When SaaS businesses grow they move though different phases. Sometimes it can be a painful experience.
You can ease up the growing pains if you understand what’s going on. So lets take a look what happens behind the scenes.
The SaaS ecosystem
You have a certain audience. These are the people who in general could buy your app, but you can only reach a part of them, the leads.
Part of the people you reach will become your customers and create new MRR (monthly recurring revenue).
Those people will move into the next category, and become your existing customers. They’ll give you recurring revenue every month.
Each month a part of your existing customers leaves, and take a part of the recurring revenue with them, the lost MRR.
￼ The proportional relationship between new customers and leads is called conversion rate. For simplicity’s sake, let’s imagine that each customer pays $1, so I can refer to conversion rate and mean the relationship between new MRR and leads.
Likewise, the ratio of lost MRR to MRR is called churn rate. But it too could be measured in customers as well.
Rules of the game
You can scale any of the colored boxes up or down. But while you do that, the green new MRR box scales along with the leads box and the red lost MRR box scales along with the MRR box.
- Running a marketing campaign to reach more people would scale up the yellow leads box, and the green new MRR would follow.
- A/B tests to increase conversion rates would scale up just the new MRR box
- Upgrading your existing customers to more expensive tier would scale up the MRR box, and red lost MRR would follow.
- Making customers happier would scale down only the red lost MRR box
Now, let’s see a couple of examples. I’ll be using 25% conversion rate and 25% churn rate - just because that’s 1/4 so it’s easy to draw.
Realistic figures for a plateauing SaaS would be e.g. 2% conversions and 10% churn/mo. Yes, per month.
A baby SaaS ecosystem
At the start your existing customer base and MRR is small. But there are a lot of people out there in the leads box.
￼ This is just a plain game of percentages, so it’s much much easier to make a visible impact by concentrating on the bigger mass of people. So you’ll focus on the left side leads and new MRR. And growth follows.
A teenage SaaS ecosystem, plateauing
When your customer base & MRR grows, the lost MRR grows along. When the lost MRR approaches the size of the new MRR, your business growth first slows down and then stops. For every new customer you win, one of your old customers leaves.
￼But as you’ve used to work on the left side, you may fail to notice that your existing customer base is now a considerable mass of people, and you keep on targeting your improvements to the leads and customer acquisition.
That’s what you’ve always done and it has worked.
What happens is that you do get growth, but as the left side feeds the right side, MRR grows and also scales up the lost MRR. Lost MRR catches up with your new MRR again.
So you work to hard to break the plateau, but the growth is withering, like you’d be pushing against a headwind. Your MRR may look something like this:
So what’s the secret?
You may have guessed it already.
You will need move your main focus from potential customers and acquisition to your existing customers and retention. But at the same time, you can’t decrease your acquisition efforts or the churn will eat you up.
You’ll need to adjust to the new environment. What boosted your business growth earlier stops working. Your old bag of tricks doesn’t help.
Edit: After analyzing a lot of SaaS metrics for FirstOfficer.io customers, I know that it’s possible to have this kind of plateau before your customer base is large. That happens when you don’t have enough traffic or conversions and in those cases the focus must remain in acquisition. Always analyze the metrics in their context!
Of course it depends on your business where the sweet growth spots are. The actions that affect the right side will often need implementation on the acquisition and marketing side, because the leads side feeds the MRR. But it’s a completely different action to change your marketing to acquire more of a certain type of customers than just to change it to acquire more customers in general.
Worse, when you’ve worked in a certain environment for years, you may totally miss several pitfalls around this change.
1. You run into the plateau in full growth mode
Businesses invest in their growth. And when you are bootstrapping, you often forego profit and just invest it all to growth. Or most of it.
The idea is that you’ll grow you business and THEN you collect the profit.
But here’s the bad news. When you are in plateau, you must keep on investing that money, or your SaaS starts to shrink. Your new MRR isn’t growing your business, it’s just replacing the lost MRR.
Yes, lots of people are coming in from the door. But your business is like a revolving door. As one person comes in, another steps out.
There’s a Finnish saying: “Everything is possible, except skiing through a revolving door”.
2. “We’ll just fix this quickly like we always do”
The actions that target leads or new MRR have often immediate and radical impact. Not so with the actions that target your existing customers.
Just think about it. A/B testing, pricing changes and conversion optimization - immediate results.
But if you want to cross-sell or up-sell to your existing customers, you’ll have to first build the thing that you want to sell. If you want to lower the churn by changing your customer base composition to better match your ideal customer, those new customers come in tiny drops relative to your old customer base.
And if you aren’t prepared at all and have to start collecting data for profiling your customers from the scratch, it will take 6-12 months to collect a comprehensive data set. Before you have it, it’s harder to measure your progress. You’ll be pretty much throwing spaghetti on the wall and seeing if it sticks.
3. You keep looking for tips and tricks from wrong places
You may not have enjoyed reading David Skok’s or Lincoln Murphy’s articles because it seems like they’d be living in a different world with different rules, like: “over 10% churn means you don’t have a product-market-fit”.
And this far those rules haven’t matched your reality. You’ve maybe even gone: “He he, whatever, MY churn is 18% and MY business is growing - you bullshitters!”
So you rather read the blog posts of fellow bootstrappers. Those are the people that you relate to and whose advice has worked so well this far.
But David and Lincoln are working with post-plateau SaaS, while most of the blogging bootstrappers are running pre-plateau SaaSes (or in-plateau).
Don’t get me wrong, all of them give great advice - they just focus on businesses in different stages. And when your SaaS plateaus, you are moving towards the world and the rules David and Lincoln play with.
So you may want to dig up those articles on negative churn, customer success, deadly customer acquisition costs and finding your ideal customers that didn’t make sense before.
But I especially enjoy reading Jason Cohen. Even though his company is big, he has the talent of explaining things in a simple way. For example following up SSEBITDA now might save your ass later.
Prevention is better than cure
This type of plateau doesn’t have to come as a surprise. It gives clear warning signs to your metrics months before it happens.
I try to catch SaaS businesses to FirstOfficer.io before their growth plateaus. It has a view that shows changes to growth in MRR component level, so it’s easier to notice the approaching plateaus.
If you start working to clear up the issues well in advance and take care of your profitability, life will be so much easier.
Of course, depending on your numbers, it may be that your SaaS is just reaching it’s normal maximum size and you may not want to grow it further. But it’s still nice to know where you stand.