Customer Development, Customer Experience, Product Management, SaaS

How to Tackle the #1 Problem Product Teams Face: Customer Feedback

September 28, 2018 by

What’s your biggest problem as a Product Dev professional? Too many demands and not enough time? Limited resources? Oddly enough, none of those topped the list for Hiten Shah’s crowd.

Hiten Shah (of KISSmetrics, Crazy Egg, and Quick Sprout fame) recently wrote in his newsletter that “the problems people have on Product teams fall into two main categories: Customer Feedback and Alignment.” This conclusion came after Hiten asked his readers to share their biggest product problems, and in more than 100 replies, those two themes emerged as the leaders.

Wootric helps customers gather, organize, categorize and analyze customer feedback – at volume – every day. And we’ve got a few insights into how Product teams can solve the issues that come with customer-centricity – while improving alignment at the same time.

Let’s go through the problems real Product professionals sent Hiten Shah point by point.

Read More on Wootric

Customer Experience, Product Management, Products, Retention, Startups

Achieving product-market fit should be job #1. By @SueDuris

September 6, 2018 by

This is a guest post by Sue Duris, Director of Marketing and CX at M4 Communications.

Every startup wants to succeed. Startups want it bad. They know nine out of 10 startups fail. They want to be that one that succeeds!

They spend all their time first making that great product. And trying to make it better.  They add to it. A new bell here. A new whistle there.

And when they think they have the next big thing that’s going to disrupt the market, they go hunting for capital, trying to get any venture capitalist and angel investor they can to fund them.

“Capital first” is the battle cry so built into the startup community that whichever startup event people attend, the conversation seems to always be about raising money.  

Yet, when a founder does get an investor meeting, typically investors want evidence to support founder claims. They want to see metrics such as monthly and annual recurring revenue, active users, renewal rates, customer acquisition cost, customer lifetime value, and the like.

They also want to know about the market and the customer, in addition to your product. Is the market big enough? Who is your customer? What value do they get from your product? What kind of traction do you have in the marketplace?

Do you know this info?

While startups make their primary focus about raising capital, they place their secondary focus, if at all, on the customer.

Many times I hear startups tell me “I’ll focus on user and customer research after I get funding”.

Too many startup founders feel that getting funding is the magic pill that will solve all of their problems and put them on some fast-track to success.

But, don’t investors want to know about your customer strategy – i.e. how you make money – before they give you money?

Raising capital is very important. But to focus on it first is the wrong approach.

The first thing a startup should do is achieve product-market fit.

It is everything.

It typically determines whether you succeed or fail. It’s what sustains a startup and enables it to grow.

Make something people want.

It seems basic.

Creating a product that doesn’t fit what the market wants is silly. Yet, many do exactly this.

And if a startup doesn’t achieve product-market fit, chances are it will fail.

According to CB Insights, who has been compiling failed startup post-mortems, the #1 reason startups fail is because they don’t achieve product-market fit. This is cited by 42% of CEO’s of failed startups.

According to CB Insights, the #1 reason startups fail is because they don’t achieve product-market fit. Click To Tweet

Product-market fit is hard work and it takes time. There is no doubt about that. Yet, it’s too much work for some founders. They want the glory but not going through all the blood, sweat, and tears to do the work.

This is where things become paradoxical.

These are the same startups that worry about churn.

“We have to eliminate churn,” they say.

But to ultimately reduce churn means you have to first retain your customers, build loyalty and drive customer lifetime value.

So what is product-market fit and why does it matter?

According to Marc Andreessen, product-market fit means being in a good market with a product that can satisfy that market.

He goes on to say product-market fit is the only thing that matters.

When it’s not there you can tell because customers don’t get your value, no one is talking about you, usage isn’t growing, conversions are slow or not at all, etc.

But when it’s there, revenue, usage, and growth are fast.

People crave your product.

People are talking about you, especially your customers.

When your customers advocate and sell for you, you have achieved it, something I call “customer nirvana”.

It’s not a destination. It’s not a journey. It’s a mindset.

When your customers advocate and sell for you, you have achieved customer nirvana. And it’s not a destination. It’s not a journey. It’s a mindset. Click To Tweet

You have to keep on working towards it. You have to give your customer that experience. The experience is the product. And it all starts with product-market fit. And making everything about the customer.

To get to product-market fit, ask yourself:

  • What is the unmet/under met need my company or product is attempting to fulfill?
  • How do I meet that need?
  • What value do I deliver to my customer that enables them to achieve their business outcomes? What is my customer’s WOW or aha moment?

That moment is what gets you to the value. But it isn’t only the value, it’s how quickly you can get to that value. Time-To-Value is key.

You have to know your why – why do they buy from you?

You have to know the what – what is resonating for them that is compelling them to buy from you?

Then you must know the actions and behaviors they have with you that’s helping them be successful.

Knowing your why, and how customers use your product is what will sustain you.

This is THE WORK.

And, you’ve got to do the work if you want to drive revenue, growth and customer lifetime value.

This work will get you to a minimum viable product, which you can use to gain traction, which you can use to get noticed by investors, which will help you get funded.

Having the insights from product-market fit is what drives and sustains growth.

Can product-market fit be measured?

It’s questionable. But there are certain trends you can look for in the product-market fit path.

Retention is the social proof to product-market fit. Other metrics to be watching for product-market fit include NPS, Customer Effort Score (CES), increased sales (upsells, cross-sells, and greater share of wallet). Win-Loss can also hold insights to how healthy product-market fit is.  

I scratch my head when companies don’t focus on retention. They should double-down on it. Yet, for many, it’s an after-thought.

In its 2018 NPS & CX Benchmarks Report, CustomerGauge still finds retention is an issue.

44% of respondents don’t know their customer retention rates, that’s one in three companies don’t know this vital info!

This aligns fairly well to my research that 2/3 of marketing budgets focus on acquisition activities and 1/3 is focused on retention.

This is another head-scratcher.

Companies place more resources on acquisition and feel it is more valuable than retention. Forget about data points from Bain – it costs 6-7 times more to acquire a customer than retain one – or Gartner – 80% of your future profits come from only 20% of your existing customers.

According to Bain, it costs 6-7 times more to acquire a customer than retain one. And according to Gartner, 80% of your future profits come from only 20% of your existing customers. Click To Tweet

There are numerous reasons for the push on acquisition.

This is the culture of the organization and how it measures success. Marketing doesn’t view itself as responsible for Marketing (to this I find fascinating, considering many marketing departments feel they own customer experience). Retention gets passed around so many times that ultimately no one ends up owning it. Investing and analyst communities place high value on acquisition and so CEO’s follow suit to be in lock step. Leaders have number-envy.

Ultimately, retention must be a mindset that is engrained in the culture.

It also troubles me when I hear people say product-market fit is elusive.

Why? How?

You want to determine product-market fit?

Get out there and research. Find people. Ask people. Take the data they give you and identify insights to help you craft your business model. Do the work.

Raising capital is vital. But it should not be the first plan of attack. Startups must make product-market fit job #1. All roads to startup success begin there.

Design

Do you need a creative safe space for your design team?

September 6, 2018 by

A space that’s perfect for collaboration and creativity. Source: Inside Design: Yesware.

While it’s not a universal experience (and very much depends on company culture), some designers in corporate environments have restraints put on their creative expression. Those might be physical restraints, like rules against whiteboards and Post-it notes out in the open, or ideological restraints that stop the creative process in its tracks.

Maybe you work in a creative utopia, or maybe you don’t.

But creativity is delicate. It needs room to grow and a nurturing environment to bear fruit.

So we’re dedicating this post to finding ways to establish safe spaces for creativity—and creatives—to thrive in corporate settings.

Physical “safe space” for design

“GlaxoSmithKline, the global pharmaceutical giant, thinks it has found the cure for the drab, inefficient office: fluid spaces where you do what the moment requires, alone or in groups, moving throughout the day. Each employee has a laptop with a built-in “soft phone,” a locker for personal possessions, and maybe one file drawer. That’s it. Even US head Deirdre Connelly doesn’t have an office.” – Inside the New Deskless Office by Frederick E. Allen, Forbes, July 2012

New trends in office design and space usage have cut down on clutter, and often even personal space. Shared workspaces and “hot-desking,” where employees move from desk to desk as needed, might minimize the expense of square footage, but it does come with other costs.

You can’t make, or leave, “messes.”

But designers need room—and possibly rooms—to create. To put their ideas out there and see how, or if, they work together.

There are strong arguments to be made for clean, tidy workspaces that lead to clean, tidy minds. But creative minds are messy, and a few studies shows that creativity spikes in messy environments.

“Forty-eight research subjects came individually to our laboratory, again assigned to messy or tidy rooms. This time, we told subjects to imagine that a Ping-Pong ball factory needed to think of new uses for Ping-Pong balls, and to write down as many ideas as they could. We had independent judges rate the subjects’ answers for degree of creativity, which can be done reliably. Answers rated low in creativity included using Ping-Pong balls for beer pong (a party game that in fact uses Ping-Pong balls, hence the low rating on innovation). Answers rated high in creativity included using Ping-Pong balls as ice cube trays, and attaching them to chair legs to protect floors.

When we analyzed the responses, we found that the subjects in both types of rooms came up with about the same number of ideas, which meant they put about the same effort into the task. Nonetheless, the messy room subjects were more creative, as we expected. Not only were their ideas 28 percent more creative on average, but when we analyzed the ideas that judges scored as “highly creative,” we found a remarkable boost from being in the messy room — these subjects came up with almost five times the number of highly creative responses as did their tidy-room counterparts.”

Designate a physical space that allows you and your team to make a mess. Click To Tweet

Read More on InVision

Customer Success, Mobile, Mobile Apps

“Do push notifications increase retention?” Answer by @NikkiElizDeMere

August 24, 2018 by

Do push notifications increase retention? Hah! I spent the first 10 minutes of my morning disabling push notifications AGAIN from my phone (because apparently app ‘updates’ = resetting my notification settings?).

I am not alone, apparently. Andrew Chen said it best: “notification-driven retention sucks.”

In all seriousness though, push notifications only increase retention as much as they are *useful.* Tell me when something is wrong. Tell me when something goes through correctly. Tell me when a friend, or client, contacts me. Tell me when you have a 20% off sale (anything less than 20% I consider spam, let’s be real here).

This morning though, my phone was pinging for no reason I could find at all. Disable. Disable. Disable. Like someone from Facebook should have listened when PostFunnel’s Matt McAllister said “Push notification permissions are a privilege… Users can take them away at any time.”

So I’ve got this crazy idea:

What if we took another look at how we use push notifications, and this time, see it through the lens of Customer Success?

How can we use push notifications to *help* our customers be successful with our product?

Not just ‘ping’ them into submission.

Let’s think about that for a moment, in the context of what your app does, who uses it, and what their ideal real-world outcomes are. Can getting a message at just the right moment help them (not just you) be successful?

Starbucks is doing this really well. If you’ve got the Starbucks rewards app on your phone, they optimize what they send you based on your purchase history, listed preferences, even the local weather, like sending an iced coffee notification when it’s 101 degrees.

And how about a crazier idea – most of the ‘push notifications’ we want to see are the ones alerting us that a personal friend, or a client, or a human (vs. a brand), or a member of a group we’re in, have said something interesting, that we might want to know about, NOW.

That’s right – the most effective push notifications are based on human relationships. Shocker!

This is actually great news when you’re trying to use push notifications to drive retention and engagement, because relationships also drive retention and engagement!

What if you focused on building relationships, say, with a social media community built around your product, and when something of interest is posted in that space, send a push notification to invite users into that conversation? I always want to know what’s happening and who’s saying what in my Facebook groups and Slack channels. That will always get me to click.

But when you start with what your customer needs and wants, they’re not going to spend their mornings like I did – disabling your push notifications!

Mobile, Mobile Apps

“What are the best practices to optimize retention in a mobile app?” Answer by @NikkiElizDeMere

August 24, 2018 by

First, let me state some fun facts.

  • Last year, there were more than 20 million apps on iOS App Store and 3.5 million on Google Play.
  • In 2017, the average person had 80 apps on their smartphone – but, only used half of those apps on a monthly basis.
  • The odds of someone becoming a long-term user are really slim. Only 29% of app users continue using any given app after 3 months.

In that landscape (appscape?), retention is an enormous challenge. And a lot of SaaS companies are trying techniques in Nir Eyal’s Hooked: How to Build Habit-Forming Products, using push notifications and emails as “external triggers” to get people to essentially practice going to the app and building positive associations with it. Almost like building muscle memory.

Or an addiction.

But let’s look on the sunny side of the street (while acknowledging that the shady side is really dark) for a moment.

One of the ideas in Hooked that I like most is “habit testing” your product. The Habit Testing process places a lot of emphasis on understanding “Who your devotees are,” in addition to “what part of your product is habit forming, if any” and “why those aspects of your product are habit forming.”

Understanding your customer is where every retention effort should start.

Talking to your best customers to find out why they use your product, how they use it, and when is vitally important. Using that information to tweak your user flow to get your customers to their goals faster and easier is the raw material of retention.

But I would go farther. I recommend interviewing your best customers (or people you believe will be your best customers, if you haven’t yet launched) to find out what they’d really like to do, and how your app moves them closer to that goal.

That goal that lives outside your app.

Let’s take Facebook for example. My goal as a Facebook user is to stay in touch with my friends, feel a sense of community and camaraderie in my groups, and share photos of my cats. Facebook has won my long-term usage by making it easier (mostly) for me to do these things by suggesting “people you may know,” sending notifications when someone posts in one of my groups, and allowing me to upload kitten pics in HD.

And, of course, there are the psychological rewards built in – the dopamine boost of the “notifications” tab, the constant drip of “what will show up on my feed next?!”

But if it didn’t get me closer to my core goals? I could live without Facebook. Happily.

The ways in which you engage your customers should be ways that help them reach their goals. Whether those are emotional goals (I’m bored! I want to see kittens playing in boxes! Hello YouTube!), practical goals (I must budget! Baby needs a new scratching post!), self-improvement goals (I will eat kale at every meal!), or professional goals (I’m going to make Partner in 5 years!).

We can personalize in-app experiences to nudge people towards making real progress. We have that technology. And I predict that, when customers are tired of being manipulated into forming habits that may not be in their best interests, they will gravitate towards apps that are genuinely designed to help them become better versions of themselves.

Customer Development, Customer Experience, Customer Success, Growth Hacking, Product Management, SaaS

There is no better “growth hack” for SaaS than talking with your customers.

August 16, 2018 by

Not just when you’re developing or marketing a product, but through every stage of the customer lifecycle.

It sounds simple — but it’s not easy: talking with your customers through every stage of the customer lifecycle. There’s been a lot said about the value of talking to your customers before you build the product to ensure market fit, but very little said about continuing the conversation past marketing and past the sale.

Why do I know talking with your customer is *the* very best predictor of, and contributor to, SaaS business growth? Because creating a constant flow of customer feedback, input, and conversation makes Customer Experience (CX) better.

Multiple studies show that CX leads to revenue growth.

CX also drives brand advocacy (aka. word of mouth), creating a virtual sales army, which leads to:

Decreased cost-to-acquire.

“Customers with the best past experiences spend 140% more than those with the poorest past experiences.” — Harvard Business Review

Increased customer lifetime value.

“Customers with the best past experiences have a 74% chance of remaining a member for at least another year.” — Harvard Business Review

Plus, qualitative customer research leads to making data-informed decisions that streamline product management, ensure customer success, and make marketing and sales far more efficient.

In short, as Laura Klein, author, VP of product, and co-founder of Users Know says,

“User research saves time. Period. When you actually understand what your user needs before you build things, you have a much lower chance of having to go back and rebuild everything after shipping something that nobody uses.”

But what does “talking with your customer” really mean?

It’s not like you’re inviting them over for tea and cookies every week for a casual catch-up (though that would be awesome, and you should do that and invite me).

When we say “talk to your customers,” or “listen to your customers,” I usually mean getting on the phone with them (or better, meeting up with them in person). But, it can also mean sending surveys that include long-form response fields, or building quicker in-app surveys into your roadmap to uncover moments of friction.

And, of course, if you’re earlier in your business, there’s the Lean approach of interviewing dozens of target customers in person and over the phone — groundwork that helps founders (and product developers and marketers) form better hypotheses around what will deliver the best product-market fit.

There’s also user testing.

These are all valid ways of listening to your customers. But I’d like to advocate for doing all of these things and going several steps further. I’m talking about combining all of the above and adding genuine conversations to the mix.

It’s just not input. It’s just not feedback. It’s getting to know your customers as human beings and building relationships with them that drive positive CX far more powerfully than any of these elements could do alone.

So much has been written about interviewing customers prior to developing products that I’d like to focus on how to keep communication lines open after the launch, after customer acquisition, starting with onboarding.

Track more than actions, during and after onboarding

(This is a chart I created for: “Product Managers: Why You Should Include Customer Success Milestones in Your User Flow”)

The first key to ensuring communication stays clear and open is to observe your customers. We communicate far more by our actions than we do verbally, and tracking the actions of your customers, especially (but not limited to) during onboarding can tell you the truths you need to hear.

Tracking customer behavior during onboarding and throughout product use allows you to see:

  • Time to first value (how long is it taking?)
  • Where customers run into trouble and need tech support
  • When customers typically need Customer Success help to reach their desired outcomes
  • Which customers reach their success milestones (the points in their user journeys where they see real progress towards their ideal outcomes)
  • And which customers don’t reach their success milestones

Yes, you want to track how well your customers accomplish the required tasks outlined in your User Flow, but usually, tracking stops there. If they press the right buttons at the right times, if they input the requested information, if they log in relatively regularly, it’s easy to assume customers are happily using your product.

But that’s not always the case. There may be ‘success gaps’ you can’t see that are causing churn. FYI: A ‘success gap’ is “the gap between what you think represents the customers’ successful use of your product and what they think equates to success,” according to Lincoln Murphy.

This is where aptly timed in-app surveys come in handy, which I’ll get to in the next section.

Tools that can help:

  • Appcues for onboarding
  • Intercom for targeted in-app messaging
  • Segment for easily managing your tools without dev

Check in with event trigger-based surveys

While you’re tracking user behaviors, successes and failures, you’ll also want to check in with your users in an unobtrusive way to get their feedback at specific points in their user journeys.

For example, if you identify a page or prompt during onboarding that tends to ‘lose’ people, have a trigger-based in-app AI chatbot pop up and offer to clarify, or transfer them to an agent. (This, incidentally, would have saved my relationship with more than one app! If you hit a ‘wall’ during onboarding, the odds of completing the process and becoming a successful customer are terrible — unless you get timely help).

You can set up event trigger-based surveys to deploy when users spend too much time on a page, ‘click away’ before completing the action, or when they’ve been ‘dormant’ (not logging in) for a while.

By giving customers opportunities to tell you they’re confused, are experiencing failure, aren’t getting the results they’d hoped for, or are suffering from a lack of time/motivation/technical skills etc., you will know who is really at risk of churning in time to save them, and really impress them with your customer service skills.

Finding friction with customer effort scores

Another place where checking in with your customer can really pay off is after the onboarding sequence is complete. It’s a perfect time to ask “How difficult was this?” (aka. A Customer Effort Score survey). The easier a process is, the less friction people experience, and the more likely they will be to complete your desired actions and reach their desired outcomes.

Then, after your new user has had a chance to put your product to work, you should send out a Net Promoter Score survey (NPS) to find out how they *really* feel about your product. Do they like it enough to recommend it to a friend or colleague? That’s an excellent indicator of how well they’re succeeding. And be sure to send an NPS follow-up question to understand the why behind the score.

Tools that can help:

Wootric: For these types of in-app surveys, I recommend Wootric. Their dashboard makes it very easy to understand what you’re seeing, and they do great work with extrapolating insights from qualitative data questions too.

The Game Changer: Have real conversations in your community

Tracking what customers do and asking them what they think at strategic points is a very good start; the trouble is, that’s where most SaaS companies begin and end. But SaaS businesses are subscription-based. They’re in this for the long-haul. They depend on customers sticking around (customer lifetime value! retention!).

And that means you also have to build relationships with your customers.

This is why I so strongly advocate that SaaS companies build social communities around their products. It’s an opportunity to relate to your customers as people.

The bonuses are many. SaaS product communities give you:

  • An on-tap resource of customers who are delighted to answer your questions and give you real-time feedback on everything you do
  • A straight line to your most engaged customers
  • A real-time capability of helping customers in trouble and creating delightful experiences for them, on a public forum, with everyone else watching (warm fuzzies all around!)
  • An opportunity to cultivate a culture around your brand and a genuine community
  • And… it’s possible — ZERO churn!

The most important thing to remember about building a community is that it’s not a one-sided arrangement. This isn’t a place for you to ‘shout into the void’, post blog posts nobody reads, try to ‘sell’ or advertise. It’s a place where you and your customers can come together around your common interests. Human to human.

Tools that can help:

  • Facebook
  • Slack
  • Your social community of choice!

Bring it all together now!

When you are tracking user behavior in your product, identifying predictive patterns of behaviors/successes/failures, locating trouble-spots and offering timely help, checking in with surveys to ask your customers what they think — in their own words and with numerical ratings, AND forging human-to-human relationships in the casual setting of social media groups, you’ll see a few things happen…

  • Your referrals will skyrocket as more customers achieve success
  • Your retention rates will go through the roof
  • Your acquisition and product development spend with become more efficient (as you target the right prospects, and use customer feedback to guide your iterations)
  • And you will grow — fast

Are you ready for that?

If you thought this was good — Sign up for my newsletter to hear from me on Sundays. I’m also available for SaaS consulting.

Customer Development, Customer Success, Product Management, SaaS

How Product Experts Use Qualitative Data for Roadmap Planning

August 11, 2018 by

Wouldn’t it be great to get customer feedback before there are even customers so you know what new features and products to prioritize?

Yes, we’re talking about gathering feedback from customers who don’t yet exist, for a product that doesn’t yet exist, to create a product that will perform better, sell better, and get rave reviews.

And it’s possible.

It’s just the opposite way Product dev usually works.

The usual way: When evaluating a new product, usually you present the product, a minimum version of the product, or a beta version of the product, to a group of users (or beta testers) and listen to their feedback (qualitative data) and look at their behaviors (behavioral analytics) to see where you’ve succeeded, and where you still need to pick out the bugs. But on brand new features and products that aren’t launched, knowing that customers want and need most is educated guesswork. A series of hypotheses and trials.

We’re going to show you how to leverage qualitative data to build better hypotheses to reach successful new products and features faster.

How can you leverage qualitative data when the product or feature doesn’t exist yet?

You have to talk to customers who don’t exist yet.

Seriously.

When preparing to create a new product or feature, your first task is to speak with potential future customers – people who are a good fit for the solution you’re thinking of building. If you have an existing user base and are planning to introduce a new feature, you can start there by finding groups of people whom you think are likely to need it.

Your goal is to check your assumptions against their real, qualitative feedback – and there is nothing like a two-sided conversation for gaining insights you’d never expect. Schedule calls with at least a dozen people you think will be a good fit, and ask:

  1. What goals, inside and outside of work, are you hoping to accomplish today, this week, and this year?
  2. Tell me about your work process – what do you do exactly?
  3. What frustrates and aggravates you on a regular basis – what are the hurdles between you and getting things done?
  4. What might make reaching your goals easier?

Then, present your product idea and ask if they think it could help them reach their goals and reduce (or eliminate!) the hurdles.

Of course, interviewing individuals doesn’t scale. So when you do have hundreds or thousands of users to poll about a new feature to your existingproduct, you’ll need to gather your qualitative data a little differently.

Read More on Wootric

Community, Customer Success, SaaS

SaaS founders: you have six months to go from scattered to hyper growth — GO! 🚀

August 10, 2018 by

If that was the challenge, could you do it? Would you even know where to start? And could you keep your momentum up the whole way, positive that you’re making the best possible choices?

Well, if you can — then you should be teaching this Mastermind instead of me! (Seriously, hit me up on Twitter, I’d love for you to be a workshop teacher for future masterminds).

But for everyone else, getting your product from that hazy, aspirational, trying-to-do-everything-at-once pre-launch place all the way through the nitty-gritty groundwork that leads to growth…

The kind of growth companies like Drift, Hotjar, AutoPilot and InVision have had…

(And yes, I’m name-dropping those companies for a reason — I’ve worked with all of them.)

It’s hard! Hard to do on your own, hard to prioritize, hard to know what will work (and what to do when it doesn’t work).

And when you actually do start to grow, it gets harder.

And more confusing. And more expensive, and time-consuming, and soon your entire world is your startup and its crumbling under the pressure…

Breathe.

Successful SaaS startup founders either have experienced a lot of failure already, or they had help. And help is what I’m offering with the Customer Obsession Mastermind, which I’m co-hosting with Marketer / Brander / Copywriter / Story-teller extraordinaire, Alaura Weaver.

In six months, starting January 2019, we’re taking a select group of SaaS founders through everything — EVERYTHING- they need to:

  • Develop a product customers will love (product-market fit!)
  • Successfully launch that product and bring it to market
  • Create a sales funnel that works, supported by marketing that speaks to your ideal customers
  • Build in Customer Success measures from the start to generate retention and referrals
  • Lay the foundation for a strong business that keeps getting better

Sure, there are books that tell you how to do all of these things (I’ve read them, they’ve got great ideas). But no book will say “normally this is what people do, but in your situation, you should try this…”

And that’s where a Mastermind group led by consultants top SaaS companies hire to help them grow comes in handy.

If you’re wondering “Okay, Nichole — what qualifies you to lead a Mastermind?”

Here are my bona fides:

I am a SaaS Growth Consultant and Customer Success Evangelist. I’ve been working with communities and top startups for more than 10 years (like Segment, Hotjar, Copy Hackers, Autopilot, Vervoe, Wootric, Appcues, InVision, HubSpot, Drift, ChartMogul, Notion, Product Plan, Growth Hackers, Product Hunt… you get the idea), and — outside of these startups — I’ve seen too many early-stage SaaS startups fail for entirely avoidable reasons. Mostly regarding language-market fit and customer success. Which is why this Mastermind is “customer-obsessed,” because your success begins and ends with their success.

Alaura Weaver and I are hand-selecting each member of the group right now — and if you want in, apply NOW! These slots are filling up fast, not everyone who applies will be accepted, because we only want serious SaaS founders who can commit to quite a lot of work.

Yeah, this isn’t one of those Mastermind groups where you just talk at each other once a month, and maybe do a little homework in your spare time. Make a vision board or something.

No.

We push you to succeed. We give you real tasks and deadlines (and a LOT of support!) that you have to do because your business depends on it.

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Photo Friday: 8/9/18

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Taking Instagram photos is my hobby. In this series, I post a few photos on Friday that I recently took.

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Guest Posts, SaaS

What goes into valuing a SaaS business? (How much can you sell a SaaS business for?) by @ThomasSmale ‏

August 8, 2018 by

Valuing a SaaS Business

This is a guest post by Thomas Smale, Founder of FE International.

The SaaS business model has enjoyed monumental growth in recent years, and though nearly ubiquitous at the enterprise level—with 73% of organizations expecting nearly all of their apps to be SaaS by 2020—the vast majority of SaaS businesses are owned by hard-working entrepreneurs and are either owner-operated or run by small teams. Not surprisingly, the ever-increasing popularity of the SaaS model has resulted in a corresponding rise in demand from investors and buyers attracted to the potential for SaaS businesses to realize predictable, recurring revenue and steady, incremental growth.

If you’re the owner of a growing SaaS business, you know what it takes to build it into a successful enterprise—and chances are you’ve wondered how much your business is worth. When arriving at an accurate valuation of a given SaaS business, an established M&A advisor will take dozens of factors into consideration in order to take a holistic view of the business.

In this piece, we walk through the basics of valuing a SaaS business, with a specific focus on areas where owner intervention can positively impact the value of the business.

SDE vs. EBITDA vs. Revenue

The first step in arriving at an accurate valuation of a SaaS business is determining the current revenue of the company, which is most commonly done in one of two ways. For SaaS businesses with an estimated valuation of $5M or less, the Seller’s Discretionary Earnings formula is applied. For businesses with an estimated valuation of over $5M, we typically employ the Earnings Before Interest, Depreciation, and Amortization (EBITDA) method.

SDE

A relatively straightforward method of determining earnings, SDE is calculated by taking the gross revenue of the business, then subtracting any Cost of Goods Sold (COGS) and non-discretionary operating expenses. Then, because many SaaS businesses valued under $5M are owner-operated, the owner’s compensation is “added back” into the final earnings determination. Other acceptable add-backs for the purposes of determining SDE might include discretionary expenses passed through the business for tax purposes, such as travel. Without these “add-backs” the true earning potential of the business may be obscured.  The goal of using SDE is to give potential buyers as accurate a picture as possible of current earnings and profitability of the business.

SDE

EBITDA

Valuations of companies with an estimated value of $5M or higher are more complex and typically use the EBITDA formula.

Again, the goal is to arrive at an accurate earnings picture. SaaS businesses valued above the $5M threshold typically are not solely owner-operated, have multiple shareholders, and a management team in place. With EBITDA calculations, any owner compensation and discretionary expenses are subtracted from earnings in order to give a clearer picture of earnings power. Additionally, by discounting expenses like interest and taxes, EBITDA provides an accurate snapshot of the operational efficiency and earnings of a SaaS business.

Revenue

In some circumstances, SDE or EBITDA may not provide an accurate measure of the true earnings potential of a SaaS business. For a fast growing, young SaaS business, EBITDA could come to zero or even less, but the business might still be an attractive acquisition for buyers who are interested in its growth potential. In such cases, it is possible to predict earnings based on projected growth. Such determinations are not without their hazards as they rely solely on growth forecasts that are by nature volatile, and highly subject to change.

Revenue multiples are also employed in larger, more strategic acquisitions. Again, the goal is to put large, often one-time, investments in areas such as development into perspective and to uncover the true earnings potential of the business.

Finding the most accurate way to determine the earnings power of a SaaS business requires a nuanced approach, sometimes utilizing a combination of all three of the methods outlined above. It is vital to determine an accurate picture of current earnings and future growth potential in order to assess a SaaS business’ attractiveness to buyers.

Valuation Drivers

Once the net earnings of a SaaS business are determined, the next step is to determine the multiple that will be applied to the business in order to arrive at the listing price. To do this, we examine hundreds of different data points. Broadly, these boil down to the transferability, scalability, and sustainability of the enterprise. On a more granular level, some of the most crucial valuation drivers include:

Valuation Spectrum

Based on the factors above, amongst others, SaaS business valuations typically fall within the 2.5x to 4.ox of annual profit (SDE) range. Obviously, this is a broad spectrum. If the SDE of your SaaS business is $100K, that’s the difference between a valuation of $250K and $400K.

The four most critical factors determining the multiple for a SaaS business are:

  • Age of the business
  • Amount of time the owner is required to spend on the business.
  • Whether the growth of the business is trending upwards or is stagnant.
  • The rate at which customers stop using the SaaS, or “customer churn.”

Key SaaS Metrics

Customer Churn

As mentioned above, the rate at which customers leave your SaaS business is a critical factor in determining the valuation multiple. There are many nuances to calculating churn, but the simplest way to is to take the number of customers who have unsubscribed from a SaaS over a specified period—typically a month or a year—and divide it by the number of total customers at the start of that period. The percentage derived from this equation equals the churn rate. When measured over the long term, churn has a substantial impact on revenue. Take the example below of two SaaS businesses, one with a 5% annual churn rate and the second with 20% annual churn:

CAC and CLTV

Customer Acquisition Cost (CAC) refers to the resources and monetary investment required to acquire a new customer. Taken in tandem with Customer Lifetime Value (CLTV), CAC is a powerful way of measuring the efficiency of a company’s sales and marketing processes. If CAC exceeds CLTV by a wide margin, this will have an adverse effect both on the valuation multiple and the long-term success of the business. A CLTV/CAC ratio of 3:1 is considered ideal.

MRR vs. ARR vs. Lifetime

While selling “lifetime deals” on platforms like AppSumo may be a tempting way of boosting short-term cash flow, relying heavily on discounted lifetime and annual plans can have a negative impact on valuation. Buyers strongly prefer Monthly Recurring Revenue (MRR) to Annual Recurring Revenue (ARR) and lifetime plans. In order of value:

In order to reach a premium valuation, a SaaS business should aim to achieve a 4:1 ratio of MRR to ARR. MRR is valued at double the rate of revenue derived from lifetime plans.

How to Increase the Value of Your SaaS Business

While some critical valuation factors, such as the age of the business, cannot be proactively impacted by the owner, there are many ways to increase the value of a SaaS business, such as:

  • Reduce Customer Churn: Improving onboarding procedures and reducing waiting times for customer support are just two of many ways to reduce churn rate.
  • Outsource/Reduce Owner Involvement: Many buyers are seeking passive income from a SaaS business. Reducing the amount of time an owner must spend on a business through outsourcing and streamlining business processes will lead to a higher valuation.
  • Document Source Code: Code is the backbone of any SaaS. Ensuring that code and documentation follow contemporary coding best practices will increase value, as will documenting the code to make it easily understandable and transferable to a new owner.
  • Safeguard Intellectual Property: Any intellectual property (IP) related to the business, including trademarks, copyrights, and patents, should be duly registered and legally transferable to a new owner.
  • Avoid Discounting and Promotions: While offering discounted annual or lifetime subscriptions may be appealing in the short term, any benefits are likely to be outweighed by the long-term impact on revenue.

How to Sell a SaaS Business

While there are numerous platforms when the time comes to try and sell a SaaS business, these can be broken down into four categories:

  • Marketplace: A popular option—particularly for owners of small SaaS businesses with a valuation of $30K or less—marketplaces such as Bizbuysell have their advantages. Upfront costs to list an online business are low, and the well-established marketplace sites get a considerable amount of traffic. Due partially to the low barrier to entry, there are thousands of websites listed for sale, so it can be a challenge for a business to attract the attention of a well-qualified buyer. While upfront costs may appear negligible, the cost and effort required to vet buyers, conduct due diligence, protect IP through Non-Disclosure Agreements (NDA), prepare contracts, etc. can add up quickly. Even with an NDA in place, there is an element of risk inherent in sharing confidential information with unscreened buyers. For some sellers, the length of time it takes to finalize a sale through a marketplace—typically six to nine months—may also be a concern.
  • Auction: Similar, in principle, to an eBay for online businesses, auction sites share many of the pros and cons of selling on a marketplace site. Auction buyers are often bargain hunting for businesses valued at $5K or below, though there are occasionally successful sales of larger SaaS businesses on the platform. That being said, these platforms bring with them a lack of due diligence into the businesses they list and proper vetting of buyers. For SaaS businesses with a high risk tolerance looking for an independent listing process, selling on an auction or marketplace site can be a good fit. For more established SaaS companies, the increased visibility and low upfront costs these sites offer may come at the expense of undervaluing the business or unspotted discrepancies that can hinder a successful sale.
  • Using an M&A Advisor: Experienced M&A advisors are judicious about which SaaS businesses they represent. Detailed financial records, historical site analytics, and upward trending growth are common prerequisites. Although there is a standard commission of 10-15%, an expert M&A advisor can provide a pre-vetted network of motivated buyers, expert due diligence, and the legal experience to ensure the deal goes smoothly. These and other factors help cut the average sale time down to four to eight weeks for qualified sellers. Moreover, the higher fees are often more than offset by the higher valuation and corresponding sale price that the business achieves, thus most often leading to a higher net profit for sellers than a marketplace.
  • Direct Sales: If you have a proven track record of success in operating and selling SaaS businesses, a direct sale may be a viable option. The seller will be responsible for all legwork such as due diligence, legal documentation, and buyer outreach, so, unlike when using a broker or marketplace, there should be no fees or commissions payable upon successful execution of a sale. However, the expenses accrued due to hiring lawyers, accountants, and other third-party contractors might quickly outweigh any savings in this regard. Additionally, unless you have a network of buyers you trust, you risk exposing valuable information about your company to unscrupulous suitors.

Final Thoughts

Regardless of whether or not you are currently considering an exit, a thorough understanding of how to value a SaaS business creates the opportunity to positively impact the asking price. If you are interested in having an experienced M&A advisor value your SaaS business at no cost and help you determine if the time is right to sell your SaaS business, don’t hesitate to get in touch.