Why Do Most SaaS Companies Grow Fast and Disappear?

The Software-as-a-Service (SaaS) industry is growing rapidly as it is revolutionizing the technology sector. Indeed, it offers flexibility for organizations to exploit software applications on a subscription-based model, without the need to install anything or maintain complex infrastructures.

The SaaS concept provides an exceptional level of scalability, adaptability, and cost-efficiency underpinning the burst of SaaS businesses globally. They serve various industries and cover a large range of business needs. The estimated revenue in the U.S. SaaS market is expected to make $190.10bn in 2024, while for 2029, experts forecast a whopping $452.10bn.

However, the flip side of such a galloping expansion is severe competition within the sector, making it hard for a startup to stay afloat. In fact, about 70% of SaaS companies close, while according to a study by McKinsey & Company, only 20% of technology startups stay alive through the first five years of business activities.

This article unveils why SaaS startups fail, brings illustrative examples of demised brands, and explains how to make your business prosper.

Reasons Why SaaS Startups Fail and Solutions to Avert Them 

A small percentage of all ventures that manage to attain sustainability in the long term raises a big question – what goes wrong with those two-thirds, or even more, that are knocked out of the market? We studied the most frequent factors leading to SaaS company failure.

The product fails to relieve the customer pain points

The faulty products often lack functionality or contain issues in serving their purpose. Users reject software that fails to provide the opportunities they seek, hence the declining demand for such offerings.

A poor product is ranked high among the potential failure reasons, confirming that it’s a common problem with many entrepreneurs.

Solution:

Secure your path by constructing a minimum viable product. Focusing on several core features would be wiser than trying to incorporate everything at once. A strong MVP with essential features will reduce your time-to-market, simplify the product, and enable a practical software solution that helps users address a particular need.

Instead of building an abundance of features, focus on several ones and construct a solid MVP around them.

The product is mistimed or targets the wrong audience

Numerous ventures seek to anticipate consumer needs attempting to create a truly unique product. The issue here lies in user unawareness of the problem the solution is going to fix. If the audience is not ready for your offer, you’ll need to invest a significant budget in their education. 
Those ventures that fail to allocate the appropriate funds for informing their potential users may end up with zero demand for their product.

Solution: 

Market research will help you evaluate the viability of your idea. Essentially, you would test your concept without investing in its development. 

How can you assess the audience’s expectations? Market research will help you validate ideas and test the demand for them.

What are your options? There are numerous platforms for trying/discovering new projects and building a user community around them. You can leverage such resources for your idea. Another approach is building a prototype based on the existing products. 

Finally, you may conduct fake-door testing or beta-testing. These relatively inexpensive techniques will allow you to check your assumptions about the new product.

Vague vision or strategy

A SaaS venture should not rest on its laurels after a successful launch. Why do the existing SaaS products fail? Because entrepreneurs stop upgrading them according to the altering needs and demands. As soon as you cease innovating your offers, you’ll get outpaced by competitors, with consumers switching to their products.

Solution:

To continue growing and expanding the customer base, you need to develop a robust product strategy, continually collect consumer feedback, and act according to the derived insights. Make sure to retain the general focus and keep your product strategy consistent, since basing your strategy on mere desire to address each and every user request may dilute brand essence and reputation.

Collect the user comments and prioritize the requests and features you would focus on when enhancing your product.

A lack of competitive advantage

Your offer needs a clear differentiation from the existing products on the market. SaaS startup failure may occur due to the product being outcompeted by its rivals. Why? Because it doesn’t provide exquisite value to the user. 

Solution:

Differentiate and rule! A SaaS business should establish its unique selling proposition (USP). Once you identify what sets you apart from the niche, you’ll understand what features and services can enrich your offer and how to conduct your communication with consumers.

An articulate differentiation strategy for your SaaS tool will facilitate brand awareness and customer loyalty in the long term.

Inadequate funding

Obtaining sufficient funds is a continual pursuit for many startuppers. According to the ranking, the lack of financial resources is the second largest reason why SaaS companies fail. Even with an appropriate offer and a valuable product, entrepreneurs may face unforeseen expenses uncovered by initial investment. 

Solution:

Focus on the quality of your SaaS tool and secure appropriate investment in team, technology, and resources. This way, you’ll guarantee that the most critical areas of your business are covered. Keep track of cash flow and monitor your financial strategy to ensure your operations are sustainable.

Inefficient business model and pricing strategy

Determining the cost of your product is crucial for its ability to bring revenue and fuel the overall growth of your business. Price composition involves a range of factors, such as market demand, the audience’s willingness to pay, competitor prices, and your value proposition. 

Making the price excessively high can force users to switch to your rivals’ products. Conversely, by setting a cheap price, you risk downgrading the perceived value of your offer. 

Solution: 

Plan your pricing strategy meticulously, select the pricing models that perfectly match your product and target users, and make your price competitive yet capable of generating revenue.

You can employ a model with monthly, annual, or multi-year subscriptions, offer pricing tiers based on features or usage limits, establish a freemium model, or charge customers based on their usage of the product. Each option should be properly calculated and assessed to ensure long-term profitability.

Compromised product quality

Another issue hitting the top 10 of SaaS failure reasons is a low-quality/functionality product with technical flaws. If your product delivers compromised quality in terms of functionality and user experience, consumers will be reluctant to adopt your software. This will lead to high churn rates, negative reviews, and the loss of market share, as a consequence.

The other aspects of product imperfection may include scalability issues if the tool doesn’t allow for seamless growth or inflicts excessive maintenance costs.

Solution:

Stay ahead of the curve in technology and innovation. Make sure you apply advanced technologies and best practices when crafting your startup product. 

Furthermore, you should keep an eye on the evolving tech industry and implement upgrades that can benefit your tool. Technological transcendence is integral to successful SaaS startups.

Weak marketing and branding initiatives

SaaS company growth is impossible without an effective marketing strategy. The ability of a startup to arrange appropriate communication with the audience, including a clear statement of the unique value proposition and activities to engage and retain customers, determines sustainable development.

Solution:

A dynamic and flexible marketing strategy is vital to adapt to altering market conditions and consumer aspirations. It would ignite your product's success and maintain its visibility among the competition. 

Your marketing efforts should prioritize creating a distinguished brand and memorable customer experience to keep your SaaS tool in users’ hearts and digital devices.

Challenges in business expansion and scaling

Once you’ve started scaling your startup, focus on maintaining a reasonable SaaS startup growth rate. If it expands too quickly, it can inflict problems with cash flow, excessive overheads, and other financial and operational issues. Therefore, an extremely rapid development is also dangerous for a SaaS startup.

Solution:

Try to attain incremental growth by setting a realistic plan and timeline. This way, you’ll be able to administer expenses, utilize cost-saving opportunities, and implement effective scaling strategies. 

Include a roadmap and goals for increasing your team, infrastructure, and offerings. Track your startup’s performance and correct your strategy if necessary to ensure controlled development.

Low focus on user retention

Acquiring a new customer can cost five to seven times more than retaining an old one. Therefore, it makes sense to invest in an appropriate retention strategy. SaaS businesses that underestimate its meaning can start losing their user community.

Solution:

Maintain a reasonable ratio between customer acquisition cost (CAC) and customer lifetime value (LTV) to drive ROI. Create an engaging customer journey, deliver value, and provide the required support. 

Ensure minimum viable onboarding to guide your users and grant a personalized service. Help each consumer segment explore the relevant features, empowering them to enjoy your product from the start.

How can you maintain effective client interactions? Employ in-app messaging, deliver tooltips and tutorials, and introduce advanced features to keep your users engaged.

Notable SaaS Startups that Didn’t Triumph

To better understand the process of SaaS product development, it’s important to assess the experience of the businesses that have closed and analyze their mistakes. 

We’ll explore several examples to derive lessons on how to prevent SaaS product failure.

1. RethinkDB

RethinkDB was conceived as an open-source database for real-time applications. Although the product obtained technical excellence, it failed to gain sufficient adoption by the audience and establish an effective monetization approach. 

What went wrong? 

Poor business model and the lack of customer understanding of the product’s USP. The product was probably mistimed since the potential consumers were reluctant to switch from traditional databases to real-time solutions.

Lessons learned:

• Shape a clear monetization strategy early, especially if your SaaS tool is open-source;
• Educate the user community about the benefits of your technology to drive adoption;
• Engage users in continual interaction with your brand to promote reputation and awareness.

2. Beepi

Beepi represented an online marketplace for used cars, where buyers could meet sellers. The platform attempted to change the traditional approach to purchasing vehicles by introducing online transactions, car inspections, and delivery services. 

What went wrong?

Although the company marked a successful business start, it eventually failed due to high operational costs, excessive expansion, and ineffective management.

Lessons learned:

• Maintain your operational costs to achieve long-term efficiency;
• Craft a realistic growth strategy with a focus on core markets;
• Utilize management practices fitting your team, business, and working processes.

3. Kiko

Kiko was an AJAX-based online calendar tool that was relatively new at that time. Launched practically simultaneously with Google Calendar, it couldn’t sustain the competition with Google’s free offering. 

What went wrong?

Kiko underestimated the competition and failed to meet the market needs. The company didn’t establish a clear differentiation for their product and failed to educate the audience about its advantages.

Lessons learned:

• Make sure that you transpose the value and unique features of the product to your audience, to differentiate it from your competitors;
• Monitor the competitive environment to keep your product relevant;
• Prioritize creating a loyal customer segment.

In Conclusion 

SaaS startup development is a promising venture as it allows entrepreneurs to enter the expanding sector with significant opportunities for potential revenues. However, fierce competition in the industry and the inability to reach sustainable operations often lead to company closure. 

Why do SaaS startups fail? The most common reasons include issues with the product, strategy, funds, business model, and marketing. 

How to avoid a startup failure? A carefully developed business strategy, meticulous planning, and insights learned from the other players’ experience are crucial success factors. 

Furthermore, you can leverage the tech expertise and knowledge of professional software development companies. SDA can become a trustworthy partner in implementing your SaaS growth strategy. We have a proven track record of SaaS development services, including goal setting, analysis, design, building an MVP, testing, and deployment.

Contact us, and we’ll help you attain your growth goals while leaving the pitfalls aside.