Why do SaaS companies fail

The cost-effectiveness and low-barrier of entry into SaaS (Software as a Service) makes it an attractive business opportunity for entrepreneurs with bright ideas. But despite the industry’s remarkable boom, ninety-two percent of SaaS companies shut down within three years, regardless of funding.

Many businesses fail due to a combination of different issues. Some examples are lack of market research, bad product development, not getting help from a SaaS design agency, poor management, or failing to use SaaS billing best practices.

Here are some of the main reasons SaaS companies don’t see the light of day. We’ll also share what you can do to avoid making the same mistakes.

No Product-Market Fit

Forty-two percent of SaaS startups fail because of a lack of market need. So before you even launch, you should have done enough market research to determine if you’re solving a problem that people want to solve.

For example, spend time exploring the type of business a SaaS company is. How does this affect your goals? Will you go with a business-to-business (B2B) or business-to-consumer (B2C) model for your company?

Start with a minimum viable product (MVP) to test your concept’s feasibility. You can tweak the solution and scale it according to feedback and insights that you get along the way.

Failed Business Model

Underestimating churn and retention can see your budget burning. Many SaaS companies assume people will magically appear once a good product is released.

You need to stop yourself from making this mistake. It’s vital to employ strategies that ensure that the amount you’re spending to acquire customers, or customer acquisition cost, is less than your revenue.

Inbound marketing is a great business model to follow as it focuses on providing value to customers at every stage of their purchasing journey. Include a solid pricing plan, and you’re off to a good start.

Bad Product

Your product is the primary touchpoint between you and your customers. You must deliver a service that matches their expectations—and exceeds them.

With so many options in the market, it’s easy for people to just switch to a different platform when unsatisfied, so you must design a product that’s beautiful, easy to use, and allows consumers to achieve their intended results.

Hiring a SaaS design agency like Merge can guarantee that you end up with an exceptional product. These teams are knowledgeable in user experience and user interface (UI/UX), making them the best consultants when you need to make a product that customers will love to use.

Poor Management

Poor management can drive any business to the ground. Your SaaS company should have leaders sharing the same goals to be successful. They should be able to develop plans and strategies and have the know-how to manage and motivate their teams effectively.

High Churn Rates

For a SaaS company to remain profitable, its churn rate (customer turnover) should remain constant or decrease as the business grows. When more people are dropping off rather than coming in, then your SaaS product is in big trouble.

Churn rate formula
Churn rate formula

Several factors contribute to churn, and many of them are out of the business’s hands. But there are other factors that you can act on, such as product satisfaction, customer support availability, market competition, service improvements, etc.

Scaling Too Fast

Typically, a startup can make three mistakes: spending too quickly, hiring too fast, and scaling in the wrong market. A business that rises too rapidly will see itself burning through resources more than generating revenue.

Prevent lousy money management by employing a financial plan, following a hiring strategy, and focusing your scaling efforts on a target market that has a demand for your SaaS.

Be a Successful SaaS Company

A successful SaaS company has a foundation built on extensive research, good management, and excellent product delivery. The first two requirements fall entirely in your hands as the business owner.

You must understand your purpose and goals, using these to build a team that can realize your wildest dreams. Merge is a SaaS design agency that knows how to turn your idea into a successful SaaS product, so reach out to one of their professionals to build your business.

Serhii Hyliuk

Head of Growth

Head of Growth and Customer Success. I'm interested in design, new tech, fashion, exploring new places and languages. My mission is to make our clients happy.

Head of Growth and Customer Success. I'm interested in design, new tech, fashion, exploring new places and languages. My mission is to make our clients happy.


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