SaaS solutions are noted for their flexibility. This quality serves as a key reason why 37% of businesses switch to cloud-based systems. Given their growing popularity, the idea of launching a company offering SaaS products seems very lucrative.
So, how to build a SaaS startup? In this article, we will answer this question, and guide you through the main stages of starting a SaaS business.
You will learn to make market research and write a lean plan. Also, we will discuss the most suitable pricing models and effective marketing strategies.
Finally, you will know how to track the progress of your startup.
1. Conduct market research
Market research should be your first step towards building a SaaS company. You need to test the waters and make sure that your project idea is worth investing in.
What should you include in the market research? We recommend focusing on such crucial aspects as an industry overview, target market research, and competition analysis.
Let’s take a closer look at each of these points.
- Industry overview
At this stage, you should expand your industry knowledge. Define the size of your market segment. Learn about the groundbreaking SaaS trends. When it comes to SaaS development, focusing on vertical markets, mobile-first SaaS apps, switching from SaaS to PaaS are gaining momentum. How can you find out about the latest trends? Attend the relevant trade shows and summits, watch webinars to keep track of events. You will get the insights that will help you stay ahead of the game.
- Target market research
Everyone is not your customer.
- Seth Godin, a famous marketer, entrepreneur, and public speaker
Indeed, it would be a big mistake to try to please everyone with your SaaS products. You would waste too much time and resources. Hence, your next step is to find out who your potential customers are and how to approach them. Get as much information about your target audience as possible. Learn about their age, gender, geographic location, education, and occupation - these findings can help you target these consumers better. In the end, this information may be crucial to answering the question of how to build a SaaS startup and succeed.
- Competition analysis
Define what cloud computing model is adopted by your competitors. Is it SaaS, PaaS, or IaaS? Take a look at products released by your market rivals. What features do they have? How often are they updated? After that, study their financial information. Analyze their pricing models, revenue, and annual reports. Look at the promotion strategies they adopt. When you know the strengths and weaknesses of your competitors, you will gain the upper hand.
2. Start with lean planning
Imagine that you are setting off on a journey. You need a GPS not to get lost on the way. It will get you to your destination. In this regard, a business plan is like a roadmap that will guide you through the SaaS development process. With this document, the whole idea of how to build a SaaS Startup becomes much clearer.
When it comes to planning, you can follow one of the two ways. You can write a traditional business plan. This detailed document covers a business overview and market analysis. It also describes your financial plan, projections, and other essential things.
Alternatively, you can save your time by making up a lean business plan. It is much shorter since all key points are briefly outlined. You can fit them on one page.
There are several reasons why you should consider lean planning for your SaaS application:
- Since a lean plan is brief, you can look to immediate feedback from business partners, colleagues, and potential customers.
- Writing such a document takes less time.
- The lean plan is much easier to update and edit.
- This document is concise and allows you to get straight to the point.
- It can serve as a basis for your detailed business plan.
The most important points that should be covered when starting a SaaS business:
- Problem and its solution;
- Target audience;
- SaaS hosting provider;
- Sales channels and marketing strategies;
- Revenue sources;
- Partners and resources.
The example of a Lean plan for a startup offered by Tom Morkes:
There’s an opinion that a lean plan is more effective than a traditional one since it involves less planning and more action. We cannot but agree with this thought. We firmly believe that this document will help you understand how to build a SaaS startup.
3. Test your hypothesis with a prototype
You have assessed the market potential of your SaaS business idea. It showed the potential demand for your SaaS product. Now you may think that it is high time to build a fully-fledged SaaS application. However, we recommend starting with a prototype instead.
A prototype is an incomplete implementation of a future product. In a nutshell, it’s like a draft. You introduce it to potential investors to show your idea alive and running. Along with that, prototype visibility is easier to understand compared to the technical language of the specification.
The primary purpose of a prototype is testing, which is extremely important for building a SaaS company. Your early adopters and investors are those who carry out this task. Building a prototype allows you to get prior acquaintance with the way potential users will interact with your future product. The development team should collect the clients’ feedback and consequently make alterations to an existing prototype or build a new one.
Starting product development with prototyping became common practice for software consultancies that build not only SaaS applications, but other products as well, for example, online marketplaces.
Below you can see the mobile app prototype that our team has developed for a multi-vendor marketplace for buying and selling cars in Africa.
4. Choose the pricing model
The right revenue model is the key to the success of any kind of business, be it a pricing model for SaaS startup, or a monetization strategy for a successful online marketplace. At the end of the day, it will define how your venture will generate a profit.
If you are wondering how to build a SaaS startup that will bring you a stable income, choose the monetization strategy wisely. You can even try to mix several revenue models to mitigate financial risks.
Let’s discuss the most suitable strategies for SaaS startups.
- Free application, ads supported
Since the SaaS product is free, it will attract many users. In addition, there is no easier way to monetize your app than to add built-in advertisements. You will get the revenue instantly. For example, Wave, the company that produces accounting software, does not charge users for its services. Still, on the sidebar of the customer dashboard, you can see ads for related products.
However, avoid the excessive use of built-in commercials since it can harm the user experience.
- Flat-rate pricing
It is the clearest revenue model. There is only one package that has only one price. The only difference depends on how you want to charge users: monthly or annually. This model often comes with a trial period. It also has a fixed policy regarding the number of users on an account.
Basecamp, a web-based project management tool, offers an unlimited number of users and full functionality for a flat price of $99 per month.
This model supposes providing consumers with basic functionality for free, and a good option for starting a SaaS business. Premium features are offered for an additional fee. The biggest challenge with this strategy is that customers churn on free packages more easily. It is in human nature to value things they have paid for more than things they got for free.
Drift, a conversational sales and marketing platform, allows companies to chat with their website visitors in real-time for free. Additional functionality including custom bots or CRM integrations goes with upgrade packages.
- Per storage pricing
For some SaaS products, you may charge users based on the amount of storage space they need. Usually, companies offer customers a certain amount of storage for free; then consumers have to pay. This model allows users to get to know your SaaS services and encourages them to upgrade when they exceed the limit.
Dropbox successfully adopted the storage pricing model:
5. Build the brand for your SaaS startup
As it has been said before, the SaaS market is very competitive these days. So the question arises: how to build a SaaS startup that will differ from the rivals?
- Clarify your vision
The vision for your SaaS startup is like the North Star that leads you toward success. Make it clear so that each member of your team can understand what direction you are following. Besides, it should explain what your company strives to achieve in the years to come.
- Prioritize the quality of your services
In this regard, we recommend focusing on the quality of your SaaS services. The term SaaS stands for Software as a Service. We believe that service is the most important word there.
- Harness the power of naming
A Latin proverb says: nomen omen. It means that the name is destiny. Indeed, the name that you picked up when building a SaaS company can greatly influence its future. Therefore, choose it wisely.
There are several simple tips on how to find the perfect name for your SaaS startup:
- Consider the name that is easy to write, read, and remember.
- See to it that it does not sound offensive when translated to other languages.
- Make sure that your competitors did not take your desired name.
6. Get the required financing
You are lucky if you have enough funds to support your business financially. What if you do not have such an opportunity? How to build a SaaS startup without money? The answer is to look for outside sources of investment.
Basically, you have several options. First, you can bootstrap your business. It means that you can finance your SaaS startup using existing resources or earning money in unconditional ways. For example, you may rent out your house or use crowdfunding platforms like Kickstarter.
Besides, to start a SaaS business, you can borrow money from family and friends. This option offers flexible conditions for paying off the debt. However, be aware that such a loan will put pressure on your relations with close people. It may happen if you cannot give money back as planned.
Finally, if two previous solutions are not your cup of tea, consider turning to angel investors. For this purpose, visit AngelList or Crunchbase. There are many professionals on these websites who may find your business idea lucrative.
7. Select the development team and approach
An important aspect that deserves your special attention is a team of professionals who will develop a SaaS app for you. Since you are building your product from scratch, you will require a full-cycle development team. It consists of the following specialists:
- Project manager;
- Business analyst;
- Backend developers;
- Frontend developers;
- QA engineers;
- UX/UI designers.
Below you can see the list of qualities that mark the best companies offering SaaS development services:
- Relevant experience. The right software development consultancies not just know how to build a SaaS startup. They have already helped launch such projects.
- Great UX/UI design expertise.
- Case studies. Usually, companies publish them on their website. Also, you can visit Behance, which is a website where software agencies showcase their projects.
- Clients’ testimonials. You can find them on such rating and review platforms as Clutch or Goodfirms.
- Extensive knowledge of advanced technologies. At Codica, when working with startups, we use Ruby, Ruby on Rails, React, and Vue as the primary technology stack.
- Experience in building MVP products. Companies with strong MVP development processes know a product you need to launch, features it should include, and can provide their clients with a realistic timeline.
When it comes to the development approach, the agile methodology seems the most suitable option when building a new SaaS company. Here’s why:
- Improved quality. With the Agile approach, the project is broken down into manageable units. The system of short sprints allows paying more attention to development and testing. As a result, the quality of the product is improved.
- Transparency. You are getting involved in the whole SaaS development process. As a result, you can see what has been made on each stage of building your SaaS application.
- Predictable delivery. Each sprint has a fixed schedule and lasts 1-4 weeks. That means the new functionality is delivered quickly and predictably.
- The possibility of making changes.The clear benefit of the Agile approach lies in the opportunity to update or reprioritize the overall product backlog on each step of project development.
- Reduced risks. Development teams who adhere to Agile principles better react to emerging changes. As a result, the risk of complete project failure is significantly mitigated.
8. Launch an MVP first
The time has come to talk about building your SaaS product. At the end of the day, its quality and value it brings to the end-users determine the success of your venture.
So how to build a SaaS startup product that your customers will love? We believe that successful SaaS development starts with launching an MVP.
A minimum viable product is a simplified version of your SaaS application with a few key features. It is designed for getting feedback from investors and early adopters.
When starting a SaaS business, there are two ways of how the MVP can help you validate your business idea even further:
- It confirms or denies the need for your SaaS product.
- An MVP identifies features that users need the most.
Below you can see some useful tips on how to create a minimum viable product (MVP).
- Don’t spend too much time on MVP. Some startups make a big mistake taking a minimum viable product for a full-fledged application. They waste their time on adding new functionality and polishing the existing features. Consider a short SaaS development cycle to validate your idea as quickly as possible.
- Cut your scope in half. Think about the minimum requirements to implement your SaaS idea. Once you have a ready scope, cut it in half. Remember that your minimum viable project should be very clear and straight to the point.
- Test different business models. Try different pricing models to find which one works best for your SaaS startup. Also, decide which features you will include in the trial version of your app. After that, it will become clearer what functionality should be added to paid versions.
9. Develop a killer marketing strategy
To promote your SaaS applications successfully, you need to understand how they are different from other products and services. These valuable insights will help you build marketing strategies accordingly.
Let’s take a look at the specific features of software-as-a-service applications and define how you can use them for the sake of marketing.
Free trial as an efficient promotion strategy for SaaS products
If you sell physical merchandise, you may think that it is not the best idea to give some of your products for free. And you would be right. However, this strategy works fine for SaaS products. Take the most popular SaaS applications. Most of them offer a free trial option.
If you want to go with a free pricing model for building your SaaS company, it comes with multiple options. These can be a free trial, freemium, 90-days free trial, trial without credit card information - to name a few. The keyword there is free. It serves as fuel for your SaaS promotion engine.
Short sales cycles
It means that customers spend less time choosing a suitable cloud solution. They do quick online research, try a demo version, or watch a video presentation of a product. After that, they are ready to buy a SaaS application that satisfies their needs better.
However, some customers become skittish when they are forced to choose a SaaS product they need quickly. As a rule, these are buyers who used to slow-pace purchases.
How can you target these consumers? The best way is to provide them with as much information about your product as possible. This way, you can convince them to choose your SaaS applications among dozens of similar products.
10. Track your progress
Now you know how to build a SaaS startup. However, after you have launched your business, you need to measure its success. The particular metrics will help you with this task.
The core metrics for a SaaS product
- Churn and churn rate. The first metric shows how many users gave up your SaaS product in a given month. At the same time, the churn rate defines the percentage of consumers that cancel your services every month.
- Monthly recurring revenue (MRR). This parameter defines your profitability. Simply put, it is the monthly recurring revenue you get at the end of a month.
- Average monthly revenue per user/customer (ARPU). This is the most straightforward metric. ARPU shows how much revenue each customer brings you on an average month.
- Lifetime value (LTV). Suppose you want to know the revenue you can get from an average customer over the whole time they have been using your SaaS products. You can easily predict this figure.
- Customer acquisition costs (CAC). This figure defines how much it costs for you to gain an ordinary user.
As you can see, starting a SaaS business requires careful planning and consideration. We hope that with this detailed guide, the question of how to build a SaaS startup will be easy for you.
If you are looking for a reliable company offering SaaS development services, feel free to contact us. We will be excited to build a scalable, secure, and cost-effective cloud solution for you, and help your SaaS startup to further grow and prosper.