Inception of the Business

Spencer’s journey began as a non-developer in a chat room. He initially created a software system for personal use, quickly gaining traction and feature requests from other users. 

He recognised the opportunity to monetise, scaling from a few users to hundreds. Faced with requests for features like free trials and referral rewards, Spencer, despite the initial MVP’s rudimentary state, saw the potential for growth. 

“I had to charge for this and then I kept reinvesting all that money into the software’s development,” Spencer said.

This marked the start of his entrepreneurial venture, growing his idea into a profitable business.

The business is a comprehensive platform and Payment Bot designed for seamless transactions. It supports multiple payment methods including PayPal, Stripe Credit Cards, and others. The platform enables users to accept payments, donations, and manage membership subscriptions with ease. It’s compatible with various platforms such as Web, Discord, and Telegram, enhancing the sales process and customer experience.

Building in a “vacuum”

Spencer built his business during a time when “building in public” wasn’t a widespread practice. This posed unique challenges. 

“You have no idea what the user audience wants until they request it or react to a release. Building without real-time feedback, you invest a lot of time and energy navigating this uncertainty,” Spencer said.

Starting with a modest $6,000 investment, Spencer and one other developer built the platform, scaling their monthly recurring revenue to $141,000—a significant feat for a two-person team. 

So, how did he do it?

Here’s a summary of the growth strategies he implemented:

• User-Centric Development: Spencer continually adapted the software based on user feedback, adding requested features such as free trials and referral rewards.

• Reinvesting in Development: All earnings were reinvested into software development, which was pivotal for enhancing the product’s features and capabilities.

• Pricing Model: The transaction-based pricing model was a key differentiator, tying the businesses success to the success of its users.

• Expanding Payment Options: Encountering limitations with Stripe, Spencer integrated PayPal and later Venmo, significantly expanding the platform’s reach to over 200 countries and regions.

• Direct Outreach and Networking: Spencer engaged in direct marketing and outreach to potential users, nurturing grassroots growth.

• Building a Reliable Team: Despite starting with just one developer, he built a team that was instrumental in scaling the business.

• Adaptability and Persistence: Spencer’s persistence in integrating with major payment platforms and his adaptability in business strategy were crucial for the platform’s growth.

Reaching for a Global Scale

Spencer encountered limitations with Stripe, initially available in only 14 countries, restricting his business’s global reach. As Stripe expanded to 30 countries, he still found it insufficient for his rapidly scaling business. 

“I thought this still isn’t it, we need the big Kahuna. We need PayPal,” Spencer said. 

But this missing piece of the puzzle didn’t come easy.

Spencer described PayPal as an essential player in his business model, which he saw as unique and distinct from typical B2B or B2C models. His company operates on a B2B2C model, serving merchants who sell to their customers. 

“We took a percentage of the transaction. So if a merchant made money, we made money. If they didn’t, we didn’t,” Spencer explained. 

Once Spencer got in touch with someone at PayPal, they weren’t interested. His business was too small. 

Spencer persisted. He kept calling and emailing different people at PayPal, until someone finally got in touch. 

“I wore PayPal down. A giant, massive corporation. They put me in touch with the integration team. It took about a month to integrate with just myself and one developer,” Spencer said. 

After they integrated, they started seeing their numbers boom.

“It wasn’t due to the lack of Stripe, it was just having the doors open to 200 countries and regions. So now we had PayPal and Stripe, why wouldn’t we go after more?”

Spencer set his sights on Venmo. And Spencer got Venmo. 

Spencer personally reached out to potential users and engaged in direct marketing, fostering grassroots growth of the user base.

He placed significant emphasis on integrating user feedback into the development process, ensuring the product met the actual needs of its target audience.

“We just kept going and then eventually I said, you know, it is time to sell,” Spencer said. 

Selling with Flippa

The decision to sell came from his desire to diversify and “not put all his eggs in one basket.”

“Having to do the vetting yourself while trying to run a six-figure monthly business is like a second job,” he said.

He struggled with other platforms, where “there were no profile pictures. No LinkedIn and very basic.” 

This led him to Flippa, where he met Fiona, his M&A Advisor. 

Spencer appreciated Fiona helping him to navigate negotiations and protect his boundaries.  

“As a risk-averse person, there were a lot of requirements that I had because, you know, going through the business world, you get very cynical. There’s a lot of backstabbers out there,” he said.

“I had specific strict requirements. I’m not showing my customer list before the check is in. I’m not going to give you the names and emails of everybody, nor will I give access to our source code.”

Spencer said Fiona was there to reassure and smooth things over.

“She was a real advocate, always in my corner, handling due diligence, and fighting for my interests. Her efforts in hustling the deal were fantastic, which is why she deserves her own Singapore office.” 

Fiona’s support led to a successful sale of over $3 million dollars, leaving Spencer to contemplate what’s next. 

What’s Next for Spencer?

Well, he’s not one to sit back and relax. Spencer’s diving headfirst into the world of personal branding and the creator economy. He sees big potential in building a direct connection with audiences and sharing his journey. 

Spencer plans to become a buyer himself, utilising his experience and insights from selling the business. His goal is to acquire businesses in familiar domains, such as marketplaces or SaaS platforms. 

Content creation and mentoring are also on his radar. He wants to share his insights and guide some up-and-comers in the tech world.

Inspired by this story? Read up on others who have successfully bought and sold their businesses here.

If you’re ready to sell, get a free valuation for your business here.

If you’re ready to buy, find your next business venture on Flippa. 

In this article, we will talk about the different pricing models commonly used in the SaaS industry, highlighting the critical aspect of value perception and its critical impact on sales. We will also delve into recent examples and stories of SaaS companies that have perfectly aligned their pricing tiers to their customer segments, utilizing value perception to maximize revenue in doing so.

Price Perception in the SaaS Industry

Price perception is crucial in gaining a fair price for your software. What are the elements that most directly impact people’s perceptions of your pricing?

Industry Specific Software

When considering pricing in the SaaS world, it’s important to understand that the industry served often dictates the value perception. Take, for example, SaaS roofing CRM software, which caters to the very specific needs of roofing contractors and companies.

Such specialized software can afford to set higher pricing tiers because they offer features that general-purpose software can’t, like customized job tracking and material estimates specific to the roofing industry. By understanding the unique pain points of their target market, businesses can price their solution in a way that maximizes both value and revenue.

Software that is more general purpose, such as club management software for gyms, spas and other organizations generally have lower pricing structures. They appeal to a wide range of companies and as such offer very general features. On the other hand, software for healthcare companies can often be pricier because they have to remain compliant with all laws and regulations, such as HIPAA.

Features and Functionality

Customers usually understand the value of a SaaS product through its features and tech-stack. Is it built on forward-facing libraries like React and Angular, or does the software rely on legacy code? Even with older, less efficient stacks, providing updated, unique features that are customized for a customer segment can greatly increase value perception. Furthermore, if software helps your organization capture a 6-figure sale, it’s clear to see that it has easily paid for itself.

Together, Mark and Alex co-founded Linkfluencer, a renowned SaaS platform specializing in LinkedIn marketing, which they successfully sold on Flippa for 6-figures. You can read they’re story here.

For example, Adobe Creative Cloud constantly innovates its collection of creative software with new tools and features, ensuring users see the consistent value provided by their subscriptions.

Even a seemingly straightforward tool like an Angular docx viewer for dev teams can span a wide range of pricing tiers. Basic packages might offer simple text editing and markup options, while premium tiers could provide advanced capabilities like document merging, encryption, and digital signature integration. The breadth of features thus not only influences value perception but also allows the SaaS company to create multiple pricing levels catering to different user needs.

Ease of Use

A simple and user-friendly interface greatly increases the likelihood of positive value perception. If customers think the software is intuitive and easy to navigate and learn, they are more likely to understand that it is a valuable tool.

Canva, a graphic design SaaS, is famous for its beginner-friendly no-code UI, making it accessible to bloggers of all design skill levels. Bloggers can easily use it to build up a following and then get an estimate by Flippa’s Intelligent Valuations Engine to sell the blog for a profit.

Customer Support and Service

Highly trained customer service associates and resources increase value perception. Customers like to know that they have reliable assistance available when needed and factor this into their value perceptions.

Zendesk, a customer service SaaS, has to focus on high-quality customer support because it’s one of the solutions that they offer through their software. This commitment to service enhances the value perception of their product and also highlights how good and competent service can be important to keeping customers loyal.

Customization and Flexibility

SaaS products that permit some level of customization and flexibility to be adapted to specific users and industries tend to be perceived as being worth more price-wise. Customers appreciate software that can scale and evolve with their own changing business requirements. Shopify, an e-commerce SaaS platform, provides many customization options, empowering businesses to align their online stores to their unique brand designs and aesthetics.

ROI and Business Impact

Illustrating an obvious return on investment (ROI) and positive revenue impact can significantly improve value perception. SaaS companies must offer case studies and metrics to demonstrate the quantitative benefits their product provides.

Take Salesforce, for example. A well-known CRM SaaS, Salesforce emphasizes the ROI its customers achieve through improved sales and marketing efforts and better organization. Salesforce success stories and metrics backing them up contribute to a solid value perception.

Balancing Pricing Tiers and Leveraging Value Perception

To increase revenue, profitable SaaS companies must carefully craft their pricing tiers and leverage value perception. There are many strategies and real-world examples of companies that have excelled in this regard, but none are more successful than the good ol’ S&P combo.

Segmentation and Personalization

Divide your customer demographic into smaller segments based on how much they will benefit from the software and their willingness to pay. Then, tailor pricing tiers to each segment to lock in the maximum value perception. However, don’t over-segmentate. If you feel like there should be a tier in between, use that as an opportunity to funnel customers into the higher tier.

We have all heard of Zoom. A video conferencing SaaS, the company offers a range of plans, from free to enterprise-level subscriptions. By segmenting their customer demographic correctly, they’ve expanded from catering to individual users and small teams to large organizations and enterprises, maximizing value perception for each segment in the process.

Pricing Models in the SaaS Industry

Now that you know how much your software is worth, which pricing model will you choose?

Value-based Pricing

Value-based pricing aligns the pricing of a SaaS product with the perceived value it delivers to the customer. It means that software developers must understand the customer’s specific needs and willingness to pay. They must then set a price that captures most of that perceived value. How much more profit can the software potentially offer to the company?

One of the most unexpected yet illustrative examples of a business leveraging software solutions to drive value is Uber. While primarily seen as a ride-sharing platform, its model exhibits many traits common to SaaS companies, such as scalability, recurring revenue, and cloud-based software that connects drivers and riders. Rides are priced based on availability and demand, incorporating the value-based sales model into the core of their business.

It becomes increasingly interesting when we consider the value perception from the standpoint of the drivers. For many, the relatively low entry barrier and flexibility of becoming an Uber driver offer a unique form of value, convincing them to subscribe to Uber’s platform as a service provider. This example illustrates that even in non-traditional SaaS models, balancing perceived value can be critical for both customer retention and revenue growth.

HubSpot, a marketing automation SaaS company, is a prime example of successful value-based pricing. They offer various packages tailored to different customer segments. Small businesses with meager marketing needs can start with a lower-priced package. Larger enterprises with more complex requirements can spring for a higher-priced, feature-rich package.

Flat-rate Pricing

Flat-rate pricing is one of the easiest-to-understand models in the SaaS industry. Customers are charged a fixed monthly or annual fee for access to all the features and services offered by the software. This pricing model is simple and is often utilized by startups and small companies looking for reliability for their budgets.

Tiered Pricing

Tiered pricing is a popular model in the SaaS industry. Companies provide various pricing tiers with differing features and complexities at each level. Customers can pick the tier that best fits their requirements and budget, allowing them to pay more for enhanced features as their business scales.

Dropbox offers tiered prices with Basic, Plus, and Professional options. Each tier offers additional storage space and unique features, catering to a variety of users.

Usage-based Pricing

In this scenario, customers are priced based on how much they actually use the software. It’s particularly common in SaaS products where usage can differ widely from one customer to another. This pricing model can be great for customers with fluctuating needs, like seasonal businesses or growing businesses.

Amazon Web Services (AWS) provides a usage-based pricing model. Customers pay for the computing power, storage, and data transfer they actually use rather than a flat fee.

Freemium Pricing

Freemium pricing is not really a pricing tier, per se. It refers to when a software offers a basic version of the software for free. There is the option to upgrade to a premium, paid version for access to advanced features and capabilities and this is usually encouraged through the use of the free version. This is actually a great marketing technique, as it allows companies to gain exposure and convert a percentage of them into paying customers. Furthermore, customers who insist they only need the most basic features will be surprised at how much the enhanced features are enticing to them.

Evernote offers a free model. It allows users access to basic note-taking tools at no cost while offering premium features. These features include offline access and advanced search for paying subscribers.

Per-User Pricing

Per-user pricing charges customers based on the number of users or accounts they require. This model is commonly used in collaboration and team-focused SaaS products.

Slack employs per-user pricing. There are different pricing tiers based on the number of users within an organization.

How to Enhance Your Software’s Value Perception

Value perception is the centerpiece of optimized SaaS pricing. It illustrated how customers associate the value they receive with the money they are willing to pay. If customers perceive a high value relative to the price, they are more likely to spend more money and never switch providers. Alternatively, if the perceived value is too low, customers may churn, seek competitors, or simply refuse to pay a fair price. Let’s take a look at how you can prevent that from happening.

Continuous Communication

Stay connected with your customers. Engage them through email, in-app messaging, and customer success teams. Consistently communicate product updates, tutorials, tips, and case studies or success stories to reinforce the value they are getting.

For example, Dropbox sends regular email updates on new features. They inform customers of capabilities to keep users engaged about the evolving value of their service.

Pricing Experiments

Don’t be afraid to play around with different pricing models and tiers! A/B testing and customer surveys can offer a crucial look into what hits home with your target customer demographic in terms of value perception.

Slack used a per-user pricing model at first, but later unveiled a new pricing model called “Slack Connect.” This new pricing strategy allowed them to serve a broader customer base and also capture more value.

Conclusion

A competent SaaS pricing strategy is a careful balance between the perceived value of the software and the price customers can actually pay. Diving deep into the factors that maximize value perception and customized pricing models to different customer segments and industries are crucial steps in maximizing profits.

Real-world examples and case studies of SaaS companies such as HubSpot, Uber, Zendesk, Zoom, and Spotify show how successful pricing strategies can contribute to astounding growth as well as customer satisfaction. By continuously staying aligned with customer needs, fine-tuning pricing models, and communicating value effectively, your SaaS brand can follow other successful examples and thrive in the long run.

By utilizing influencers as affiliate marketers, you can grow your SaaS brand by generating more leads and building trust with potential clients.

However, you should know that influencer marketing for SaaS products is slightly different from other industries. Here is the step-by-step guide to SaaS influencer promotion that you need to know so you don’t need to hire a new marketing agency. 

How is SaaS Marketing Different?

SaaS marketing is notably challenging. The differences in marketing style often shock owners of B2B SaaS startups, but it makes sense that it is unique.

Image credit: Best Writing

First of all, the purposes of a SaaS business are entirely different. Whereas B2C and PaaS businesses have something tangible they can offer consumers, SaaS companies are uniquely positioned as software providers.

Not only does the lack of physical products make it difficult to market, but software can also be exceptionally niche. How can you meet sales targets when your target audience is so small?

The marketing goals of SaaS businesses are thus quite different. The target market is not the average consumer but other businesses seeking solutions to specific problems.

Moreover, multiple people are usually involved in the decision-making process; you don’t need to convince just one person but a team. The marketing strategy is also different since the sales cycle is very short, and your target consumers seek education. The greatest asset of a SaaS marketer is information.

The idiosyncrasies of the industry thus make influencer marketing for SaaS slightly different from other industries. Nevertheless, plenty of exciting reasons exist to include it in your marketing campaigns.

Related: 10 content marketing strategies to grow your SaaS business

How does Influencer Marketing Work?

Influencer marketing refers to leveraging the opinions of influential people to promote and present your product or service. It builds on the concept of celebrity endorsement — an age-old marketing technique and modernizes it using social media and content creation. 

Influencers and celebrities are slightly different. Influencers usually have an entire online brand, the ability to influence their audience’s purchasing decisions, and a following in a distinct niche.

Image credit: Orderhive

In this form of marketing, brands and influencers collaborate to create content. The marketing is not entirely down to the SaaS company but is also created independently by the influencer. They have more free reign than with other forms of marketing.

Influencer marketing has several benefits, including vastly increasing brand awareness and generating leads. It has a tremendous ROI of $5.78 for every $1 spent, and the return is also excellent when judging it based on Earned Media Value. 

Lauren Sommer, co-founder of Moi Moi Fine Jewellery has this to say after recently implementing an influencer marketing program,  “When we first brought influencers onboard, it was a very transactional relationship, and we noticed that they would really only post and tag our products when we pushed for it. However, after we started our affiliate program, it incentivized influencers to include our rings throughout their daily lifestyle posts, and both our goals would be aligned.”

Another benefit of this method is that brands can span their campaign over numerous marketing platforms, from social media sites to blogs. 

Related: How to grow your Instagram following and user engagement

Which Industry uses Influencer Marketing the Most?

Influencer marketing can benefit all businesses, especially in the modern content economy where digital marketing is king. Fashion and beauty brands utilize Instagram influencers as a core section of their campaigns. 

Any industry focusing on visual marketing can benefit enormously from influencer promotion, so it becomes difficult for software and service companies to leverage influencers similarly.

Image credit: Oberlo

This is not to say that SaaS businesses cannot use influencers. A SaaS influencer can benefit your business significantly; it means finding one that fits your brand and using the correct content to engage your audience.

There are plenty of successful examples of influencer marketing in the SaaS industry, namely from marketing influencers and influencers-turned-CEOs who are highly skilled at creating paid social media content.

Related: The ultimate guide to buying a social media account

Which Platform is Best for Influencer Marketing?

Influencer marketing can vary significantly between brands. Remember, the primary strategy is to create branded content that generates leads within your target audience. As such, you need to choose a platform that best suits your ideal consumer.

You can connect with influencers on Facebook, Twitter, Instagram, YouTube, and more. Influencers can also use all of these platforms to promote their content. Platforms like LinkedIn can be even better within the SaaS industry because they specifically target professionals.

Another option for finding the right people is to use an influencer marketing platform. Options include GRIN, Creator.co, CreatorIQ, and others. Regarding influencer platforms for SaaS brands, IZEA is ideal because it operates as a SaaS business. IZEA has paid bloggers to produce content for brands since 2006, making it an old hand in the industry. 

Onalytica is another SaaS option that charges a monthly subscription fee for influencer discovery tools, talent management capabilities, access to support, and more.

Related: 7 ways to build up social proof to boost eCommerce conversions

What are the KPIs in Influencer Marketing?

There are several KPIs in influencer marketing, all of which are relevant in some way. Part of your influencer marketing strategy should involve measuring the key performance indicators of your campaigns so that you can adapt future strategies and grow your business. To do that, you need to know what to look out for.

Viewing a social media platform in terms of vanity metrics, such as followers, likes, and engagement, is tempting. However, these numbers do not necessarily tell you how good a social media user is at ‘influencing’ purchases.

Image credit: Gitnux

Influencer marketing’s main goal is to drive sales for your business. So, the most important KPI is conversions. Track sales before, during, and after a campaign and compare any changes. Alternatively, utilize affiliate links and promo codes to monitor performance.

Conversions are one of many important metrics because monitoring leads generated is equally crucial in SaaS influencer marketing. You also need to track referral website traffic, partly because it helps you figure out the conversion rate and partly because it helps you monitor interest in your product. You can do this using Google Analytics or other marketing software.

Audience growth and engagement are other valuable insights you should track as a part of lead generation and nurturing. Alongside driving conversions, a SaaS influencer marketing campaign can grow your audience and expose more people to your business. This is an essential sales funnel part, so don’t underestimate it.

Related: How to build an online community for your SaaS business

How do SaaS Companies Create an Influencer Marketing Strategy?

Whereas cosmetics companies can easily track relevant influencers and market to their target audience through Instagram, SaaS businesses must approach an influencer campaign differently. As mentioned above, influencer content in this niche is a lot more specific, which can make SaaS marketing a tad more complex. 

Here is a step-by-step guide to help you market your SaaS product using influencers.

1. Find an influencer that represents your brand

The first step is tracking your ideal influencer. This is easier said than done for SaaS brands because the type of influencers that work for B2B brands is a smaller pool; you need to identify influencers with a sizeable audience with similar interests to your customer base.

You can locate relevant people using an influencer marketing agency or by looking at the social media platforms you wish to promote. It’s vital to start in the places where you know your audience is looking, which is why LinkedIn is an excellent tool for finding B2B clients. 

However, don’t underestimate the power of other social networks like Instagram and TikTok. You can make conversions if the influencer’s following matches your target audience.

There are pros and cons to using social platforms or influencer platforms. Both allow you to find a potential influencer and contact influencers you want to work with. However, a marketing platform is better if you want to track metrics and nurture relationships.

Related: 5 ways to tell your brand story on social media

2. Consider your audience

While developing a content plan, consider your target market. This is vital throughout the entire process, from tracking down influencers with similar target audiences to developing content that sells.

Image credit: Later

Utilize social listening techniques to see what conversations are happening about your SaaS brand or niche. You can also leverage the social media insights of a relevant influencer and take on board their expertise to learn more about your audience. 

Influencers tend to be experts in social media marketing, so don’t be afraid to let them take the lead in some content planning phases. They know exactly who is following their social media channel and what their audiences want to see; ask them for expert insights when negotiating a contract. 

Related: The rise of the SaaS business model

3. Nurture relationships

All forms of influencer marketing require relationship management. To get people to work with you, you already need to market yourself to the influencer. This requires a personal touch, so ensure you are familiar with the influencer before contacting them. You can invite influencers to collaborate once you have a good handle on their interests, expertise, and communication styles.

It takes time to nurture influencer relationships, but the payoff is enormous. Influencer marketing for SaaS involves collaboration between your brand and the influencer. The influencer has freedom when creating content that goes on their own channels, so it’s vital to maintain a positive relationship with them.

Influencer relationship management goes beyond keeping them happy and collaborating on projects. You also need to have a clear plan for the campaign so that both parties emerge with what they want from the collaboration. Ensure the influencer knows their role, whether sharing links to your product, creating engaging social content or collaborating on a case study.

Related: How to sell a SaaS company: The complete guide

4. Consider a budget

As with all marketing campaigns, you must consider a budget and be upfront about it when contacting an influencer. There’s a fine line between investing lots of money to reach your target audience and being able to afford the campaign. Don’t go straight for the top influencer because you feel it will increase sales the most.

Micro-influencers (with smaller followings) tend to have higher engagement than those with enormous audiences. Plus, they can be better influencers for your SaaS business because they charge lower rates.

There is a delicate balance between paying the best influencers and getting the best ROI. Nonetheless, investing in influencer marketing is bound to be worth it if you find an influencer with the right target audience and plenty of sway.

Related: Saas pricing pages: Design strategies that boost conversions

5. Produce relevant content

Next, it’s time to encourage influencers to promote your brand on social. Influencer marketing is a subsection of content marketing in which the influencer produces content that incorporates your brand material. Then, they use their platforms as a form of content amplification to spread the word. 

You can use many content types, from social media posts to blog articles. Blogging is a great option because it’s similar to guest posts and can help build hyperlinks to your brand’s website. You can also utilize the guest blogging technique to incorporate affiliate links, helping you track conversions. 

You can use a project management platform to create a content calendar. It’s essential to have a content plan that drives users through the sales funnel instead of posting random content that doesn’t convert.

Related: How to buy a SaaS business: The complete guide

Summing up

The key to successfully marketing your SaaS startup using influencers is considering what your audience wants to see. Influencer marketing works because audiences trust what they say and enjoy their content. As such, when leveraging influencer marketing, you need to find a charismatic influencer relevant to your niche and let them create fun and educational content that they know works.

In this article, we will explore how startups can effectively use data to capture the attention and investment of potential backers.

This article explores:

• How VC funds evaluate investments.
• TAM, SAM, SOM.
• SaaS metrics that matter.

How Do Investors Decide to Invest in a SaaS Startup?

When it comes to data, there are many factors involved to demonstrate how your Saas company is performing. But how do investors decide to invest in a Saas startup?

To explain this, let’s first understand how investors, in this case, VC funds work.

VC funds usually have a five-year window in which they invest in a number of startups. This could range between 20-100 startups, depending on the fund.

Not all of the startups will become successful, but these funds bid on a few that have the potential to become unicorns. 

In general, the majority of portfolio returns will be generated by only two or three investments, where the biggest players achieve significant success. 

VC funds, depending on which stage they invest in (seed, series A, B, etc), will expect different returns.

Seed investors aim for a staggering 100-fold return on their investment, while Series A investors seek a more modest 10 to 15 times return. 

Later-stage investors have lower expectations, aiming for a 3 to 5 times multiple of their initial investment. These varying targets translate into targeted internal rates of return (IRRs) ranging from 20% to 35% for their investment portfolios.

Understanding this aspect of how VC funds look at investments, how could you make your Saas startup more attractive to investors, for them to potentially invest in your company?

7 Aspects Needed to Make Your Company Stand Out

1. What is your Value Proposition?

Your value proposition is of high importance when it comes to showcasing your solution to investors. Startups that use data to support their claims about solving a critical problem for their target market are far more likely to convince investors to invest in their company.

But how could you articulate this best? 

This can be achieved through customer testimonials, case studies, or market research that demonstrates the demand for the solution. By presenting tangible evidence, startups can instill confidence in investors that their product has real-world value and market fit.

2. User Metrics

Investors are interested in SaaS solutions’ user adoption and traction. Startups should highlight key user metrics, i.e. the number of active users, customer acquisition rate, retention rate, and engagement stats. 

This should be calculated from the start of the startup and measured over time in order to gauge the health of the startup.

These metrics provide quantifiable evidence of product market fit and growth potential. Investors seek assurance that a SaaS startup’s product is gaining momentum and has the ability to attract and retain customers.

3. Demonstrating Revenue and Financial Metrics

Generating revenue and achieving profitability is crucial for SaaS startups.

By presenting financial data such as Annual Recurring Revenue(ARR), Monthly Recurring Revenue (MRR), average revenue per user (ARPU), customer lifetime value (LTV), and customer acquisition cost (CAC), startups can illustrate their revenue-generating capabilities. 

To measure the health of Saas company, the rule of 40 is another metric that can shed light on how well a Saas company is performing as it compares revenue growth to profitability. It states that a healthy SaaS company has a combined growth rate and profit margin of 40% or more.

For example, if your company’s growth rate is 60% or more, you could lose 10% or 20% and still be “healthy.” Investors may consider an unprofitable business healthy if it generates enough revenue as a tradeoff. 

Other metrics founders should look at are LTV/CAC ratio (3:1) meaning your LTV should be at least 3 times your cost to acquire a customer, in order for the company to acquire customers profitably.

These data points provide insights into the business model’s viability and showcase the potential return on investment for investors.

4. Churn and Retention Rates

Low churn rates and high customer retention are indicators of a SaaS startup’s long-term viability. In Saas, depending on which industry you are in, the ideal Annual Churn Rate(ACR) would be ideally 8% or less.

By showcasing data related to churn rates, expansion revenue from existing customers, and customer retention strategies, startups can demonstrate their ability to retain customers and build long-lasting relationships. These metrics calculated in conjunction with one another, can assure investors that the product has stickiness and the potential for sustainable revenue streams.

5. The Market Opportunity

Investors are interested in the size of the target market and the scalability potential of a SaaS solution.

As a founder, you can show investors that you have deep knowledge of the market by dividing these into TAM, SAM, and SOM.

• TAM means the Total Available Market, 
• SAM means the Serviceable Available Market
• SOM means the Serviceable Obtainable Market

TAM is defined as the ‘total market for your solution.’

SAM is defined as ‘how much of the total market can the startup realistically capture based on their current resources.

SOM is the percentage of SAM the startup can capture at this moment.

By breaking down these 3 key areas, founders are able to show investors a concrete plan on how to capture the market and provide a clear picture of the market opportunity. This data should be supplemented with growth projections and strategies for capturing a significant market share. Demonstrating scalability through data ensures that the startup can meet investor expectations for exponential growth.

6. Emphasizing Data-driven Decision-making:

Data-driven decision-making is a critical aspect of successful SaaS startups. By highlighting how data is collected, analyzed, and utilized to drive strategic decisions, startups can showcase their ability to adapt and optimize their product. Investors appreciate startups that leverage data to inform product development, pricing strategies, and personalization of user experiences. Demonstrating a data-driven approach provides confidence that the startup can make informed decisions and stay ahead of the competition.

7. Building an ‘Economic Moat’:

Coined by Warren Buffett, the concept of an “economic moat” describes a business’s capacity to safeguard its long-term profits and market share by preserving competitive advantages over its rivals.

As a Saas startup, could you build a solution where you can acquire customers for a lower CAC and retain them longer (LTV)? And if so, how can you do this better than your rivals?

Data can be instrumental in showcasing a SaaS startup’s competitive advantage. By utilizing data-backed testimonials or third-party benchmarks, startups can illustrate how the solution outperforms competitors in terms of features, performance, or customer satisfaction. This data establishes credibility and provides a compelling reason why customers choose the startup’s solution over alternatives.

Conclusion

In the competitive landscape of SaaS startups, leveraging data-driven insights has become a critical factor in attracting investors. By effectively utilizing data, startups can bolster their value proposition, demonstrate growth potential, and showcase their ability to generate sustainable revenue. From user metrics to financial data, churn rates to market opportunity, and data-driven decision-making to competitive advantage, startups can paint a comprehensive picture of their business’s potential. Investors are increasingly drawn to startups that back their claims with tangible data, allowing them to make informed investment decisions. Ultimately, by harnessing the power of data, SaaS startups can position themselves as promising investment opportunities in the Saas space.

Let us know, how are you leveraging data in your Saas startup?

Share your thoughts with us in the comments below and let’s start the conversation!

And if you are a passionate Saas startup founder in search of funding to further accelerate your Saas?

Discover how to secure the funding you need to fuel your startup’s growth and success and schedule a 15 min call with our team to see if you apply.

This article explores the following:

• The key indicators in how SaaS founders can find product-market fit. 
• The process needed to solidify growth and scale.
• Actionable strategies for founders to ensure that they have achieved it before pursuing an exit.

The Technology industry and specifically Software-as-a-Service (SaaS) is a fast-paced industry, with SaaS founders looking to bring their unique solutions to the market and vying for attention and market share. 

FAANG companies that represent the five major, highly successful US tech companies: Facebook, Amazon, Apple, Netflix, and Google were once also startups but are now seen as behemoths in the tech industry. They have a combined market cap of over $4 trillion. It is safe to say that a startup over time with the right mix of product market fit and growth strategies can lead to a scaling and profitable business.

The SaaS founders of these tech startups are spearheading these businesses forward. When looking at the total number of founders and entrepreneurs in the technology space, in 2020, there were 472 million founders of which 305 million startups were created.

1.35 million of those startups were in the field of tech.

If you would calculate how many startups would have been started over a year’s time, it would equate to 3,699 tech startups that are founded each day. 

What’s the Difference Between a Tech Startup and Other Startups? 

Tech startups provide solutions to both consumers and businesses with cutting-edge technology-based products and services to the market, fostering innovation and novelty and addressing problems that were previously unrecognized. 

Their business models are typically scalable, allowing for rapid expansion due to the internet-based nature of their offerings, which can reach a wide customer base. In Schumpeterian terms, startups are disruptively creative, causing upheaval in the business realm through their innovative services and novel business models.

We can divide tech startups into early-stage, VC-backed, and late-stage.

Early-stage (typically Seed stage) startups are focused on product development, building a customer base, and establishing a strong cash flow.

VC-backed startups (typically series A & B) refer to a startup company that uses venture capital to fund their businesses for scaling growth.

We’ve broken down the different stages in more detail in this video.

And late-stage typically refers to funding rounds such as Series C, and D+ rounds where the primary objective of securing late-stage funding is to provide an exit strategy for earlier-stage investors, allowing them to realize ROI on their investments before considering options like an initial public offering (IPO) or acquisition. 

We should also not forget about tech companies that bootstrapped their way to growth (some before accepting outside funding) i.e. Github, BaseCamp, AppSumo, and MailChimp. 

From the early stages, achieving product market fit and profitability in your startup can be challenging but it is paramount for any SaaS startup to thrive.

Through each stage of the process of your solution from launch, scale, and beyond  (meaning from ideation to prototyping, to launch, traction, monetization, and growth) SaaS founders will mostly likely have to carry out certain pivots to achieve product-market fit. 

Once their market share grows and their internal organization scales, new challenges arise  at each new stage, which makes it inevitable for the founder(s) and their teams to be adaptable.

It takes on average seven to ten years from inception for a startup to reach an IPO or exit event. 

The timeframe for a startup to achieve an IPO or exit can significantly differ based on several factors, such as the developmental stage, industry, and prevailing economic conditions. Prominent venture capital funds often invest during the Series A stage and generally seek companies within their portfolio to achieve significant growth and exit within a span of five years.

If we look at a few relevant stats on the industry and its profitability, startups take (on average) approximately three to four years to be profitable, and only 40% of startups actually turn a profit. 

In 2023, 82% of businesses that went under failed due to cash flow challenges.

The failure rate of startups increases each and every year with 90% of startups failing in general and 10% of startups failing in their first year, 30% in their second year, 50% in 5 years and 70% in ten years.

The top three reasons for startups failing: 

3. Competition (20%) 

2. Lack of product-market fit (35%)  

1. Running out of cash and not being able to raise new capital (38%).

When Does Product-market Fit Occur?

Product-market fit occurs when there is an intersection between the SaaS solution and the demands of its target market. It is the point at which the product resonates with customers, effectively solves their pain points, and provides exceptional value. Achieving product-market fit is pivotal as it establishes the foundation for successful customer acquisition, retention, revenue growth, and finally exit strategies.

You can’t have a successful exit strategy without having exceptional product market fit. Though, keep in mind that an exit strategy can take years to work towards, and achieving product-market fit is an ongoing process that requires continuous monitoring, adaptation, and responsiveness to customer needs and market dynamics.

If you have the following aspects right, you will increase your chances of finding exceptional product market fit, through all the growth stages of your company up until a successful exit. And this applies to bootstrapped and investment-backed companies.

1. Understanding Customer Needs & Deep Market Research: Thorough market research is essential to understand the target audience, their pain points, and preferences. Conducting surveys, interviews, and competitor analysis helps in developing a product that addresses specific customer needs and aligns with market trends, and helps in positioning the product in a way that differentiates it from competitors and aligns with market demands. This is not only done through finding pain points but also what’s the underlying pain that these customers need to have addressed and what is the customer geared toward buying.
   
2. Iterative Development: Achieving product-market fit often involves an iterative process of development, testing, and refining the product based on customer feedback. Continuous improvement and adaptation are necessary to align the product with customer expectations. Adopting an agile approach allows SaaS founders to iterate on their products quickly. Launching a Minimum Viable Product (MVP) and gathering feedback from early adopters enables founders to refine and improve the product based on real customer experiences and demands.
   
3. Continuous Customer Feedback Loop: Actively seeking, validating, and incorporating customer feedback from early adopters or target customers throughout the product lifecycle can provide valuable insights into whether the product meets their needs and expectations and is crucial to achieving product-market fit. Regularly engaging with customers through feedback channels, user forums, and support interactions helps identify areas of improvement and align the product with customer expectations.
   
4. Effective Value Proposition: A strong value proposition that clearly communicates the unique benefits and values the product offers to customers is critical. It should effectively address customer pain points and highlight the advantages of choosing the product over alternatives.
   
5. Scalability and Growth Potential: Evaluating the scalability and growth potential of the product is important for achieving product-market fit. The product should have the capacity to cater to a larger customer base and capture market share effectively.
   
6. Competitive Advantage: Understanding the competitive landscape and identifying a unique selling proposition or competitive advantage is crucial. The product should offer something distinctive or superior compared to existing alternatives to stand out in the market.
   
7. Timing and Market Conditions: External factors such as timing and overall market conditions can influence product-market fit. Factors like economic climate, technological advancements, regulatory changes, or cultural shifts can impact the reception and adoption of the product.

As a SaaS founder, in each stage of the growth cycle, you will be focused on one or more of these aspects moving forward and growing toward your exit strategy. 

Exit Strategies for SaaS Founders

Exit strategies can entail an IPO (Initial Public Offering), Acquisition, MBO (Management Buy-Out), Merger, or Strategic Partnership. 

When evaluating a tech startup for a potential exit, several factors should be considered:

1. Financial Performance: What’s the financial health of your start-up? It’s of high importance to look at factors such as revenue growth, profitability, and cash flow. A strong financial track record and growth trajectory can make the startup more attractive to potential acquirers or investors. KPIs to take into consideration when exiting are MRR, Churn, LTV, CAC, ARPU, gross margin, sales and marketing conversion ratios, unit economics, product mix, sales, and payment cycles.
   
2. Intellectual Property (IP): Does the startup have any IP? For example patents, trademarks, and copyrights. Strong IP protection can provide a competitive advantage and increase the startup’s value to potential acquirers.
   
3. Customer Base: A diversified and growing customer base indicates market acceptance and can be appealing to acquirers seeking to expand their reach. It can include size, loyalty, and engagement.
   
4. Product Differentiation: Does the SaaS have a unique value proposition and competitive advantage? A differentiated product or service that solves a significant problem in an innovative way can attract potential buyers looking for disruptive solutions.
   
5. Team and Talent: A strong and experienced team can instil confidence in potential acquirers and increase the startup’s exit potential. Factors include the startup’s management team, their expertise, and their ability to execute the company’s vision.
   
6. Scalability and Growth Potential: Consider the startup’s ability to scale operations and achieve significant growth. Is this done through i.e. automation and systems? Scalability is crucial for attracting acquisition interest or investment from larger players seeking to expand their market presence.
   
7. Partnerships and Strategic Alliances: Have you formed any strategic partnerships or alliances? This can demonstrate industry recognition and potential for collaboration or acquisition opportunities.
   
8. Technology and Innovation: Your cutting-edge, proprietary technology or unique algorithms’ and continuous innovation can be attractive to acquirers seeking to enhance their own offerings.
   
9. Competitive Landscape: What does the competitive landscape look like and what are the potential threats to your startup’s market position? Understanding competitors and potential disruptors can help assess your startup’s long-term viability and attractiveness for an exit.

It’s important to note that each potential exit scenario may prioritize different factors depending on the goals and preferences of the acquirer or investor. Therefore, it’s crucial to tailor the evaluation criteria to the specific exit strategy being pursued.

Conclusion

By understanding what it takes to get to product-market fit, and maintaining this with essential pivots needed due to market factors, regulatory changes, and adoption of the product, through all the stages of growth, SaaS founders can adapt to these changes and looking at the KPI’s involved, work on these towards their ideal exit strategy.

Let us know, how will you leverage the power of product-market fit to propel your business forward? Share your thoughts with us in the comments below and let’s start the conversation!

And if you are a passionate SaaS startup founder in search of funding to further accelerate your SaaS?

Discover how to secure the funding you need to fuel your startup’s growth and success and schedule a 15 min call with our team to see if you apply.

SaaS businesses still operate at healthy margins, making them great companies to buy despite the massive market.

The underlying technology is critical to Software-as-a-service companies and the SaaS business model. With an understanding of the software built to power a SaaS company, you can notice warning signs that might seem obvious in hindsight.

In this article, we’ll outline the different aspects of technology that make up a SaaS business. You can then apply this knowledge in future acquisitions by asking thoughtful questions before the sale.

Components to Consider when Purchasing a SaaS Business

There are four main components for you to consider when buying a SaaS company: 

1. System Architecture: The different components of the software, leading to its ability to scale.
2. Development Methodology: The development and deployment of the software.
3. Production Operations: Processes and tools used to monitor and manage your application shown to your customers.
4. Security and Compliance: Any measures in place (or lack thereof) to help protect customer data and ensure compliance depending on the industry.

By the end of this guide, you can have a full 360-degree view of the software operations of the business. 

System Architecture

System architecture in software can mean many different things. Still, in the context of this article, we’ll refer to it as the components, technologies, and infrastructure of your soon-to-be SaaS business. 

Three of the most critical pillars behind any system architecture in a software company are any Third Party Integrations and Dependencies, the Technical Stack, and the Technology and Hiring Costs that tend to come with that technology stack.

Technical Stack and Infrastructure

The technical stack is critical to any SaaS company’s product. The technical stack is a combination of a programming language, frameworks available for that language, databases, and any other infrastructure (such as messaging queues). 

Note the technology stack and its popularity.

Finding skilled developers to maintain and improve the product will be challenging if you use outdated or unpopular programming languages or frameworks.

On the other hand, a modern and popular tech stack may attract top talent and enable faster development and deployment of new features.

Questions to Consider Asking:

• What is the primary programming language used?
• What frameworks and databases do you use? Are they open source?

Evaluate the reliability of the infrastructure.

If the infrastructure is unreliable, it can result in poor customer experience and lost revenue. Typically you’ll see a reliability metric for uptime, expressed in “nines.” Three nines, for example, means 99.9% uptime. 

Each nine is increasingly more challenging to reach and becomes more expensive. For the most part, having this metric available indicates well-maintained software. When improving reliability, you’ll want to balance the cost of more reliability against revenue lost due to downtime. 

A larger enterprise software company will likely want to be hosted on cloud infrastructure, which can be hosted in multiple regions with zero downtime deployments. Lack of cloud infrastructure is less of a problem for smaller acquisitions – and you’ll need to continue to scale the architecture as your company grows anyway.

While there can be some up-front cost savings regarding self-hosting, it’s often only recommended if you have hosting expertise yourself.

Questions to Consider Asking:

• How is the software hosted?
• Do you have any reliability metrics available? What are they?

Hiring Costs

As with any company, you’ll need to hire or grow your team post-acquisition. 

Analyze the cost of hiring new technical talent in-house.

You might need to hire software engineers. This becomes even more important if the existing staff is separate from the acquisition or you need to be more technical yourself.

The median salary for software developers in the United States ranged from $148k to $234k per year, per the Levels.fyi 2022 Pay Report.

Consider the cost of outsourcing technical work.

At some point, you’ll likely want to outsource some work.

If you need someone as a holdover until you can vet a decent contractor or agency, the seller may be willing to stay on for a short period as an emergency option.

Re-train your existing staff.

Effective financial management is crucial when considering outsourcing technical work.

If you have an existing technical team, consider re-training them. Although it will take resources away from your current projects, re-training can be cost-effective. By re-training, you can push out a hiring plan for new staff to a later date.

Questions to Consider Asking:

• What does payroll currently look like?
• Would you consider hiring more resources if you were to keep the company?

Third-Party Integrations and Dependencies

Third-party integrations are outside software or tools used to make a product or feature come to life.

Third-party integrations allow a SaaS company to focus on its core product and outsource the parts that are not differentiators.

Take inventory of the company’s third-party tools, libraries, or APIs.

While a huge time saver, there are risks to using third-party integrations.

If a SaaS company relies on a specific third-party API, and that API becomes deprecated or changes its pricing model, it could impact the product’s functionality, revenue streams, or even customer acquisition cost.

For example, many AI tools on the market are built upon the GPT models offered by OpenAI. If OpenAI decided to compete in the same market as some of those AI tools, they could deprecate or raise the price of their API. This could completely danger the business model of these SaaS products.

The deprecating of APIs or changing of business models is more common with integrations offered by early-stage startups who have yet to find a path to profitability.

In addition to essential third-party services integrated with the SaaS platform, check for any integrations with social media platforms. Social media integrations play a significant role in social media marketing efforts and contribute to the overall success of the SaaS business – but they can become costly quickly if your product takes off.

Evaluate the reliability and security of integrations.

Earlier, we discussed evaluating the reliability of internal software. Similarly, you’ll want to consider the reliability of external software.

A vulnerability or frequent outage in a third-party software provider could impact the product’s functionality and customer experience. Outages lead to a loss of revenue or damage to the brand’s reputation.

For example, if a SaaS company relies on inbound marketing software and that software experiences a data breach, it could result in customer data exposure and a loss of trust. This is what happened in cryptocurrency when Ledger was breached via their marketing database in 2021.

While imperfect, a rule of thumb is to prefer widely used third parties with greater revenue sources and more incentive and resources to invest in security.

Questions to Consider Asking:

• What third-party integrations do you leverage?
• What software do you use internally?

Development Methodology

Development Methodology is the process that facilitates software creation.

Most SaaS businesses leverage agile methodologies. Agile methodologies provide more flexibility and are better suited for iterative development. 

In the case of strict regulatory or compliance requirements, companies use waterfall methodologies. While not typical, the presence of any development methodology is a good sign of a healthy product.

Product Velocity

Check the speed of releases, including new features and updates.

Product velocity signals the efficiency of the software development process and code quality. 

If product velocity is slow, it can indicate underlying issues with the code base. Conversely, a high product velocity signals an efficient software development process that will likely continue post-acquisition (with some exceptions!). 

Consider the balance between speed and quality, and plan to address any shortcomings.

It’s also vital for any company to balance release speed and feature quality. While it’s great if a company can release updates rapidly, it’s also important that those updates are high-quality and don’t introduce new bugs or problems.

Post-acquisition, companies often analyze their internal systems to improve their processes. One such corner that is usually cut early in development is automated testing.

Version Control

Confirm the existence of a version control system.

Version control is essential for managing changes to any software as a service over time. While it’s relatively straightforward to implement version control post-acquisition, the lack of a version control system such as Git in SaaS businesses can indicate poor code quality.

Feature and Issue Tracking

Identify the tools used to manage feature requests and bug reports.

Most SaaS providers track feature requests and bug reports in project management or issue-tracking software. Smaller SaaS companies might not use dedicated software but will undoubtedly have a spreadsheet tracking product progress.

Consider the ability to prioritize and manage feature requests and bug reports.

Even healthy products will have bugs, but consider whether meaningful progress has been made over time. Bugs that stick around for a long time indicate expensive, time-consuming fixes and additionally impact the customer experience. 

Questions to Consider Asking:

• What is your software development methodology?
• How often are you able to release new features?
• What are some of your most recent features?
• What do you use to track bugs and new feature requests?

Production Operations

System Stability & Monitoring Capabilities

Ask for any metrics around system stability and production outages.

Software is flawed, and things break. You’ll want to know how often their software fails. Smaller companies may trade off monitoring capabilities for product velocity. This will lead to less granular metrics, but still, Error-free sessions or Error-free users are two such metrics that are often available.

With larger acquisitions and engineering teams, metrics around uptime should be front and center. These are commonly called Service Level Indicators (SLIs). SLIs typically contain error rate, response time, and availability metrics.

Identify any recent incidents or outages and evaluate their impact on customers.

SLIs are good baseline metrics but only sometimes tell the entire story. Not all bugs or incidents are reflected in metrics, so it’s also good to know about recent incidents impacting customers.

If a SaaS company experiences a significant outage or security incident, it will impact the product experience and lead to a loss of trust. 

Questions to Consider Asking:

• Do you have Service Level Indicators such as error rate, response time, or availability?
• Are there any recent customer-impacting incidents or outages?

Security and Compliance

Encryption

Ensure the presence of proper encryption.

Encryption is essential for protecting sensitive data such as Personally Identifiable Information (PII) in any SaaS business. Ask about the company’s encryption methods, confirming the business uses industry-standard algorithms such as AES-256.

Confirm encryption at rest and in transit.

“At rest” refers to any data saved long term, such as in a database. These should be encrypted, as noted in the previous section.

Ensure encryption protocols like TLS or SSL are used for data in transit. For web-based portals, this can be confirmed by the presence of a “lock” in your browser’s address bar.

Penetration Testing (optional)

More crucial for a SaaS provider operating in the security and finance industries, you may want to consider paying for a penetration test before closing the deal.

Conduct a penetration test to identify potential vulnerabilities or weaknesses.

Vulnerabilities can exist anywhere in the SaaS platform, including both the business you are acquiring and any third party the company integrates with. A penetration test will help you identify any vulnerabilities before an attacker does.

This doesn’t have to be completed before the close, but you’ll probably want to do it at some point, regardless.

Questions to Consider Asking:

• How is data encrypted?
• What processes do you have to ensure data is safe?
• What regulations do you have to comply with that are specific to your industry?

Conclusion

The SaaS business model is an attractive one. But when buying a software business, you must consider the most critical part – the software!

If you’re interested in acquiring a SaaS business, Flippa’s inventory of available SaaS businesses for sale is the best place. Visit Flippa’s blog for more resources and insights on the process and SaaS model.

We already wrote a post about how to sell a SaaS business. In it, we covered everything from why you would want to sell it, how to measure value, and where to sell it, to how to position your SaaS business as an easy sell. We also wrote another post on how to price online businesses. However, since the price point is one of the most critical aspects of selling a business, especially a SaaS business, we wanted to provide a more in-depth guide on how to price your company.

Aspects to consider when pricing a SaaS business

When it comes to pricing a SaaS business, there are several key elements that you need to take into account. These are related to your company’s present and future value, how much your business’s tangible and intangible assets are worth, and how much money the company’s making. All these factors are essential for investors that want to assess how good an investment your business is.

1. The value of the software
2. The value of the customer base
3. Cost of Goods Sold
4. The pricing model and strategy
5. The level of recurring revenue
6. The seller’s discretionary earnings (SDE)
7. The industry’s price-to-earnings ratio or earnings multiplier
8. The business’s location

Let’s take a more detailed look at each of these elements to see how they can help you price your SaaS business correctly.

1. The value of the software

When you’re selling a software-as-a-service business, the software is obviously an important part of the deal, and it’s something you’ll need to factor into the sale price. Factors that determine the value of the software are how well it’s coded, how in-demand the software is in the market, whether there are any intellectual property rights attached to it, and so on.

When valuing software, there are two main methods: top-down and bottom-up.

• The top-down method is when you start with the total addressable market (TAM) or serviceable available market (SAM) and then estimate what portion of that market your software can realistically capture.
• The bottom-up method, on the other hand, is when you look at all the individual factors that contribute to the value of your software and then come up with a total number. This is a much more thorough and accurate way to value software, but it’s also more time-consuming.

You’ll need to get an expert opinion on the matter to establish an accurate value for your software. However, the bottom-up method is probably the way to go if you want to get a ballpark estimate.

2. The value of the customer base

Another important aspect to consider when pricing a SaaS business is the value of the customer base. Since SaaS businesses rely on subscriptions to generate revenue, the customer base is a crucial asset. The size of the customer base, the average monthly recurring revenue (MRR) per customer, the churn rate, and the customer lifetime value (CLTV) are all important factors to consider when valuing a SaaS business’s customer base.

Regarding the size of the customer base, you have to look at the total number of customers and the number of active paying customers. This is because some SaaS businesses have a lot of free trial users that never convert into paying customers or inactive users that don’t use the service.

You can estimate the value of your customer base by multiplying the total number of customers you currently have by the average customer’s lifetime value.

In turn, the customer lifetime value (CLTV) is the average amount of revenue a customer will generate for your company over their relationship with you. To calculate CLTV, you’ll need to know the average revenue per user and the customer churn rate.

You can easily calculate the first by dividing the total revenue generated during a given period by the total number of users during the same period. The customer churn rate is the ratio between the number of churned or leaving customers for the period and the total number of users at the beginning of the period.

Once you have these two numbers, you can calculate the customer lifetime value with this formula:

CLV = (ARPU / Churn Rate)

Consequently, the value of your customer base will be

Customer base value = CLV * Total # of Customers = (ARPU / Churn Rate)* Total # of Customers

For example, suppose you’re running a crypto exchange platform with 1,000 users who stay with the company for one year on average. During that year, each user generates an average Monthly Recurring Revenue of $5, or $60/year. Your estimated churn rate is 20%.

In this case, the value of your customer base will be:

Customer base value = (($5/user/month * 12 months/year * 1 year)/(20%))*(1,000 users)

Customer base value = $375,000.

While this is an important metric, it’s also vital to note that it doesn’t consider the costs of running the business to generate that revenue. That’s where the next element comes into play.

3. Cost of Goods Sold

The cost of goods sold (COGS) is another critical factor to consider when pricing a SaaS business. This includes all the direct costs of producing and delivering the software to the customer.

COGS can be divided into two main categories: direct costs and indirect costs.

• Direct costs are those directly related to the production of the software, such as salaries for the developers who create it, the wages of the people who maintain the software and provide customer service for that software, cost of marketing directly associated with that particular product, etc.
• Indirect costs are those not directly related to the software but necessary for its production, such as office expenses, internet service, accounting fees, legal fees, hosting services, etc.

The primary use we give COGS is to calculate the gross margin, which is the difference between the revenue generated and the COGS.

Gross Margin = Revenue – Cost of Goods Sold

For example, if your SaaS company has a total revenue of $1 million and the total COGS is $500,000, then your gross margin would be:

Gross Margin = $1,000,000 – $500,000 = $500,000

Considering the cost of goods sold is important for buyers because it gives them an idea of how much it costs the company to generate profit.

4. Your business’s pricing model

In the SaaS space, you can use many different pricing models to price your product. From subscription to tiered pricing and from per-feature to freemium, there are many options to choose from, and each has its own set of pros and cons that make it ideal for each business model. The combination of your customer base with the pricing model you’re using to generate revenue can be a source of value for interested investors.

Furthermore, an investor may also want to assess your pricing strategy to see how your company is generating the revenue it’s receiving. A poorly thought-out pricing model and strategy represent a significant risk for the potential buyer. However, it can also mean an opportunity to increase revenue once they purchase your SaaS company.

Either way, if you want your SaaS business to be as attractive as possible for potential buyers, it’s important to have a well-thought-out pricing strategy that is in line with your business model and can generate the revenue you’re looking for.

5. The level of recurring revenue

Recurring revenue is the portion of a customer’s payments that come in regularly, typically monthly or annually. For example, if you have a customer who pays you $100/month for your software, that customer generates $1,200 of recurring revenue over the course of a year.

The higher your recurring revenue, the more valuable your business is, and the higher the price tag you can put on your business.

6. The seller’s discretionary earnings (SDE)

The seller’s discretionary earnings (SDE) is a metric used to assess a business’s profitability. It’s calculated by taking a company’s net income and adding back in any expenses considered discretionary, such as the owner’s salary, personal expenses, etc.

The SDE is important for buyers because it gives them an idea of how much profit the business is actually generating. It’s also vital for sellers because it’s an objective metric they can use when negotiating the price of their business. A higher SDE means the business makes more money for the current owner.

7. The industry’s price-to-earnings ratio or earnings multiplier

The SDE or seller’s discretionary earnings isn’t important just because it gives an idea of how much profit the company generates. It’s also important because we can use it to provide an unbiased estimate of what a SaaS business is worth. This is done thanks to the price-to-earnings ratio, a.k.a. earnings multiplier.

The price-to-earnings ratio is a metric investors use to determine whether or not a company’s stock price is high or whether the company is undervalued. This is because it measures the company’s current share price in relation to its earnings per share.

By comparing the earnings multiplier to the one for other companies in the industry (or with the industry average), we can get an idea of whether your business is performing well compared to other players.

But more important is that you can use the industry’s price-to-earnings ratio or earnings multiplier to estimate the value of your SaaS business by multiplying it by the company’s SDE.

For example, let’s say the average P/E ratio for your SaaS business is 4, and your company has an SDE of $100,000. This would mean that your company is worth $400,000 (4 x 100,000) if you want to price it according to the average company in the industry.

8. Your business’s location

The location of your headquarters can significantly impact the price of your company and how attractive it is to investors. For example, a SaaS crypto company based in India will most likely fetch a lower price than a similar company based in Silicon Valley, even if the first one has a better source code. While this may be unfair, there are several reasons for this. Big tech hubs like Silicon Valley are considered the mecca for tech startups, and investors are willing to pay a premium for companies based there.

Additionally, wages and living costs in some developing countries are much lower than in industrialized countries, so developers and entrepreneurs are almost always willing to accept a lower price.

The bottom line

Now that you understand the different factors that go into pricing a SaaS business, you’re better positioned to set an asking price that is both fair to you and attractive to buyers. Keep in mind the importance of recurring revenue, the seller’s discretionary earnings, and the industry’s price-to-earnings ratio when setting your price. It’ll be a win-win for everyone once you sell your business.

Things are even trickier with software-as-a-service businesses (SaaS), as you often inherit many clients, processes, and technologies. This article will discuss key steps to consider after you acquire a SaaS business.

Analyze the Company’s Financials (Again)

If you did your due diligence before acquiring a new business – which you certainly should have! – you’ve likely already overviewed the company’s financials. But it’s a good idea to do so once more post-acquisition. Why?

Because as the new executive or manager of a SaaS company, you now have access to even more financial documents and information than you did previously. This information can fill in any economic gaps you might have noticed, answer questions you may still have, and provide you with an overall better picture of your new company’s performance and abilities.

For example, according to a recent study, 70% of businesses surveyed reported having to wait between one and six months on average for their invoices to be paid. You need to ensure your acquisition doesn’t have this issue (or if it does, there is a plan to correct it).

By overviewing your new SaaS company’s financials once more, you can:

• Better determine the steps to take to “right the ship” if needed
• Understand how best to leverage your new acquisition
• Spot any problems you’ll need to solve ASAP as the new CEO 

Key Metrics To Consider

But what exactly should you look at? There are many different key metrics to analyze and consider as you overview a SaaS business’s financials, including:

• Free cash flow. The free cash flow will tell you how much money you have to reinvest back into the business, return to stakeholders, or use on any other expenses.
• Website traffic, which indicates how many visitors your business’s site receives
• Customer acquisition cost or CAC. This tells you how much money you have to spend to acquire a new customer with the SaaS business.
• Customer lifetime value, which tells you how much money you can expect to make from each client or customer.
• Average conversion time, which tells you how long it takes to convert an average customer.
• Employee satisfaction
• Employee turnover rate, which indicates how often employees leave.
• Client retention rate, which tells you how many clients you retain over a set timeframe.
• Profit margin, which tells you your net profits after deducting the cost of business expenses.
• Revenue growth
• Revenue per client, which tells you the percentage of your revenue you get from an average client.

Talk to Your Workers

Immediately after acquiring any SaaS business, you should make an effort to talk to all new workers under your employ.

Whenever a company acquires another or changes leadership, it causes a lot of confusion and uncertainty in the workforce. That confusion can manifest as lower productivity, people jumping ship for competing organizations, and other negative effects.

But you can circumvent or stop this from happening by simply communicating directly with your employees. Specifically, you should tell your workers:

• Your goals for the organization
• How you plan to improve the SaaS business
• What you’ll strive to do in terms of personal goals
• Anything else you might feel is crucial

Above all else, be confident. If you sound confident, you’ll inspire further confidence in your acquisition and prevent people from feeling like they need to look for new jobs right away.

That said, you should also not promise that there won’t be any personnel changes in the future. Not only will your employees not believe you, but you’ll end up looking untrustworthy if you do have to let some people go, change managers, or make other staff adjustments later.

Communicate to Clients, Too

By the same token, it’s critical to communicate with your new SaaS business’s clients. If you purchased the business, odds are it has a substantial clientele. That clientele might be aware of your acquisition or that you are now the leader in charge of the company.

If you don’t communicate with those clients, they could lose faith in your SaaS business and decide to go to a competitor. This is bad for your bottom line and your reputation overall.

Talk to your SaaS business’s clients directly by telling them your goals, how you plan to maintain service quality, and what exciting developments you have in mind. The more you tell them, the more likely they’ll stick with your company even if they don’t know you personally.

It’s best to start off your relationship with the clientele on the right foot instead of losing the customer list and having to rebuild it from scratch.

Expect Job Hunting – But Retain Key Talent

As touched on above, any acquisition usually comes with some personnel changes. You should expect to do some job hunting soon, especially when it comes to middle management positions.

For example, if you merge your company with another SaaS enterprise, you probably don’t need as many supervisors and middle managers as shared between the two organizations. The same is true with upper-level staff, executives, and front-line workers.

Your HR department needs to be firing on all cylinders and ready to find new people to fill open positions, especially if you shift your acquisition’s goals or processes to some extent (more on that below).

However, don’t immediately go on a firing spree! The worst thing you can do is indiscriminately fire all the leadership from the acquired SaaS business. This makes the front-line or lower-level workers nervous and could cost you impressive talent for no good reason.

Instead, take a few months (such as the first 90 days) to analyze which managers and executives do their jobs the best. You can retain that talent in the long run, then let go of the employees who aren’t worth it in comparison.

Remember, you acquired this SaaS business as a shark. You must expect to behave like one in terms of personnel management!

Do an Assessment of People, Technology, and Processes

It may also be wise to thoroughly audit an acquired SaaS business at the earliest opportunity. An audit in this sense is an overview of the:

• People who work at the organization. Specifically, you need to know how many people work for the company, how they operate, what they want, and the kind of leadership they respect.
• Technology the company currently uses. For example, does this new SaaS company use a specific type of software or CRM platform? If it’s the same as your current organization, great! If not, you’ll need to integrate the two systems or make the acquired SaaS business use your organization’s technology.
• Processes used by your newly acquired SaaS enterprise. The processes, like workflows or methodologies, may or may not be the same that you use at your primary organization. Again, this will require further integration or you to override the business’s current processes with new ones.

Try to integrate processes and technology wherever possible. While you can override them when needed, it’s usually more costly and time-consuming, especially if the workers at the acquired SaaS business are attached to those tools or procedures.

For example, major PCI compliance requirements that must be met include using secure payment devices, regular accounting, etc. Seeing whether your acquisition meets these requirements is crucial in the early days of owning the business.

Define Your New Objectives

It’s also important to look at your merger or acquisition at a high level. You should define the objectives for your acquired SaaS business, such as:

• Bolstering revenue between your two organizations
• Eliminating a key competitor in your niche or industry
• Changing the acquired business to focus on a specific aspect of your model or business plan, etc. 

By defining your new objectives, you can do all the above steps with your new goals in mind. For example, if you want to eliminate a major competitor and downsize the SaaS organization, you know you’ll have to cut most of the employees so that you can look at the personnel roster with a clear focus.

Double Down on Marketing and Customer Acquisition

You’ll likely want to focus more on marketing and customer acquisition as your merger proceeds. Whenever one company acquires another, customer acquisition and retention tend to suffer. It’s a natural byproduct of customers losing faith in the organization since it was purchased by someone else.

Expect to spend more time and money on marketing, acquiring new customers, and retaining current ones. Your marketing department should double down on announcing the merger and depicting it as a positive thing (which it is!).

You should also launch marketing campaigns to previous clients to draw them from the acquired SaaS enterprise to your new brand. Marketing campaigns like PPC or pay-per-click ads, social media campaigns, and more can offset the initial turbulence experienced after an acquisition. 

Lean Into Content Marketing

But what if you’ve acquired a SaaS business and aren’t looking to create a new company?

In that case, you need to lean hard into content marketing. Content marketing is one of the best ways to bolster brand authority and awareness in a specific niche or subject. If you produce a lot of high-quality content, like guides and blog posts, your target audience will see your brand as an authority in that subject.

This works wonders for boosting your initial and long-term customer account. On top of that, it can help to restore any lost confidence in the organization after it was acquired. Content marketing often results in ancillary benefits as well, such as:

• Bringing new potential customers to your site
• Improving your website SEO or search engine optimization efforts
• Acting as passive marketing for your brand
• Helping to build brand authority across the internet by linking to high authority sources, etc.

Accelerate Integration

No matter what you plan to do with your SaaS business, be sure to integrate it quickly and smoothly. The longer integration takes, the more personnel you may lose and the more time you’ll have to spend converting previous clients into current customers.

It helps to have a solid integration plan in mind from the start. Determine:

• When you want the two businesses to be operating with the same technologies and processes
• When you want your staff roster to be finalized
• When you want the SaaS enterprise’s customers to be fully on board with your organization

Don’t Forget the IRS!

There’s one last thing to keep in mind: the IRS. Whenever you acquire a new business, you have to assess your tax situation diligently and thoroughly. You must also figure out what you’ll tell the IRS within the first 90 days of acquiring the business to avoid major fees or tax time headaches.

Of course, you should have followed good tax procedures and tax structuring processes during the due diligence timeframe. For example, you should know how much you can deduct due to the purchase price of the business and any associated expenses for the transaction.

However, you’ll likely need to make tax filings after acquiring your new SaaS business. For instance, you’ll need to file IRS Form 8594, the asset acquisition statement you attach to your individual income tax return. The seller of the business will need to fill out and file this form, as well.

If needed, don’t hesitate to hire an accountant to make the process smoother and faster. It’s best to avoid major mistakes when it comes to the IRS so you can proceed with your business and grow it without a hitch!

Wrap Up

Ultimately, the first 90 days post-acquiring a SaaS business are vital. These initial weeks set the tone for your leadership of the organization, help set expectations for your clients, customers, and employees, and set your company up for its financial future.

But if you follow the above steps, you’ll jump into your new position successfully and find that your acquisition serves you well in your goals. Good luck!

When choosing a business to buy, you must first decide what type of business to acquire, and there are many options to choose from. However, one industry that is booming and will most likely keep growing in the foreseeable future is the software-as-a-service or SaaS industry, which is expected to hit a total market value of more than $430 billion by 2025, almost doubling its value from 2020.

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This level of projected growth in only five years makes the SaaS industry an attractive target for investors looking to buy businesses. That’s why we wrote an entire How To guide about buying SaaS businesses for newbie investors a while back.

However, acquiring businesses with the sole purpose of selling them in the future is by no means the only reason to invest in SaaS businesses. You may be interested in acquiring a SaaS business to add to your portfolio to earn long-term passive income from the business’s subscription revenue. Or, you may want to purchase a SaaS business to integrate it into your own business.

Whatever your reasons for wanting to acquire a SaaS business, you need to have a clear roadmap with a well-defined acquisition strategy, which is what we’ll cover in this post.

What is a business acquisition strategy?

A business acquisition strategy is a plan that helps you zero in on businesses that are available for sale, and that fit your investment criteria. It involves a systematic, rational methodology for acquiring companies tailored to your specific goals and needs as an investor or business owner.

Why is having a SaaS acquisition strategy important?

When you’re running a business, especially in a highly competitive landscape, having a plan and a proper strategy can mean the difference between success and failure. Each aspect of business requires its particular type of plan and strategy. For example, when marketing teams want to home in on a particular market segment, they’ll create a customer acquisition funnel custom tailored for that audience. When choosing a SaaS business to acquire, you should do the same.

There are thousands of SaaS businesses, but not all of them will be a good fit for you. A clear strategy can save time and energy by only considering businesses that match your criteria. All too often, investors get caught up in the excitement of buying a business and end up paying too much for it. Others end up purchasing a business without first doing their due diligence, only to realize that the company was not a good fit for their intended goals.

What should my SaaS acquisition strategy include?

When creating your SaaS acquisition strategy, there are several vital factors you need to take into account, including:

1. Your investment goals: What are you looking to achieve by purchasing a SaaS business? Are you looking for rapid revenue growth, diversification, capturing a larger market share, long-term stability, or something else?
2. The size of the business: What size of business do you want to purchase? Are you looking for a small, medium, or large SaaS company?
3. The type of business: What kind of SaaS business do you want to buy? There are many different types of SaaS businesses, so choosing one that matches your goals and needs is important.
4. The business’ location: Where is the company located? Are you looking for a local company or one headquartered in another country?
5. The price of the business and your budget: How much are you willing to pay for the company? Remember that you will likely need to negotiate with the seller, so it’s essential to have a realistic idea of what you’re willing to pay.
6. Timing: When do you want to buy the business? Are you looking for a short-term or long-term investment?

By taking the time to consider all of these factors, you’ll be in a much better position to define your acquisition strategy and find and purchase the right business.

Different acquisition strategies for different scenarios

Any plan starts with clear goals, which rings true for a SaaS acquisition strategy. As I mentioned before, there are several reasons why you may be interested in purchasing a SaaS company, and it’s critical to have clarity in this respect before shortlisting your options.

Depending on what these goals are and on your answers to the questions in the other five items listed above, we can define several different types of acquisition strategies.

Let’s look at what those strategies are:

#1 Synergy Strategy

The synergy strategy is about finding a company you can integrate into your own business to achieve cost savings or revenue growth. The idea is that acquiring the new SaaS company will help reduce costs and/or increase revenue in your current business. At the same time, your existing business will also help reduce operational costs or increase revenue for the target SaaS company. That way, joining both companies will result in more profitability than the sum of the two independently made. In other words, synergy is about 1 (your business) + 1 (the acquired SaaS business), equaling more than 2.

How to make the synergy strategy work?

The synergy strategy usually works when acquiring similar businesses in your market. The reason is that to make it work, you need to understand how the particular industry works and all the costs involved in running that specific type of business. Business owners usually have that type of clarity in their own business, but not in other niches.

However, this knowledge is essential to correctly evaluate how the new SaaS business will impact your current business’s costs and how your existing business will affect the target acquisition.

How to identify a SaaS business for your synergy strategy?

The first step is to analyze your business and understand how you can improve operational costs or revenue streams by acquiring a SaaS company. Once you have clarity on that, you need to look for SaaS companies on sale that would help improve those specific areas in your business.

Once you have a good list of potential candidates, it’s time to analyze those businesses’ costs and revenue streams and keep only those that can benefit from your products and services.

For example, suppose you own a trading platform and identify a SaaS company that provides order management software for brokers but doesn’t have a trading platform of its own. In that case, that could be a good fit for your synergy strategy. The reason is that you can offer order management software to your clients through your trading platform, increasing revenue for both companies.

#2 The Vertical Integration Strategy

The vertical integration strategy is about acquiring a SaaS company to attain greater control over your supply chain, either upstream or downstream. Controlling your supply chain, or at least the most critical parts of it, can help you improve customer satisfaction by ensuring more consistent delivery and quality of your product or service.

There are two types of vertical integration strategies:

• Backward vertical integration, and
• Forward vertical integration.

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The idea behind backward vertical integration is that it will give you more control over the quality and costs of the products and services supplied by the target company. On the other hand, the idea behind forward vertical integration is that it will give you more control over the distribution channels and customers of the target. In both cases, you can improve your profit margins by having greater control.

How to make a SaaS vertical integration strategy work?

The first step is to analyze your business and understand what parts of your supply chain would benefit from greater control. Once you have clarity on that, you need to look for SaaS companies on sale that would give you that control.

I spoke with Zach Grove, employee #4 at Drip, who was part of the vertical SaaS acquisition of Drip by a leading landing page platform, and here’s what he had to say: “Consider which integrations your customers recommend the most. Your integrations are a gold mine for finding smaller (and loved) SaaS apps that you could add to your portfolio.”

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Depending on which type of vertical integration you want to pursue, you’ll be looking for different types of SaaS businesses, but you want to home in on those that excel in the product or service you need for your supply chain.

How to identify a SaaS business for your vertical integration strategy?

The obvious choice for this strategy is a SaaS company already part of your supply chain. However, those businesses may not be on sale, so you’ll need to find other SaaS companies that can potentially take over critical parts of your supply chain effectively.

For example, if you’re running a cloud-based crypto exchange business, you know that security is always a top concern, and you must help your customers keep their private keys safe. Many companies in this niche outsource this part of the process to popular crypto wallets. These businesses might want to consider acquiring that SaaS company to have greater control over one of the most sensitive aspects of their business.

Once you have a good list of potential candidates, it’s time to analyze those businesses’ products and services and keep only those that can help improve the quality and consistency of your product or service.

For example, if you run a Business Intelligence Company, you might consider acquiring a SaaS company that provides data visualization software. That way, you can inherit the data processing and segmentation capabilities that can give you a competitive edge over others.

#3 Diversification strategy

The SaaS diversification strategy involves acquiring a SaaS company to enter new markets or geographies. This type of acquisition can be a way to reduce your dependence on a single market or customer segment and mitigate the risk that comes with it. This is undoubtedly the broadest of all the SaaS acquisition strategies and may be a good candidate for those seeking to flip SaaS businesses. This strategy entails a diversification in branding development, but the financial safety it offers you might be worth the extra work for most people.

How to make the diversification acquisition strategy work?

This strategy requires more hard work on your behalf since you’ll probably need to learn a lot about how to operate in a new market. If you’re not careful, this strategy can quickly become a distraction from your main business and reduce your focus.

The first step is to identify the alternative market you want to enter. Then, you should research and learn all you can about that market. This means analyzing things like:

• The size of the market
• The market’s growth rate
• Key trends
• The competitive landscape, and more.

Once you understand the market, you can start looking for SaaS companies that operate in that market. Remember to consider the products and services offered by the target company, its customer base, growth potential, and profitability.

If you’re diversifying into a new geography, then you’ll also need to consider things like language barriers, cultural differences, and differences in business practices.

How to choose the right business for this strategy?

You should start by identifying SaaS businesses with a strong presence in the markets you’re interested in moving into. The idea here is to find companies that would give you a foothold in new markets without requiring you to start from scratch.

Once you have your list of target companies, it’s time to start the due diligence process. This will require a deep dive into each company’s financials, products, customer base, and competitive landscape. It’ll also mean looking into the business model and key performance indicators, among other things mentioned in our post about buying a SaaS business.

The bottom line

SaaS acquisition is a complex process that requires adequate planning and laying the groundwork for the right strategies. This post covered the three most important methods to choose when acquiring a SaaS company. The SaaS diversification acquisition strategy is a good option for those entering new markets or geographies. Vertical integration, on the other hand, can be a way to reduce your dependence on a single supplier or distributor. Finally, synergy is one of the best strategies for increased revenue or reduced costs.

If you’re thinking about starting your own software company or selling your software online, this guide will teach you all you need to know about the SaaS business model including its pros and cons:

SaaS Business Model