As start-ups head into a down-turn economy, retention and tactics used to extend your runway will become critical to SaaS businesses. The question is where and how do you start to analyze your business, which in reality you are trying to scale regardless of economic trends?
Never fear! We’ve got a few tips on how to sustain profitability in an uncertain economy. Enter the concept of identifying margin killers and eliminating them.
What’s a margin killer, you ask? One example is a product that is not performing and is keeping you from hitting “The Rule of 40” a key performance indicator for investors. Underperforming products also can skew your valuation.
Five Margin Killers
- Holding onto that unprofitable product
- Pricing that Doesn’t Reflect Your True Costs
- Failing to manage customer relationships (Hello Churn!)
- Direct & Overhead costs that Grow without Control
- The Balance of Technology
When is it time to pull the plug on a product? If you’ve taken the time to build a product roadmap, you should also have benchmarks built against its sales, product adoption, and usage. As your company grows, so will your research and development of new features or product extensions. This is where some classic CPG Gate modeling can be tweaked to fit a subscription-based or SaaS business model.
The gate theory is that you need to hit key “gates” or “milestones” before you can proceed to the next stage of development. Yes, yes, tech companies use this specifically from the product team side, but the gate theory is cross-functional in its nature. It takes in essence the product roadmap and involves sales, marketing and finance at each stage – ensuring that you are building something viable and won’t have to deal with a margin killer in the future.
Pricing that Reflects Your True Costs
The main outcome of the stage-gate concept is that it not only helps you understand the value proposition to your customers, but also maps out your price point and margin at the onset.
Failing to manage customer relationships – aka Churn
We talk a lot about churn as a lagging indicator – i.e. your customer has left, maybe for a competitor which, let’s face it, isn’t great.
But getting bogged down by the churn metric causes you to analyze your processes in a very reactive way when really, with the right customer onboarding, education, and support tools you can ensure the right customer stays from the beginning – and customers who aren’t a good fit (i.e those who will eventually churn) don’t start a paid plan with your business to start with.
Here the product-led approach comes heavily into play as well. For so long we have been sales-oriented – closing the deal and making quotas, at any cost – and the price you pay is ultimately signing up clients who will eventually churn.
Hint: Book a Demo with us and we can show you how to prevent churn and increase conversions.
Direct & Overhead costs that Grow without Control
When companies are scaling up – they often lose sight of their expenses. In fact, scaling often equates anywhere from rising costs of employees to marketing that doesn’t correspond with your MRR. Here are a few things to do to prevent that imbalance:
- Set budgets for your overhead and stick to them – you’ll know if you have a problem if your gross margins are going down along with your productivity
- Reduce expenses – look at your tech and marketing stack and assess if you simply have too many tools
- Every quarter look at the marketplace and see if you can get a better deal from your fixed costs
The Balance of Technology
It’s important to utilize technology to streamline processes and improve efficiency – particularly as it relates to your customer experience, but it’s tricky. You need to ensure you have the right tool vs. too many tools that do half the job or only 2 people on the team use it.
At FROGED we often find we are part of that solution, with our clients going from 3-4 tools to our one solution. The result is omnichannel communication married with higher conversions and reduced churn.
Scaling up is tricky, but if you are aware of these margin killers, you’ll be able to create sustainable growth that appeals to investors and extends your runway.
Read more about retention and engagement best practices:
- What customer experience can do to Increase your NRR
- 4 customer retention strategies you need to implement
- Is your product team focusing enough on retention
Want to learn more – contact our team today!