Steps to success when scaling your SaaS business

Ahead of his appearance on the upcoming Sage webcast: Growing a SaaS Company in a Shifting Landscape, Bruce Croxon, partner at Round13 Capital and co-host of BNN’s, The Disruptors, offers insight into how SaaS companies can achieve success during the growth phase of their business journey and leverage technology to scale their operations.

As an entrepreneur Bruce Croxon first gained notoriety as a growth specialist with the success he achieved with the pioneering dating service Lavalife. After co-founding the operation in Canada in 1987, he would later help grow the company’s membership beyond 700,000 users before leading Lavalife to a sale valued at $180 million in 2004.

In the decades that followed, Bruce would channel his entrepreneurial efforts to seek out start-ups with potential to fund and mentor as part of his role on Dragon’s Den. Now as a partner in Round 13 Capital, he and his partners seed an expanding portfolio of growth stage Canadian companies.

His hands on experience of scaling his own business and helping his investees with their growth trajectory has enabled Bruce to keep his finger on the pulse of the every shifting business landscape in Canada, and enables him to impart advice that is of value to SaaS businesses operating in a variety of sectors.

1. Dive into data analytics

They say that if you can’t measure it you can’t improve it –this is especially true of SaaS companies. The accurate collection of analyzing customer and business data allows organizations to make critical business decisions, make forecasts, and understand customer behavior and sentiment. According to Bruce, this is an area that is constantly being disrupted and is an element of business that is increasingly easier to navigate in 2020.

“I think the technology that actually measures customer behavior has gotten a lot better. The lag that we had [in Lavalife] on understanding what people were doing, we had to go through three departments and four spreadsheets. I think the connection between spend, acquisition and behavior of the customers and the ability to look at that has become a lot quicker,” says Bruce.

For a business to have any chance of scaling successfully, they should be accessing the best available data analytics tools for their organization, especially as customers grow increasingly technologically resourceful and data-savvy.

Bruce continues, “There’s really no excuse for either us as investors or our investee companies to not have the same customer insights that every consumer on the planet has access to as they, for example [might use] when shopping for a new product, or looking around for information. All the information is available so how it gets organized I think has improved a lot.”

More and more companies are seeing a positive impact thanks to manual tasks being automated due to advancements in technology such as cloud computing. Growing SaaS companies are using this reclaimed time to focus on scaling their operations.

Bruce adds, “The better we’re able to keep track, the less people are required [for this task] and the more resources you can put into understanding what the data is telling you. If you can do that then obviously speed is going to increase. The ease of applications to talk to each other as a result of cloud computing versus the much slower, ponderous, on premises and old style of software, in accounting for example, has made a tremendous difference in terms of speed and agility.”

2. Strategically invest capital in growing your customer base

A SaaS company that is ripe for growth has already proven that the business is viable and is already earning revenues during the launch phase. An integral part of scaling the business is the ability to locate large swathes of potential new customers and have solid strategies in place to acquire them and grow your customer base. As Bruce explains, a management team that recognizes this is a good indication of a promising operation.

“At Round 13, we like to come in when the product market fit has been established and we would love it if 80% or so of our investment was actually going into sales and marketing and the actual growing of the business. A company growing the top line through channels that they have preferably already established as being the best ones to acquire customers through? That is our kind of dream. If somebody comes in and says, ‘look, I’ve tried 17 different ways to attract customers, here’s the eight channels that really work for me on a metrics basis…it really would be great if I had an extra $1 million to pour into that channel to acquire a whole pile more’ without fundamentally changing the economics — that’s when we get really excited,” says Bruce.

3. Keep an eye on the cost per acquisition

When a business is preparing to scale, all eyes are on the subscriber/user/customer numbers. This is partly influenced by the desire to attract investment to fuel the scale mission. During this phase, it’s crucial to understand the value of a customer to your business. Churn also plays a part in calculating this value. For example, if a software subscription costs $100 a year and the cost per acquisition is $120, then this is only worthwhile to the business if the data shows a customer is likely to stay over 12 months before churning.

“If it’s a long, expensive process to acquire a high value customer, you definitely want to see a low churn rate because those customers are gold and they take a long time to grab. If it’s a relatively low cost of acquisition and a customer tends to bring three other customers with them and the funnel is full, then that business can afford to have a higher churn rate at the bottom, it’s not ideal but it can afford it,” says Bruce.

The subscription model’s impact on churn

There’s no doubt that when it comes to SaaS the subscription-based pricing model is here to stay. Gartner predicts that by the end of 2020 that all new entrants and 80% of historical vendors will offer subscription-based business models. As it became easier for customers to access products in the cloud  and sign up and pay for their software with a number of micro payments throughout the year, the concern was raised that it would be easier than ever for customers to unsubscribe, resulting in higher churn rates.

This is a theory Bruce is happy to ‘myth bust’.

‘Whether a customer churns on an annual basis or a monthly basis. It’s still a churn’, says Bruce. “The fundamental thing that has occurred is that we’re now dealing in a world of much smaller payments every month versus the big annual payment that came with hardware and software upgrades and tied up tons of capital from your balance sheet.”

“In this case when a customer churned it was a really big deal and the propensity of the customer to churn may be higher…because it’s such a large capital expense that you as the customer look at all the time, so you’re tempted to [shop] around, ’ says Bruce.

In fact, as Bruce suggests, the rise of the subscription model has possibly contributed to better financial stability due to the improved faith of Canadian lenders in SaaS companies.

‘I think part of the reason that the Canadian banks have become comfortable in lending favorable debt to SaaS companies is because…as a service provider once you have gotten a customer using your software…as long as you do a good job of delivering what you said you would, there’s not a real incentive for the customer to churn out,’ says Bruce.

Power of the people

While there is no doubt that capital, customer demand and technology are important forces driving a company’s growth trajectory, for Bruce, the people in the business will always be the X factor.

“I’ve looked at enough deals to confidently say that I’ve seen more good ideas ruined by bad teams and I’ve seen a fair number of so-so ideas do quite well with the right team.  It really is all about the people behind the business, it might sound a bit cliché-ish, but it has turned out to be true, in my experience. Especially in technology. Most ideas sound very good out of the gate…they make a ton of sense but very few of them end up being scaled into half decent sized companies and that’s all about the people behind them,“ says Bruce.

Join Bruce Croxon and Matt Hodgson, CFO at Kitchener-based online video platform company, Vidyard, as they address the challenges and opportunities of a shifting landscape in the SaaS industry.

Register here:

https://www.sage.com/en-ca/cp/growing-saas-company-shifting-landscape-webcast/