EP25: 5 Growth Opportunities for SaaS Startups
Founding a SaaS startup is a challenging task. And when it comes to actually growing your startup, many founders turn to marketing and customer acquisition first.
While marketing and acquisition may help your business grow, we’ve found that other critical areas can help make your efforts more meaningful.
So in this post, we’re sharing the top 5 growth opportunities for SaaS startups. Let’s dive in!
The first area we recommend looking for growth is your activation rate. The term “activation” has many different definitions in startup lingo. But for this post, we’re defining it as the practice in growth where you engage and encourage your target customers to become “activated” and achieve value from the product (therefore becoming paying customers).
This stage is all about converting people who are aware of your product or service into paying customers. To get even more specific, we recommend looking at people who have started free trials, created free accounts, or booked product demos.
If you have an activation rate of 45%, all that means is 45% of the people who signed up for your free trial “activated” a paid membership at the end of the trial. In general, aim for activation rates between 30% and 60% with free trials and 2% to 3% with freemium models. If you have a sales model, you’ll want to close 20-30% of deals. If your rates fall below these ranges, there’s likely room for growth.
Improving your activation rate can ensure that your efforts in areas like awareness and acquisition have an even larger impact, which is why it’s number one on this list. Low activation rates can result from several things, including an unappealing product or service, a slow onboarding process, or your marketing and sales efforts attracting poor leads. Determine the cause of your low activation rates and then focus your efforts on resolving the issue.
Next, consider your retention rate. Retention refers to your company’s ability to keep existing customers. The goal is to keep customers engaged, satisfied, and loyal by maintaining a positive relationship over time. A high retention rate means you’re keeping a high percentage of your customers over time. A low retention rate indicates you have high customer churn.
And if you aren’t retaining customers, you won’t grow. Period.
Why? Because acquiring a new customer can cost several times more than retaining a current one. If you constantly lose customers, the never-ending cost of bringing more in will drain your cash over the long-term. In other words, there’s a severe leak in the ship.
To figure out the cause of a low retention rate, you’ll need to go directly to the source. If you can, gather surveys and relevant data from customers who are leaving. This will help you understand why they’re leaving, but don’t forget about your existing customers too. While they may be actively engaged in your service or product, it doesn’t mean they won’t exit in the future. Understand their pain points and work to make a better product for both your current and future customers.
Pro tip: identify leading indicators in behavior that indicate if a customer is a churn risk and create a program to identify it before it happens.
If you’re happy with your activation and retention rates, then it’s time to look at revenue expansion. This refers to increasing your revenue by increasing sales. That doesn’t necessarily mean selling more of your flagship product or acquiring new customers. Examples of revenue expansion include:
- Upselling – encouraging customers to purchase add-ons or to upgrade to higher-value assets
- Cross-selling – Offering complimentary products or services to existing customers
- Subscription models – Shifting from one-time purchases to a subscription-based model
- Pricing optimization – Strategically adjusting your prices to reflect market demand
Expansion can be a fantastic growth opportunity for SaaS startups, but you need the right people behind it to make it work. For example, a strong product team will help you identify when a feature should be an add-on (upsell) vs. an addition to an existing service or product. You’ll also need a good product marketing strategy that helps current customers adopt new features and creates awareness with potential customers.
4. LTV & ARPU
For the fourth growth opportunity, we’re actually encouraging you to look at two different metrics:
- Lifetime value (LTV) – This is the amount of revenue a customer is expected to generate throughout the lifetime of your relationship.
- Average revenue per user (ARPU) – This is the amount of revenue you expect from a customer in a given period of time.
The key difference between these two metrics is time. LTV refers to the entire relationship, while ARPU can refer to a month, a quarter, a year, or whatever else you’d like to measure. Higher LTV and ARPU are good, but low metrics can indicate that you’re not retaining customers well or monetizing your customer base appropriately.
Similar to retention and expansion, if your LTV and ARPU are low, you’ll want to reevaluate how you engage with and provide value to your current customers. When your retention and expansion rates increase, your LTV and ARPU will likely follow.
One thing to remember here is that the quality of your data is critical in evaluating these metrics. You need to look at your LTV based on very specific metrics because it can vary from market to market and customer segment to customer segment. The more specific and detailed data you can get, the more you can derive from that information.
Finally, if everything else looks strong, consider your operations. The goal is to identify key areas for improvement and optimization, and it may take an unbiased third party to help you get there. When evaluating your operations, ask these questions of your company:
- How do we function as a team?
- How are decisions made?
- How are responsibilities distributed?
- Are we collecting and analyzing data effectively to make data-driven decisions?
- Are we effectively managing costs and maximizing profitability?
No amount of advice, mentorship, or support will help your SaaS startup grow if you don’t have strong systems and procedures in place. For example, we’ve worked with a company that wanted to start by looking at marketing as an opportunity for growth. While we did find opportunities for growth in their marketing efforts, over several years, we found that some teams couldn’t execute plans. After a few new hires and implementing some new processes, everyone in the company measurably improved, and we made significant progress.
As a bonus opportunity for growth, consider acquisition. Acquisition is always an opportunity, and you may have been surprised it wasn’t mentioned sooner. But new customers won’t solve growth challenges without solid activation, retention, expansion, and operations. Bringing new customers to a product or service with growth gaps is like pouring water into a bucket with holes. You should focus on the top 5 growth opportunities for SaaS startups before worrying about acquiring new customers (unless of course you’re starting from scratch 🙂).
To learn more about how to reach your growth goals for your SaaS business, check out our top offers here:
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