4 reasons why you can’t raise capital for your SaaS company
Having a product-market fit or remarkable software alone does not guarantee investments. Founders still need to get a couple of other things right. These days, I see a lot of founders chasing the wrong metrics and wondering why they keep getting rejected by venture firms.
In this article, I will be covering 4 mistakes that your saas business is making that are preventing you from convincing investors and how you can solve them.
- Having a poor product-pricing strategy.
Several saas products are low-priced. A common reason for this is that early-stage saas businesses do not want anything getting in the way of getting customers to adopt their products. Founders tend to see their businesses as small and cash-constrained while against their beliefs, a lot of B2B buyers are not price-sensitive. A well-priced saas business is seen as a signal of great quality and long-term staying power by both customers and investors.
To affirm you are effectively optimizing your pricing model, you can nudge up the price of your product by 10% or 20% and observe the effects on your conversion rates. It is very much possible that your customers are willing to pay it and if they are not, you can roll it back without that much of a risk. It can be in the form of beta updates.
2. Using the wrong value pricing model.
Value metric is the unit that determines what you charge the customers. With the advent of new technologies like better saas billing systems and tracking software for product activities, you should get a lot smarter in the way you estimate the value metrics of your software businesses. Your pricing tactics should be directly related to the worth it gives the customers.
For example, in horizontal companies like Slack, and SalesForce, users are the primary way of charging and you can then sell to loads of members within an organization but for vertical applications like Substack, Canva, or infrastructural software companies like AWS or DataDog, number of users are not the only value metric as a lot of them charge based on customer’s usage. So as a software vendor, it is in your best interest that you scale only based on the success of your customers. Picking the right value-based pricing model will help increase your value and stay above your competitors. Also, you won’t necessarily depend on the sales team to upsell as the upsell is built in naturally based on the customer’s engagement with the product.
3. Inability to expand existing customers
Having the ability to get a customer hooked on your software is very important, especially for b2b saas companies. It involves having multiple axes to upsell a customer over time. You must be able to take your customer from an initial low-priced product to a much higher one ideally in the future. Your software business will expand efficiently when your customers are really into your service. You can do this by running packages. For example, you can have a tiered pricing strategy where you have an increase in features and functionality as customers increase in their sophistication. Salesforce is a classic example of that.
But when b2b saas companies find it difficult to expand at all or have very limited expansion routes, it indirectly shows little or no capability for growth which can be much less appealing to investors. It also leads to a net positive churn rate that can lead to the death of the business.
4. Not carrying out frequent pricing research
Your company’s pricing structure needs to expand as it expands. As founders, you should engage in more pricing research and price testing. This involves asking customers/target audience about what the value they get from your software, your competitive differentiation from other products, the ROI they get when they use your software, and for non-customers/prospects, the problems they want to be solved, how much it means to them and their price expectations.
With the feedback gotten, you can decide on what to focus more on what matters and generally make better decisions. This in turn will make your pitch more convincing.
Raising capital helps businesses to grow and to be profitable. In 2020 alone, about $156.2 billion was poured into startups in the US and this number is growing every year. However, not a lot of startups especially in the saas industry get funding due to some mistakes they make. As discussed earlier, such errors can render all the efforts by your team meaningless in front of investors. Therefore, taking cognizance of the mistakes and solving them will immensely increase your rate of getting the funds that your saas business rightly deserves.
Follow this page for more information on how to effectively build and run your saas business.