After sales skyrocketed in 2003, Salesforce was bursting at the seams. Employees worked full-time in hallways and conference rooms because no one was prepared for the company’s explosive growth.
Arguably the first true software-as-a-service (SaaS) company, the story of Salesforce exemplifies the dramatic expansion of the entire SaaS industry over the past two decades. Still, many SaaS startups or those moving to the subscription model find themselves unequipped for the unique challenges that come with managing SaaS operations, particularly financial operations.
Until recently, software providers have been slow to adapt to the needs most SaaS businesses have around managing financial operations, subscriptions and customers. Because of this, many SaaS businesses start out using spreadsheets and basic accounting software. If you are a growing SaaS business, this may work in the short term but can’t scale and eventually breaks down.
Growth Of SaaS Businesses
According to Transparency Market Research, the SaaS market is expected to reach $164.29 billion by 2022. Gartner predicts that by 2020, 80% of software providers will have migrated to a subscription-based business model.
Before the SaaS industry began its rise to prominence nearly 20 years ago, almost all software was sold on a perpetual license basis. Although this model usually had an optional 15-20% annual subscription component called “maintenance” that allowed customers to receive software updates and technical support, traditional software businesses (in the absence of a new product to sell) had to seek out new customers if they wanted to grow. Today, subscription businesses typically include access to software, updates and upgrades, along with technical support for a monthly or annual fee.
Thanks to the growth of the subscription model, we have the ability to earn repeat business and generally make the same or more revenue each renewal term. However, this requires consistent customer support and a rock-solid customer experience. Essentially, customers are making the decision to purchase each year, so the focus must shift to a 360-degree view of the customer. Understanding all customer, support and financial interactions over the term of an agreement is the new standard. If done well, the existing customer base is preserved through automatic software updates and a simplified subscription renewal process, and at the same time, new customers are gained.
Overcoming Common SaaS Related Challenges
Although the SaaS model presents new opportunities, it also offers a new set of challenges. These pitfalls are common and we see them time and again, but with awareness, they can be proactively addressed and dealt with successfully. Here’s how:
1. Traditional Financial Operations Are Not a Fit for SaaS
First, it takes longer than necessary for many SaaS founders to realize that finance and accounting for subscription-based businesses differ from those of a perpetual model. Enterprise SaaS solutions such as ERP software are overkill for most small and growing SaaS companies. This leads many SaaS businesses to rely on time-consuming and error-prone spreadsheets, manual processes and disconnected systems. If you’ve taken this path, you’ll have the painful discovery that this short-term approach leads to errors, different versions of the truth, heavier reliance on manual processes and an inability to scale effectively. However, it’s not too late to turn things around by moving away from spreadsheets and manual processes and begin implementing automation.
2. Disparate Systems Don’t Provide The Big Picture
SaaS businesses need greater visibility throughout the customer life cycle in order to customize the overall experience from a sales and customer success perspective and to improve renewals and revenue predictability. This “single source of truth” is achieved when sales, customer success and finance share customer information.
In the ideal software stack, customer data is pulled from one reliable source and all billing, collections, revenue, and financial transactions are visible to sales, customer success and finance through a single integrated platform that provides the SaaS metrics and analytics that are essential to managing and growing the business.
Prioritize solutions that integrate with your existing tech stack and create that single source of truth. The ideal solution will provide performance metrics and key performance indicators, financial information, annual or monthly recurring revenue (ARR/MRR), and outstanding invoices, as well as streamline new order processing and changes to existing subscriptions.
3. A Lack Of SaaS-Specific Solutions
Most growing SaaS businesses have, until this point, been forced to adopt their own strategies for managing a subscription model, with poor results. As mentioned earlier, too many SaaS businesses start out relying on spreadsheets, manual processes and disconnected systems.
Unfortunately, most solutions tailored to provide the single source of truth that SaaS businesses need were built specifically for large SaaS enterprises like Salesforce, yet large enterprises represent only a small percentage of the overall SaaS market. Today, there are approximately 50 publicly traded top SaaS companies, and some estimate there to be over 100 private unicorn SaaS companies. In comparison, there are over 10,000 private SaaS companies, most of which are in their early stages of growth with annual revenues of around $3 million.
Luckily, the market has moved toward solutions that were built from the ground up to support small and growing SaaS businesses. Today, subscription management software specifically designed for a subscription business can scale with your company as it grows, move your business away from spreadsheets, and improve order management, subscription billing and collections, revenue reporting, and metrics and analytics.
SaaS growth isn’t slowing down any time soon. Fortunately, the solutions that growing SaaS businesses need are available today, affordable and becoming more widely used. Those looking to scale to their full potential only need to be aware of the common pitfalls and willing to put the modern solutions and processes in place to maximize the opportunities for growth.
This article by Tim McCormick from SaaSOptics originally appeared in Forbes.