A common reason why SaaS companies fail is the lack of market fit. To succeed, companies must identify a viable market and develop products that resonate with their customers. SaaS companies often spend 60-80% of revenues on sales and marketing, which means they are unprofitable. Revenue growth increases your company’s value. Most SaaS companies should achieve 75-80% gross margins. The median ACV in 2016 was $25,000. Successful SaaS companies produce 16 percent of ACV by upselling to existing customers. SaaS companies are very profitable due to low customer churn.
Over 90% of SaaS startups fail. Only 35% last 10 years. Out of those, only 40% become profitable. Why do they fail and how can you avoid it? Reason 1 is lack of product-market fit. Reason 2 is not having a solid business model. Many SaaS startups use the freemium model which is not sustainable. To be successful, have a model generating revenue and profit. Reason 3 is not focusing on the right things.
Outsourcing software development converts ideas into scalable, reliable, profitable products. Major reasons SaaS businesses fail include: 1) Lack of a market. SaaS startups often accelerate burn rates with poor prioritization. Spend only once your product is almost ready. Enterprise SaaS companies are unprofitable the first 12-24 months per customer. But new customers continually land so despite individual older customers becoming profitable, healthy growth means permanent unprofitability.
The new normal for SaaS companies: Investors have long rewarded prioritizing growth over profitability. However, this trend is changing, companies are now expected to demonstrate financial discipline and profitability.
A key reason SaaS companies fail is lacking product-market fit. When SaaS companies fail to deliver a product solving a real problem, low adoption leads to limited revenue. To avoid failure, validate product ideas before investing in development.
Many think SaaS companies burn cash forever. But companies like Zoominfo, PayCom and Veeva are wildly profitable. SaaS economics are not intrinsically unprofitable. Understand the market and differentiate your product. Focus on the right things. Have a model generating revenue and profit.
Acquiring and retaining new customers takes time and effort. The product work never stops. R&D is usually 15% of revenue forever.
Sales and marketing expense at profitable SaaS companies is 30-40% of revenue, but that means not growing so fast. Profitability aligns stakeholder interests and enables partnerships and growth.