Why do SaaS Companies Fail?

The 99.5% Failure Rate of SaaS Businesses

The 99.5% Failure Rate of SaaS Businesses

The vast number of SaaS businesses fail before anyone ever hears about them. The main reason is that people don’t know how to start. They’re jumping into running a new kind of business without real experience.

People doubt me when I say that 99.5% fail, but there is no doubt in my mind after having spoken to so many entrepreneurs who wasted tens to hundreds of thousands of dollars to not even get out the gate.

The sad story I’ve heard a hundred times 😭

Why Do SaaS Companies Fail

It’s the same story all the time. The entrepreneur is out of money, they don’t have a product that works, and they don’t know how they are going to get it finished or get it to market.

Failure looks like this 👣:

Assuming the founder has a reasonably good development team, has some money, and is a reasonably intelligent person.

(Failure can happen before you ever get to this list without those items.)

  1. A founder (entrepreneur or intrapreneur) has what they think is a great idea. Sometimes it is, sometimes it isn’t.
  2. They hire a developer to start working on it.
  3. They want to “have something to show” to their audience or stakeholders.
  4. Spend tens or hundreds of thousands of dollars on building an idea.
  5. They start trying to promote it only to realize they don’t know much about marketing and don’t know how to get it out there.
  6. A handful of people have started using the tool and the feedback is that it needs substantial changes.
  7. Most or all of their money is spent and they can’t get to market or make the required changes. Often, they realize the entire system has to pivot before any sales will come their way.

Now What 🤔?

Now they have to either tell their investors they’re out of money and need a lot more, pay out of their own pocket slowly to rebuild and rework, or just give up and move on (which most commonly happens).

Be the .05%

1️⃣: The first thing to know is that you’re not building an app, you’re building a business and you need to understand how the business is run and plan it out.

2️⃣: The second thing to know is that you have to validate the idea with the audience BEFORE you start developing anything.

3️⃣: Then you can start working on the application.

The right way of making a SaaS successful has more steps, it’s more tedious, and it takes some skills that many people don’t have, but if you do it this way it is TREMENDOUSLY easier in the long run and you’re more likely to fall into that .001% of SaaS businesses that work.

Pro-Tip: Most people try to build a system that is complex out of the gate. The trick is to build something simple that solves a single core issue. The bigger the tool, the bigger the cost of building it and the bigger the cost of onboarding new customers. Make it simple to start and you’ll have a much better chance of success.

Make Your SaaS Success

Disclaimer: Winning at SaaS may not actually look like this.

Here’s the way you should be going about it:

Step 1: Forecast your business

  • How much is it going to cost to create the tool?
  • How long is it going to take?
  • How many sales do I need to produce to get to breakeven?
  • What are my operational costs?
  • What are my marketing costs?
  • What are my sales costs?
  • Is this venture actually going to make money or not?
Click the image for access to the file.

All of these questions need to be built into a forecast that shows you what the future of the business looks like and when you’ll start making money. Here is a link to an example forecast that we at JHMG often use when doing operational forecasting and a link to how we cost project build.

Step 2: Determine how will you distribute this system

The best clients I’ve worked with have a pre-built audience or partner with a large audience. As soon as the tool is ready for primetime, they press a button (or send an email) and 40,000 people start looking at the system.

Don’t have something like this pre-built for your tool? Then you need to consider how you’re going to distribute the system upfront AND TEST IT before going any further. If you’re looking for a place to start on this, consider our PPC ROAS (Return On Ad Spend) spreadsheet which will tell you if you can make any money.

Beyond that, there are many, many ways of distributing your system, but you need to know it will work before you start.

Even if your distribution models are rock solid, you still need to test them. This is also a part of the next step…

Step 3: Validate your offering

Here’s the part where you don’t hire a developer.

Before hiring any developers to do anything, hire a UX Designer to design the entire system. You will pay a fraction of what it will cost to hire a developer to do this (plan on 4k – 10k to start) to have a designer do this work and iterate on it.

Now that you have a system you can show potential users and get their feedback, and that’s the next step. Get as many potential users and buyers as possible to look at the tool and click through different processes and ask them what you’re missing and how much they would pay for the tool.

Pro-Tip: If you are building something that is cutting edge, you do need to bring in a developer to consult on whether the project is feasible and how much it will cost to build, but NOT to develop anything.

You can also get money and buyers at the same time by bringing together potential investors who all want your tool. The deal with them is that they will put money into the project to fund it and they will get equity as well as forever access to the tool.

Step 4: Focus, Focus, Focus groups

As people are looking at your designs, you’re going to get asked to build a ton of different new features. The trick here is to make sure you build a core feature set that solves the problem. Build one thing that works, ship that thing, get feedback, and THEN build more stuff. Don’t build more stuff first!

As you’re doing that though, you’re going to iterate on what you built, and having a set of core users that act as a focus group for the product is very helpful, if not critical. You have to be able to ask people what they like and don’t like on a regular basis.

But you haven’t started development yet, and you shouldn’t until you…

Step 5: Iterate (and budget for it)

The more people you show your tool to, the more you’re going to realize what needs to change and where.

Since you have that fancy focus group of core users, you can have your designer iterate on those initial designs and then show them to the focus group again and again and again until you’ve got something that everyone wants.

Step 6: Are your potential buyers asking when the product will be ready?

This is the go/no go gate.

  • Are people interested?
  • Are they willing to pay what you need to make this work?
  • After all this iteration, is your solution better than the competitors, both direct and indirect?
  • What else needs to be built to bring in the revenue?

Most importantly, are the people that you showed the system asking when it’s going to be built and ready to use?

Yes?

Now it’s time to hire a developer and potentially raise some money.

No?

Then aren’t you glad you just paid a designer a few thousand dollars to test out this idea?

Step 7: Now you can raise money…

By this time, you’ve probably seen that it’s going to cost a pretty penny to build your tool, and you haven’t even thought about a support team, a customer success team, managers, etc. Even though you had that forecast built up front, you weren’t sure it was going to take all those people, but by now you see that it probably will, and to do that you’re going to need some money.

Step 8: Who is going to build this thing?

You can either bring on a team to build the tool or use a pre-built team at an agency. Both have pluses and minuses.

Hiring an in-house team 👊

If you hire a team, you have an asset within your company and generally lower ongoing prices. But you also have a liability in that if you need to cut costs you may end up having to cut the team that manages everything and lose all your tribal knowledge.

Also if you don’t know how to hire for these roles or how to manage projects, manage products, or run an agile method team, it’s going to take a substantial amount of time to get going.

Shameless plug: We’ve done this dozens of times and can help you find and hire a team.

Hire an agency 🙌

Often, you can get going a lot faster with a good agency. They will cost you a lot more per hour, but the time to start will be substantially less.

What we’ve had many clients do is start with an agency (JHMG in this case), then start hiring internal team members to slowly replace the agency over time. Some clients prefer to just stick with an agency for a long period of time. It depends on the needs of the business.

Second shameless plug: JHMG is an agency that can likely build your SaaS. (We’ll tell you if we’re not a good fit.)

Step 7: Iteration in development

In the software development world, this part is known as CI/CD or Continuous Integration and Continuous Deployment. What it means is that software is never finished. There are always new features to build, new issues to solve, new things customers ask for, and generally ongoing development. This is why we need the SaaS billing model to make it all work.

So when you’re planning it all out, make sure to budget for continuous work on the system. As long as you’re in business as a SaaS, you’re never going to be done developing the tool.

Step 8: Now for the catch🪝

You’re building a sales and marketing company,
not a development company.

You just went through all of that work to figure out the best product to build, but your main job is to distribute that product because that’s how you make money.

So don’t forget, your company will be more sales and marketing than it is development if you want to grow. But that’s for another email.

For now, at least you know how not to end up in the trash bin.

And that’s just the start.

After you get all this done, then it’s time to think about things like customer success, support teams, onboarding processes, managerial staff, and so much more.

So take my advice, if you don’t have experience doing this kind of thing, find someone who does and ask them for some help to make your SaaS a success (hint, hint).

Jason Long‍
Owner, Founder

As owner and founder of JHMG, Jason has worn many hats over the years. Looking back even to his high-school years, Jason has always been a passionate entrepreneur at heart and a strong leader. Jason’s background in UX design, his history of starting new businesses from the ground up, and his unwavering dedication to excellence in every project he is a part of have earned him a reputation for high-quality work in all that he does. ‍

In his free time Jason enjoys traveling, swing dancing, crossfit, and hiking. ‍

Further Reading