on January 26, 2022 (last modified on March 21, 2023) • 13 minute read
A whopping 70% of startups fail because of premature scaling.
But, as a newer SaaS business, it can be hard to tell when you should hold off and when to take the next step. You’re in a competitive, fast-paced industry, and you need every advantage you can get.
How do you know when to scale your SaaS?
We asked 20 SaaS professionals what they saw as signs to begin SaaS scaling. They shared 8 tips in total across a variety of stages and growth rates.
Before we look at expert takes on SaaS scaling, let’s give their advice some context.
Most respondents have experience working directly for a SaaS business. The vast majority — 85% — of the SaaS professionals we consulted come from SaaS businesses. Meanwhile, 10% invest in SaaS companies, and 5% are agencies or consultants who work for SaaS clients.
The SaaS professionals we consulted come from businesses with a wide range of annual recurring revenues (ARR). 40% earn less than $1 million ARR. But 30% earn $3 million to $5 million, and 20% earn $5 million to $10 million.
We’ll divide the advice we received into three groups based on the scaling stage their SaaS is in:
You’ll learn about each stage’s unique traits and considerations as we go.
The stepping-stone stage of a SaaS business happens in between the startup and growth stages. At this point in your company’s lifecycle, you’ve found your main selling point and market fit — now, it’s time to scale your business by improving processes. Once you refine them enough to drive a healthy supply of traffic, leads, and conversions, you can start considering scaling to the growth stage.
The process improvements involved in the stepping-stone stage can be easier said than done. 30% of the experts we consulted consider stepping-stone stage activities some of the most demanding.
But once you’ve achieved the milestones highlighted by SaaS experts, it could be time to finalize your processes and move to the next stage.
In your business’s pre-startup stage, you ideally defined the solution you want to sell to your customers. As you refine your processes in the stepping-stone stage, you’ll need to identify the sub-solutions — think features and services — that make your product shine.
“Once we found the right solution our customers wanted most we were able to determine our next steps,” says Jared Martin of OnePitch, a SaaS with less than $1 million ARR so far. “The metrics for this included overall user activity, time spent on site, which features were used most often, as well as how many users returned to the application over time.”
You’ll need to dig into your user data and see what aspects of your product your customers value the most. For more qualitative data, you could also interview some of your most loyal customers about the strengths they see in your SaaS.
Before you dive into the growth stage, make sure your customers generate more revenue than it costs for you to acquire them. At Social Rise, a SaaS with less than $1 million ARR so far, Jennifer Stapleton watches their customer lifetime value/acquisition cost ratio closely. “We aren’t there yet. When the time comes, we’ll use the LTV (lifetime value)/CAC (customer acquisition cost) ratio,” Stapleton explains.
How do you know you have the right ratio? “If it’s greater than 3, money is best spent acquiring new customers. On the other hand, if it’s smaller than 3, you’re better off just collecting profits. Or fix the funnel until the ratio is greater than 3 and then scale. The formula is great because when broken down, it shows what parts need improvement.”
Let’s break this ratio down, starting with customer lifetime value (CLTV).
There are two ways to calculate CLTV:
Now, let’s calculate customer acquisition cost (CAC). Use this equation:
Cost of marketing + Cost of sales/New customers acquired
Take your CLTV and divide it by your CAC. A ratio larger than 3 could show you’re ready to move to the next stage.
As a SaaS business leader, there’s no shortage of metrics you could be monitoring, but the real question is, which metrics should you be paying most attention to? To monitor the health of your SaaS business, you want to identify any obstacles to growth and determine which elements of your growth strategy require improvements. To do that, you can track the following key metrics in a convenient dashboard with data from Profitwell:
If you want to track these in ProfitWell, you can do it easily by building a plug-and-play dashboard that takes your customer data from ProfitWell and automatically visualizes the right metrics to allow you to monitor your SaaS revenue performance at a glance.
You can easily set it up in just a few clicks – no coding required.
To set up the dashboard, follow these 3 simple steps:
Step 1: Get the template
Step 2: Connect your Profitwell account with Databox.
Step 3: Watch your dashboard populate in seconds.
Some indicators of growth don’t involve data and numbers. Instead, they relate to your team’s belief in your company and morale.
“We knew we were ready to scale when we had a strong, clearly defined ethos,” says Craig Hewett of Castos, a SaaS with a $3 million to $5 million ARR. “It encapsulates the way we do business, the way we relate to the world, and what we stand for. As we started to scale we needed a solid, never-changing core to keep us centered on our principles. Without a strong ethos, we knew that expanding and adding new employees might dilute our company culture and cause us to lose our way.”
Look at your product mission, company culture, and processes, and think about the ways they connect to each other. Do you have a cohesive ethos in your product, people, and work? Since the stepping-stone stage focuses on strengthening your processes, it could be time to strengthen your culture at the same time.
When a SaaS reaches the growth stage of business, they have a solid product, market fit, and process. At this point, businesses focus on acquiring customers more effectively. With your company’s identity and approach clearly defined, you have the resources to drive better acquisition.
The most common stage our respondents mentioned being in was the growth stage at 30%. These experts are done defining their business — it’s now time to do business.
To move from the growth stage to the maturity stage, you’ll need to build a dependable and manageable base of customers. These three achievements will contribute to that base:
Sometimes, the state of your business will let you know if it’s time to scale. If you notice that you can only get over your largest issue by scaling your business, it could be time to grow.
“It’s not time to upscale your SaaS until you run into a problem,” says James Diel of Textel, a SaaS with $5 million to $10 million ARR. “When you’re considering scaling, examine the issue and ask yourself if your proposed solution scale solves it well. If the answer isn’t a clear yes, hold off on scaling and focus on building the best SaaS product you can as you work to build out your business.”
Diel learned this tip from experience. “We decided to scale once the interest in our product started outweighing our capabilities to provide it – lost revenue was unacceptable, so we worked to improve our MVP as quickly as possible to maximize our sales,” Diel concludes.
We recommend performing regular SaaS performance reports to keep an eye on your business’s strengths and weaknesses. If any of your weaker data points relate to a lack of resources, you might consider scaling.
Here’s a logical conclusion to the growth stage: Having a customer pipeline that’s healthy enough without hyper-focusing on acquisition.
“Our business was ready to scale when we had proven we can repeatedly make customers successful (solve their problem/pain) using our product and we had identified a target market where more of them lived and we could market to. A tell-tale sign of customer success is of course retention but also more inbound lead demand and existing customers giving referrals thus driving inbound demand,” advises Trey Gibson of SPOTIO, a SaaS with an ARR of $5 million to $10 million.
Gibson continues, “If I had to do it all over again, I’d pay more attention to the early signs of retention like user activation and adoption and how to drive that up. It’s something we’ve put an emphasis on and is starting to pay dividends. Since then, we’ve ventured into new verticals and we start with the pain of the customer. Do they have a real pain — which is a problem with a quantifiable impact — that our product can help solve for them?”
“From there, we can build out the target messaging, sales process — which includes how we’re going to demo the product — and then onboard the new customers. Start small with a few and then scale it up,” Gibson concludes.
If you are an early-stage business make sure you identify the target audience first. If your business is well established, you’ve probably defined a target audience for your product and marketing. But, consider revising your target audience based on the experiences you have now. Do you notice customers coming from a source that you don’t typically aim for?
Do you feel “settled” in the SaaS industry? Do you know the investors, collaborators, and tools to turn to for your business? If you can confidently answer “yes” to either of these questions, you could have a good shot at scaling your SaaS.
ReviewTrackers’ Chris Campbell stresses the importance of slowly adapting your business through flexibility and gradual hard work. “We started by pitching ReviewTrackers to investors, as well as in joining programs such as SXSW Interactive Accelerator and Start-Up Chile amongst others. This increased our visibility within the marketplace, press, and investor space. We managed to grow quickly thanks to connections with amazing technical entrepreneurs as well as good recommendations from industry professionals. Collaborations with like-minded productivity providers as well as adapting to automating everyday possibilities also helped us scale,” Campbell says of ReviewTrackers’ journey.
What did Campbell learn from these experiences? “Keeping your finger on the pulse and the ability to be flexible will increase your chances of scale viability. It’s a journey, not a race, which a lot of eager start-ups make the mistake with and therefore fail. It’s slowly building the correct attention and getting the software working beautifully which allows you to attract attention and scale.”
Campbell concludes, “Scaling is almost philosophical at the beginning. It’s commitment, an everyday task, almost like a Jenga stack game. You slowly add the pieces, maintaining your balance and focus to create a bigger company.”
As you work on acquiring more customers throughout the growth stage, remember to keep your acquisitions manageable. Scale your team and resources slowly alongside your customers.
Once your business reaches the final stage — maturity — you know how to get results consistently. You’ll continue to grow your business across multiple dimensions, like customer acquisition, product expansion, and global growth.
SaaS experts in the mature stage had two milestones to consider when you’re thinking about scaling your business:
At any business stage, you should look at both quantitative and qualitative factors when deciding to scale. Your performance data is invaluable, but so are “softer” indicators like employee input.
“Many SaaS businesses choose to look at numbers to decide when they are ready to scale, and while that works, there’s also the internal approach. We knew our SaaS was ready to scale when we saw the internal development and the team’s need for growth,” explains Andriy Shvets of MacKeeper, a SaaS with $3 million to $5 million ARR.
Shvets continues, “Team attitude and appetite changes are a good sign that your business is ready to scale, as long as the numbers are there to back it up. In my experience, it’s best to have both of these factors working for you when you make the decision.”
As you look at your scaling options, keep your team members involved with regular (but meaningful) meetings. Hold feedback and town hall meetings with your employees to understand their thoughts on your scalability.
As you’ve learned, it takes a combination of factors to tell when you should scale your business. Many of them relate to reaching stability in your current stage so you can take a few risks as you scale.
Charles Cridland from YourParkingSpace, a SaaS with $3 million to $5 million ARR, names multiple factors related to establishing your SaaS as a respectable competitor in the business. “There are a number of signs that can tell it’s the right time to scale up your business and achieve new heights. Most importantly, you need to understand the core consumer need, have the product that satisfies this core need, and have a customer base that makes your business model stable and profitable. If your SaaS business exhibits these signs, you can start evaluating your options and think about scaling,” Cridland states.
Cridland adds, “To ensure your growth, you’ll also need to develop a bunch of nice-to-have features and functionality that will give you a competitive edge. That will require hiring more developers, increasing marketing costs, and funding.”
Regardless of your current business stage, you’ll need to watch your performance carefully to know if you have room to scale your SaaS. But if you have a full stack of business apps in use, how can you track them all?
Databox combines data from your favorite business management apps so you can keep an eye on your KPIs in finances, marketing, sales, and product performance — all in one place.
Plus, it’s free for the first three data sources you use. If you decide to buy, Databox’s paid plans scale — just like your business.
Sign up for Databox today to see for yourself.
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