Entrepreneurs

SaaS Companies Are Taking Over the World. What We Can All Learn from Them

According to Finerva, the average fintech multiple was 15 times revenue in Q4 of 2020, after rising steadily over the last two years. It used to be that profit was king and fifteen times earnings was a strong valuation.It would seem that today, what the market values is growth and predictable revenue. Companies such as Amazon and Tesla are going deep into their company lifecycles before earning profit. Yet, they are among the most valuable companies in the world.

Part of this may be the undercurrent of pressure applied by venture capital and private equity. Eager to recoup their seed capital, VCs and PEs put down the hammer on growth. Startups often feel they need to grow by 30% per year just to survive. SaaS (software as a service) companies have been the ones that most readily satisfy the need for predictable revenue.

In fact, the SaaS model is spilling over into other business models. The reliability of subscription pricing is ruling the day, in an environment where grow or die has become our mantra. Here are principals utilized by SaaS and subscription companies that can apply to any business:

Build a conversion model.

It used to be that sales and marketing teams were disparate. Today, they must work in unison to develop the right content for the right prospect at the right time. Artificial intelligence is quickly accelerating the extent to which messaging can be targeted based on client need. Once a prospect hits our website, we are able to create messaging based on their movements and interests

Savvy marketers today know what levers to pull. The ability to model out the number of at-bats required to generate the optimum sales calls, proposals, and wins is everything. Every marketer must understand the mechanics of their cost of acquisition in excruciating detail.

Test.

In ecommerce today, it is common for providers to A/B test everything from product photos to descriptions, price points, price spreads and promotions. To be agile requires that we test, learn and iterate. Use testing as a method to validate your business assumptions.

Price dynamically.

We are amidst a paradigm shift.

If you go into a restaurant on a Wednesday and order seabass, it’s the same price as Saturday even though demand is entirely different at that time. Today, airline and hotel pricing are entirely automated, changing in real time based on demand and inventory.

As AI takes hold, prices will be based on consumer demand. Ensure you have a way to price and re-price to optimize your labor, capacity and profit.

Shift from projects to subscriptions.

All the business owners I know in stodgy, project-based industries would rather have the predictability of subscription fees. The dirty secret of subscriptions is one reason they are profitable is because it’s rare that customers fully utilize what they’re paying for. Never underestimate the laziness of a buyer, including their inability to unsubscribe.

The key metric for most subscription models is customer lifetime value. If a provider can sustain a subscription for some period of time, the economics fall in the favor of the vendor. For example, a well-known subscription fashion brand CEO told me his breakeven with a new customer was about 12 months, and at 18 months, customers were very profitable. Of course, the true benefit of SaaS is its remarkable scalability.

Even some accounting firms are moving toward subscriptions. Considering the total cost of ownership, it may be more efficient if their clients have a set cost paid monthly on ACH (Automated Clearing House), as opposed to the cycle of billing, lost invoices and manual payments.

Overinvest in marketing.

Because of the attractive economics of subscription, SaaS companies and those with predictable revenue overspend on marketing early in their lifecycle. That’s because the cost of acquisition goes down as lifetime value goes up. In other words, a marketing dollar goes further, and is spread across more revenue if you can keep the clients longer. It’s just as important to understand subscription math as conversion math.

If your endgame is to drive the ultimate value of your business, think like a SaaS entrepreneur. Ironically, that happens by building predictable revenue that can drive higher profits as well.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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