3 strategic steps towards SaaS profitability

In the “good old days” – just two years ago – making a profit was not the most significant thing for enterprise capitalists or, subsequently, for entrepreneurs. When there was more enterprise capital than good startups to speculate in, fiscal concerns often fell by the wayside.

But times have modified. In today’s market, even implausible corporations struggle to secure limited enterprise capital. These days, to get in, you wish a rare combination of high growth, profitability, low customer churn, and high net dollar retention.

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A financial benchmark generally known as “Rule 40” – a method used to balance growth and profitability, meaning that year-on-year revenue growth in excess of 40% could allow for negative profitability – currently appears to be changing. Today, each profitability and growth are needed to draw investors.

Reaching this level was already difficult, but now the bar has been set even higher, making it a complex puzzle for tech entrepreneurs to resolve.

I’ll refrain from obvious cost reduction tactics reminiscent of optimizing cost of products sold or reducing cloud costs and other operational expenses because they are trivial and may have limited impact in the future.

Instead, I’ll focus on three strategic points it’s best to consider as you steer your small business toward profitability and growth.

Are you targeting the right customers?

When developing a market entry strategy, the most significant thing is to find out the target market.

Let’s assume you run a cybersecurity company targeting large enterprises with annual recurring revenue of $45,000 and annual gross profit per customer of $30,000. You may have a famous Fortune 500 logo, but you are probably also bleeding money.

Given the price point, it might be time to contemplate focusing on small and medium-sized businesses. Attracting large enterprises will be an expensive and time-consuming endeavor, costing a whole lot of 1000’s of dollars per client, involving innovation centers, pilots, and infinite hoops to go through only to seek out out your champion has left the role.

If all of those efforts only result in $30,000 in gross profit per customer per 12 months, even with a decent customer retention rate, your lifetime customer value won’t be three times your customer acquisition cost – you may have lost a whole lot of 1000’s of dollars per customer, leaving you in a bind. money stagnation.

It can be helpful to read my previous article on unit economics. Therefore, it is less time-consuming and costly to succeed in SMEs if your CAC is $40,000 and your customer lifetime is 4 years and you possibly can achieve an LTV/CAC ratio of 3. Note that now your CAC has a payback period of just below a 12 months, which suggests it’s perfect.

Are you getting the most out of your existing customers?

When raising capital, entrepreneurs are often in a hurry to accumulate recent customers. That’s great, but only if you master two things first: monetization and retention.

If you do not know how you can keep your current customers and make money from them, it’s higher to not hassle acquiring recent ones.

For example, if you focused on an SME and spent $40,000 to accumulate a recent customer who generates $30,000 in annual gross profit and leaves after six months, you are in trouble. You only made $15,000 in gross profit, but with an acquisition cost of $40,000, you lose $25,000 per transaction, creating a money crunch.

Knowing how you can keep customers in business for years to come back with great customer support, knowing how you can upsell, cross-sell and increase the value of each customer over time is critical to sustainable growth.

I’d also suggest reading about net revenue retention and gross revenue retention calculations to get an idea of ​​how much money is retained versus how many customers are retained. Understanding this ratio is extremely necessary and required by all investors and buyers.

Are you focusing on the right place in the value chain?

Companies often expose themselves to unnecessarily costly operational burdens by attempting to capture more of the value chain than obligatory.

For example, consider a company specializing in medical detection technology powered by advanced artificial intelligence. Such a company faces a strategic alternative: it may possibly either sell its unique AI-based detection algorithm to leading medical device manufacturers, or take the ambitious path of developing its own medical device by integrating AI internally. While the latter route may hold promise, especially with significant funding and a highly expert team, today’s funding landscape encourages a more pragmatic approach.

In the current situation, it might be clever to opt for the first option. By positioning itself as a pure software company, it may possibly remove the burden of hardware production and regulatory approvals, in addition to adhere to compliance standards, manage complex logistics, and incur the high costs of direct commercialization when competing with industry giants.

Even in the realm of pure SaaS, as in the case of a cybersecurity company, there is the opportunity to strategically focus on specific technology strengths while outsourcing or integrating third-party solutions for complementary functions reminiscent of data visualization. Every company should improve its core strengths, reduce unnecessary operating expenses and maximize efficiency.

In today’s competitive landscape, achieving each growth and profitability is a must. To achieve success, entrepreneurs should be flexible, make data-driven decisions, and be willing to adapt their strategies. It’s about focusing on your core strengths, targeting the right customers and maximizing their value over time.

These practical considerations may also help technology entrepreneurs address the challenges of achieving sustainable growth and profitability in today’s demanding market.