV) and increasing churn rate.

Final Words

For SaaS startups to be successful and avoid failure, it is important to have the right product-market fit, a strong management team, a good business model, and a balance between the core offering and support systems, where the emphasis is placed on providing the client with a user-friendly product. By doing so, success for any SaaS startup is guaranteed.

© 2022 Tushar

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