Rob Walling: The SaaS Playbook

The SaaS Playbook

You can make the best possible decisions in poker and still lose; that’s the nature of systems — like poker and startups — that are equal parts skill and luck.

Some acquisitions are scary. All of them are stressful.

Why You Should Read This Book

“I am not anti-venture capital. I am anti-everyone-thinking-venture-capital-is-the-only-way-to-start-a-tech-company.”

Build your business, not your slide deck.

After nearly two decades of working with startup founders, I know that bootstrapping takes longer to generate life-changing wealth than the moonshot approach of raising venture capital. But the likelihood of some kind of a “base hit” is much, much higher.

There are superpowers to being bootstrapped. One is that you don’t need anyone’s permission to start or build your company. Another is that your business doesn’t die until you quit. Bootstrappers don’t run out of money; they run out of motivation.

You Know What’s Cool? A Million Dollars.

The Playbook for Building a Multimillion-Dollar SaaS. Stair Step Method of Entrepreneurship.

Step 1: Your First Product. You’ve got a simple product with a simple marketing plan, usually with a single traffic channel.

Step 2: Rinse and Repeat. Step 2 involves doubling down on the model that worked in Step 1 and repeating it until you own your time.

Step 3: Standalone SaaS Product. SaaS is complex to build and market, and there’s a long on-ramp to any kind of substantial revenue.

What Is Bootstrapping, Really?

As recent as a few years ago, a startup was one of two things: bootstrapped or venture-funded.

Here are terms the startup community uses to describe the funding status of a company:

• Bootstrapped: You started the business on your own, with limited resources, and grew it slowly over time as the business generated cash.
• Venture-funded: You found investors (sometimes friends and family, but usually angel investors or venture capital firms) who were willing to write you a check to grow your company and raise your next round of funding in about 18 months.
• Self-funded: Some use this interchangeably with bootstrapping.
• Mostly bootstrapped: Some founders want to build a bootstrapped company but know that a bit of funding will help them get there faster.

Why Is SaaS the Best Business Model?

There are a couple of reasons why SaaS companies have the best business model in the world. Let’s dig deep into some of the most relevant.

• Recurring Revenue. Subscription revenue is a business cheat code. With SaaS, it’s built into the business model.
• Recession-Resistant.
• Not Dependent on Luck. Launching a B2B SaaS company is about building a real product for real customers who pay you real money. You’re solving a problem, and therefore your profitability is based on finding a problem that’s worth paying to resolve and solving it in a way that makes your users desperately want your solution. There’s not much luck in that formula.
• Not Fighting a Battle on Two Fronts. One of the most challenging problems to solve when building a startup is kickstarting a two-sided marketplace, where you need to bring both supply and demand to the table simultaneously.
• You Don’t Need Funding. For the most part, SaaS does not have this capital requirement.
• High Profit Margins. Because of the low cost of servicing additional customers, SaaS companies reach gross profit margins of 90 % and net profit margins of 50 % or more at scale.
• High Exit Multiples.

Achieving Escape Velocity

The process of moving from “a product people love” (product-market fit) to “a product people love, and you can find more of them every week” (escape velocity) involves building your product for your ideal customer, finding one or more marketing channels that work, building moats, reevaluating pricing, building your team, unlocking SaaS Cheat Codes, and finding and fixing bottlenecks in your funnel.

The strategies in this book are arranged into six parts:

• Market: How to understand your market and beat your competition.
• Pricing: Structuring pricing for maximum growth.
• Marketing: Finding and scaling the right marketing channels.
• Team: How to get the right people working with you 80/20.
• Metrics: The highest-impact SaaS metrics you should be watching.
• Mindset: The psychological factors that can help you become a successful founder.

Four super-strategies, which I call the SaaS Cheat Codes. These Cheat Codes — expansion revenue, virality, net negative churn, and dual funnels — can grow your business at an incredible pace if you get them right.

Market

Strengthening Product-Market Fit

Most entrepreneurs don’t have enough conversations with potential, current, and past customers.

There’s another reason entrepreneurs don’t talk to customers: fear — fear that they’re bothering them, fear the customer will say something they don’t want to hear, fear that it’s a waste of time.

Who should you be talking to? Prospects Customers, People who decided not to become customers, People who became customers and then canceled.

The key to getting actionable information from customers depends on whether you’re doing early customer discovery or researching how (and whether) to build a new feature. But typical questions might include: Can you walk me through a sample flow? What problem are you trying to solve? What do you currently use to solve this problem? What did you use in the past? What are some of your biggest frustrations about this solution?

Deep dives into customer conversations have literally filled books. For a great resource on doing customer interviews as a founder, check out the book Deploy Empathy: A Practical Guide to Interviewing Customers by Michele Hansen.

“By taking yourself and your offering out of the equation, potentially — there’s no guarantee of this — you can actually find opportunities that you wouldn’t see otherwise.”

• The Crackpots. First up are the crackpot requests: ideas so far out of left field you can’t imagine why they want it or even understand what they mean. The crackpot suggestions are the easiest to process because you know right away you’re not going to build them.
• No-Brainers. You’ll also get requests that are either already on your road map or make you wonder why you didn’t think of them. Once in a while, your customers will come up with an idea that’s so awesome you want to put it into production immediately.
• In-Betweens. I’d estimate only 10 % to 15 % of the feature requests are crackpots, while maybe 20 % are no-brainers, so that leaves a lot of judgment calls.

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas . . . Innovation is saying ‘no’ to 1,000 things.”

Your job is to figure out the problem your customer is trying to solve, not just build the solution they suggest.

• Question # 1: What’s the Use Case for This? Or, in layman’s terms, what problem are you trying to solve? You can get at this by asking questions such as: “What leads you to want that? What problem are you trying to solve with this feature? What are you currently using to get that done?”
• Question # 2: What Percentage of Customers Will Actually Use This Feature? If you think only 5 % to 10 % of your customers will use something, go a step further and spot-check which users they are.
• Question # 3: Does This Fit with My Vision of the Product? Every feature has opportunity costs. Every hour you spend building a feature is an hour you don’t spend building a different one.

How Can I Compete in a Competitive Market?

I’m not recommending that you remain the low-cost provider indefinitely, but before you’ve built a strong brand, this can be a good strategy.

Another place to innovate against bigger competitors is with your sales model.

Many incumbents in competitive markets have a high-touch sales process where customers must schedule a demo before learning the price. They may also have mandatory setup fees. If you enter the space with a low-or no-touch sales process and your pricing is listed on your website, you can start winning customers who don’t want to jump through so many hoops.

You’re not going to outmuscle or outspend entrenched, well-funded competitors. You need to use their biggest strength (their size) to your advantage. With big companies comes slowness to react to the market, dated UX, legacy code.

How Much Should I Worry about Competition?

Most founders worry too much about their competition. In my experience, unless you’re losing deals to specific competitors on a regular basis, it’s more helpful to keep your eyes on your own paper.

There are only two things you should care about when it comes to competition:

• High-Level Updates. If an announcement is big enough to merit space in your industry news sites. Read it and understand it.
• Deals You’re Losing. If you’re losing deals to a competitor, you should figure out why.

Their Funding. If a competitor raises funding, that’s not necessarily a bad sign for you. It’s not a sign they know what they’re doing — just that they were able to convince an investor that there’s an opportunity.

How Can I Build a Moat?

The idea of an economic moat was popularized by the business magnate and investor Warren Buffett. It refers to a company’s distinct advantage over its competitors, which allows it to protect its market share and profitability.

In SaaS, I’ve seen four types of moats.

• Integrations (Network Effect). Network effect is when the value of a product or service increases because of the number of users in the network.
• A Strong Brand. When we talk about your brand, we’re not talking about your color scheme or logo. Your brand is your reputation — it’s what people say about your company when you’re not around.
• Owned Traffic Channels. One caveat is that this moat can be a bit dicey to maintain because the algorithms at any of those companies can change quickly — and have.
• High Switching Costs. Products that require a significant amount of work to migrate away are said to have high switching costs.

False Moat: Unique Features. As makers, we want to believe that features are what differentiate us.

Should I Translate My Product into Other Languages? (And Other Common Mistakes)

White labeling is when another company pays you to license your product and present it with its own branding, and the moment you launch a successful product, people will start emailing you with “exciting opportunities” to white label.

Usually what you have is someone who wants to start a business but can’t build their own product. They want to pay you per account they add, but they have no audience or distribution. In the end, you’ll spend a bunch of time talking to them, writing up contracts, and taking feature requests — for nothing. If you’re approached about white labeling by a large player, it’s worth having the conversation. You know they’re not wasting your time because they don’t want to waste their own.

Adding other verticals is the easiest siren song for me to justify. Sometimes it makes sense to pivot or expand to other niches.

Unless you already dominate a particular niche and are moving into another or are making a full-blown pivot into the new space, be careful with this one.

Most of the reasons I see founders pricing too low are psychological, not logistical. You’re afraid of rejection.

Pricing

How Should I Structure My Pricing?

Pricing is the biggest lever in SaaS, and almost no one gets it right out of the gate.

Most founders price their product too low or create confusing tiers that don’t align with the value a customer receives from the product.

You’ll have more breathing room (and less churn) if you aim for an ARPA of $ 50 a month or more. In niche markets — or where a demo is required or sales cycles are longer — aim higher (e.g., $ 250 a month and up). If you have a high – touch sales process that involves multiple calls, you need to charge enough to justify the cost of selling it. For example, $ 1,000 a month and up is a reasonable place to start.

As mentioned above, the sales process has tremendous influence over how a product should be priced.

No matter where your business sits, one thing is true: “If no one’s complaining about your price, you’re probably priced too low.”

SaaS Cheat Code: Expansion Revenue

SaaS Cheat Code: Expansion Revenue. Expansion revenue is when customers pay you more as they get more value from your product.

There are two basic ways to build expansion revenue into your pricing tiers.

• Value Metric. A value metric is how your company measures the per-unit value of your product.
• Feature Gating. The second way to unlock expansion revenue is by expanding the features your customers can access at higher plans.

Using Both. You can also combine a value metric and feature gating.

Should I Offer Freemium?

According to the State of Independent SaaS Report, 66 % of SaaS products offer a free trial, but only 17 % offer a forever-free (aka freemium) plan.

Freemium pushes your revenue into the future, so if cash is tight it can be less than ideal.

You can run into problems if your free users are in a completely different market than your paid users. If your freemium users aren’t at some level helping push growth of your paid tiers, offering a freemium plan isn’t the right call.

Should I Ask for a Credit Card Up Front?

Dropping the credit card requirement is an attractive option because you can get ten times as many trials if you don’t ask for a credit card.

Entering a credit card is a qualifying event. A person willing to enter a credit card has more interest in your product than someone who won’t, and it reduces the number of tire kickers in your sales funnel.

My default recommendation is to require a credit card up front.

Remember the golden rule of experimenting: Only change one variable at a time.

When Should I Raise Prices?

I recommend revisiting your pricing every six to 12 months because if you’re like most founders, you’re probably charging too little.

Instead of dropping your price, one approach is to figure out what you need to build to make your tool worth what you are charging.

How to Raise Prices

Use Rob’s Rule of 10: If raising prices for existing customers will not grow MRR by at least 10 % (ideally more), it’s rarely worth considering. The amount of headache, support burden, brand damage, and potential churn is so onerous that if you’re only going to grow by a few percentage points, it’s best just to grandfather those users in.

One thing you never want to do is raise prices on existing customers without sending notice. That’s a recipe for angry customers.

When you announce a price increase, use this template:

• Set the stage for the value your product offers (i.e., we’ve been around for some time, we’ve become a trusted provider in this space, etc.). “We’re changing our pricing.”
• Let them know up front what’s going on. Provide high-level justification about why you’re changing your pricing.
• (Optional) Offer more specifics about whom it impacts, when price increases will go into effect, etc.
• (Optional) Provide more justification if you feel it’s necessary.
• “Reach out with questions.” Let them know your doors are open for questions, comments, and feedback.

Marketing

How Do I Find More Customers?

At a minimum, founders need to learn SaaS marketing strategy or risk losing control of and visibility into a crucial part of their business.

Marketing Funnels

The most common marketing funnels in SaaS are high-touch, low-touch, and dual. Which one is right for your product? That depends on your market, pricing, and customer base.

A high-touch funnel gives your customers a lot of human interaction as they make their buying decision.

Obviously, the higher touch your marketing funnel is, the more money you need to make from each customer. High-touch funnels work best for companies that charge a minimum of $ 500 a month and focus on customers who can afford that price point. Higher-touch funnels also tend to focus more on outbound marketing tactics like cold-calling, cold-emailing, and LinkedIn outreach.

A low-touch or no-touch funnel works when you have a wide market and a low-priced product.

In this model, you set up a large funnel where leads come in on their own and are led automatically through a sales process without much input from you or your team.

Because you’re not spending as much energy qualifying leads, you’ll see lower conversion rates and usually higher churn — but because your low-touch funnel doesn’t require as much hand-holding, your cost to acquire a customer and the cost to sell to that customer are very low.

SaaS Cheat Code: Dual Funnels

SaaS Cheat Code: Dual Funnels Another Cheat Code is something I call a dual funnel, which targets both a wide audience at a low price point and a premium or enterprise audience at a high price point.

Everything at the top of the funnel is a vanity metric when the bottom of your funnel isn’t healthy.

Business-to-Business SaaS Marketing Approaches

The 20 most common business-to-business (B2B) SaaS marketing approaches:

• The “Big 5” SaaS Marketing Approaches I call these the big 5 because they are the most common marketing approaches that work for B2B SaaS companies.
  • SEO.
  • PPC Advertising. PPC advertising is the tried-and-true, usually expensive way to drive traffic quickly.
  • Cold Outreach. This is outreach to prospective customers directly via email, phone, LinkedIn, or DMs on social media.
  • Integration Marketing. This is one of the only marketing approaches that also serves your current customers because it improves your product by adding more features through integration with a partner.
  • Content Marketing. Although it is often coupled with SEO, content marketing relies solely on virality or on building an audience slowly over time, without the long-term benefit of organic search.
• Other (Still Important) Marketing Approaches
  • Affiliate Marketing. Affiliate marketing is a common way to tap into established audiences in your industry. You’ll typically pay between 10 % and 30 % commission to the affiliate.
  • In-Person Events and Trade Shows. Events and trade shows can be a fantastic marketing approach, depending on your industry.
  • Free Tools (i.e., Engineering as Marketing). Usually tied in with SEO, this approach involves building a software tool you give away for free to generate traffic to whom you pitch your main product.
  • Hangouts. These are gathering places like online forums, private Slack groups, Facebook groups, and subreddits.
  • Q&A Sites. This approach focuses on answering questions on Quora, Stack Exchange, and other relevant Q&A sites.
  • Virality. Make sharing your product with other potential users part of your product’s experience.
  • Other People’s Audiences. This involves putting yourself in front of established audiences through guest posts, podcast tours, and YouTube tours.
  • Daily Deal Sites. These sites promote SaaS products and other software tools at deep discounts. For example, AppSumo and PitchGround.
  • Launch Sites. These sites curate and showcase new SaaS and software products for clients to discover. They rate them by a voting system. For example, Product Hunt and BetaList.
• Lesser – Used Approaches
  • Building an Audience/Community/ Movement.
  • Display Ads. This is buying ads based on a cost per impression rather than cost per click.
  • Viral/Stunt Marketing. Stunt marketing works for Red Bull, but it’s expensive, and the brand-building that results doesn’t have a measurable ROI.
  • Speaking Engagements.
  • PR.
  • Offline Ads.

How Do I Know Which Marketing Approaches Fit My Business?

How to filter and prioritize marketing approaches to find the handful that are likely to work best for your business. Here’s the framework I recommend for this: The Three Factor Framework. The three factors of a marketing approach are speed, cost, and scalability.

• Speed. How long does it take for a marketing approach to start returning results? In the early days, faster approaches are the key to getting initial customers. Ideally, you should be working on a fast and a slow approach at the same time.
• Cost. How much will it cost? In the early, you’ll want to think in terms of hard costs — dollars and cents — instead of your own time.
• Scalability. Can you scale this approach to reach more people?

It’s challenging to create a concrete list of which approaches work best at what price point.

I’ve found the ICE framework helpful for this purpose. ICE stands for:

• Impact: If this works, how big will the potential impact be?
• Confidence: How likely is this to succeed?
• Ease of implementation: How easy is this to execute?

ICE is often used to prioritize feature development, but it’s also a good tool for prioritizing marketing.

List potential approaches in a spreadsheet and rate them on a scale of one through 10 for each of the above characteristics.

Score = Impact x Confidence x Ease: This gives you a score with an exponential impact.

Score = (Impact + Confidence + Ease )/3: This gives you an average of these three scores.

Keep a Marketing Changelog. I recommend keeping a marketing changelog, a chronological record of everything you try, even small things like updating marketing copy on your website.

Measure. One mistake I see founders make at this stage is that they don’t measure the effectiveness of each channel.

Don’t Try Too Much at Once.

You want to start by testing one approach that works quickly (e.g., cold outreach) and one that works slowly (e.g., Google SEO).

One of the biggest mistakes I see venture-funded companies make is raising buckets of money, then dumping it into marketing before they have product-market fit.

How Should I Structure Sales Demos?

With B2B SaaS, sales shouldn’t be sleazy. Instead, it should be an educational conversation.

My TinySeed cofounder Einar Vollset says, “When selling SaaS, think of yourself as an unpaid expert who’s helping the prospect solve their problem using software.”

When I used to do sales demos, I would introduce myself as the founder and say, “I’m not trying to talk you into anything. I’d just love to show you our tool and get your feedback on how it might fit your needs.”

Asking even a few questions about budget, timeline, and the problem they are trying to solve can be a window into whether it’s worth your time to jump on a demo.

Not every SaaS application is a one-call close, but if yours is, set up their account at the end of your call, including taking their payment info over the phone.

Your demo is not a product tour; it’s proof you can solve their problem. Focus on the customer’s pain and how you can fix that.

Sales demos are pretty high-touch, which means they should be reserved for customers who are going to pay you enough to be worth it.

Dialing in your positioning, website, and marketing is one way to make sure you’re attracting the right prospects and weeding out those who aren’t a good match.

One thing to note is that if most of your leads are warm, inbound leads, you can actually combine the sales role with customer success.

If it’s more cold/complex sales, you’ll want a salesperson incentivized by commission.

Team

How Should I Structure My Team?

But a challenge most founders face is, because you perform three (or ten) roles at once, you think you can hire people who can also handle many roles.

When building your team you should delegate roles, not tasks. So how does one do that?

The following is a list of the departments you’ll need (plus a likely first hire in each):

• Product. Product is focused on what to build and how it should function.
• Design.
• Engineering.
• Marketing.
• Sales.
• Customer Support.
• Customer Success.
• Human Resources.
• Legal.
• Finance.

Being a founder means firing yourself from one job after another to focus on the high-level strategic roles the company needs you to handle. Before you can fire yourself, you have to hire someone to fill that role.

As a general rule: support is usually an early hire because it’s a repetitive task of lower value than other things a founder is typically focused on.

Sales, marketing implementation, and development usually come next; which one depends on the skill sets of the founders.

Unless you’ve raised a chunk of funding, when you only have 10 or 15 employees, you’ll want to look for generalists who can fill two roles at once.

There are standard SaaS job titles. Use them. Your ideal candidates have saved job searches for things like “Engineer,” “Customer Service Lead,” and, yes, “Senior Architect.”

Be careful with handing out elevated job titles to early employees.

SaaS founders generally come in three flavors: those with a software development background, those with a marketing or sales background, and those who are subject matter experts.

As a developer, you need to be on what Paul Graham calls a Maker’s Schedule, where you can take a whole afternoon to immerse yourself in work uninterrupted. As a founder, you will absolutely be on a Manager’s Schedule, which cuts the day into one-hour increments you can fill with all those necessary meetings and other tasks.

Ninety percent of bootstrapped SaaS companies have at least one technical founder, according to MicroConf’s State of Independent SaaS Survey. 9 in 10 bootstrapped SaaS companies have one or more developers on their founding team.

Having no developers on your founding team makes SaaS difficult to bootstrap.

You’ll hear a lot of people talking about how their company is all one big happy family, but I caution against that. I do not refer to my fellow employees as family. I view us as a high-performing team.

If you hire and tolerate mediocre performance, you will lose your best people and create a culture of underperforming.

No one has ever said, “I fired that person too soon.”

Hiring Managers

I separate management into two components: supervision and leadership.

If everyone who works for you is a task-level thinker, it places a tremendous burden on you as the founder. Consider bringing some project-level or owner-level thinkers onto your team.

• Task-level thinkers are team members who focus on their current or next task.
• Project-level thinkers look ahead weeks or months and juggle multiple priorities.
• Owner-level thinkers not only manage projects but also think about how to improve internal processes and bring ideas for experiments that can change the trajectory of the company.

When you’re just starting out, you won’t have the budget to hire a manager. It depends on several factors, but I usually recommend finding leads once you have two or three people in the same department and finding a manager once you have four or five people in the same department.

Usually, founders let it go for too long and then start managing their team poorly because they are pulled in too many directions.

Keep in mind that your first management hires must also be individual contributors. You’ll want to find someone who can manage and develop.

Just because someone is a good lead doesn’t mean they will be a good manager. Not everyone has supervisory skills or the desire to learn them.

One of the more challenging things about becoming a manager is learning to give negative (constructive) feedback.

My rule is to praise in public and correct in private.

How Can I Hire Great People?

Amazing team members want to be challenged and learn something new each day.

Think of Your Job Description as a Sales Letter. Your job description should convince the person reading it that you have a fantastic company and that they should apply.

Should I Offer Equity, Stock Options, or Profit Sharing?

Bootstrapped founders face a big question: How do I incentivize employees beyond the agreed-upon salary? — Bonuses? Profit sharing? Stock? Equity?

• Bonuses sound great because of their flexibility, but they are tricky, given their arbitrary nature.
• Equity gives employees ownership — and not just literal ownership. It gives them emotional ownership of the business and motivates them to grow it. With a venture-backed startup, selling is often the goal, and equity comes with the promise of large liquidity in the relatively near future. Because bootstrapped startups tend to grow more slowly and deliberately, equity isn’t always as much of an incentive. In most cases, equity is best for founding employees (cofounders) who receive it when it’s virtually worthless and they know the ramifications.
• Stock options are the standard startup approach to getting deeper buy-in from employees. Stock options are a reasonable choice for employee incentives, especially if your goal is growth and an exit rather than running the company for the long term.
• The nice thing about profit sharing is that it doesn’t require you to sell your business for your employees to make money. If your goal is to make your company profitable and run it for the long term, profit sharing may be your best option.

Do I Need a Cofounder?

Venture capitalists tend to look unfavorably on single founders, partly due to the opinion of Y Combinator founder Paul Graham. In the bootstrapped SaaS space, though, single founders make up many of the most successful companies.

Here are some thoughts to keep in mind if you’re considering a cofounder:

• Are Your Skills Complementary? Too much overlap means you’ll argue over certain areas of the business and neglect others.
• How Well Do You Know This Person? You are effectively entering a marriage.
• Are You Protected If Things Don’t Go Well? Talk to a lawyer.
• How Much Value Does a Cofounder Add? The biggest question to ask yourself is: Will joining forces with this person make the company more valuable?

Too Many Founders Some companies I see don’t need more founders. Sometimes they need fewer.

80/20 SaaS Metrics

Which Metrics Should I Track?

Your two most important metrics are MRR and month-over-month growth rate.

But MRR and growth rate are lagging indicators. To that end, I’m going to give you a metrics framework called 3 High/3 Low to help you zero in on the other important key performance indicators of your business.

3 High/3 Low Metrics Framework

Tracking the 3 High/3 Low Metrics (six in total) will tell you two important things: How healthy your business is. When your revenue is going to plateau.

You want the Low Metrics to be as low as possible and the High Metrics as high as possible, but often when one is going down, it’s causing another to increase.

We’ll start with the three Low Metrics.

• LOW:  Cost to Acquire a Customer (CAC). In its simplest form, CAC is all the costs associated with landing new customers (e.g., marketing, advertising, sales) divided by the number of customers you acquired during that period. How do you know if your CAC is too high? By calculating how long it’ll take to pay back the costs of acquiring each customer.
• LOW: Sales Effort. Sales effort is a measure of the length of your sales cycle and includes the number of touch points required to make the sale. The best way to track sales effort is to look at both the average number of days from someone scheduling their first demo to closing and the number of calls it takes to close a deal. Self-Serve Sign-up and Onboarding. Many inexpensive products can get away with low price points because they have a low-touch or no-touch sales process. They have a self-serve sign-up and onboarding process, which requires almost no sales effort. One-Call Close. Self-service isn’t going to work in a lot of spaces, but you can try to get to a point where the decision is made by a single person. You can do this by targeting a founder, a developer, or a single manager.
• LOW: Churn. Churn is the percentage of people canceling their subscription each month, and it’s the Achilles heel that kills (or plateaus) SaaS apps. As a general rule, for most bootstrapped B2B SaaS businesses: Gross churn > 10 % = Catastrophic. Gross churn 8 – 10 % = Not Good. Gross churn 6 – 7 % = Meh. Gross churn 4 – 5 % = Fine. Gross churn 2 – 3 % = Good. Gross churn < 2 % = Great. Churn is such a critical metric because it helps you calculate when revenue will plateau. At some point, the number of new customers you acquire will equal the number of customers you churn out each month. This causes your growth rate to effectively hit zero. You’ve hit your maximum number of customers (and revenue) that you can achieve without changing something in the business.
• HIGH: Annual Contract Value (ACV) ACV is the amount a SaaS customer will pay if they stick around for a year, whether you offer a yearly plan or calculate it based on 12 months of your monthly subscription cost. The simplest equation for LTV is your ARPA divided by your churn. One of the biggest ways to keep your ACV high is to sell to businesses rather than consumers — usually the larger the business, the more they can pay (though that depends on the problem your product solves).
• HIGH: Expansion Revenue. Expansion revenue is when customers pay you more as they get more value from your product.
• HIGH: Referrals. The last critical SaaS metric is referrals, or how many new customers were referred by your existing ones.

SaaS Cheat Code: Virality

SaaS Cheat Code: Virality. When we talk about a SaaS product having virality, it means that every user you add has a viral coefficient greater than zero.

Vanity metrics like page views, subscribers, or free users are interesting, but only in context. The real question is: how many of those visits or free users are turning into paying customers?

How Much Should I Worry about Churn?

Generally speaking, the lower your product’s price point, the higher your churn.

I suggest shooting for gross revenue churn as low as possible, certainly under 3 % per. At the venture scale, successful companies have less than 1 % gross churn.

Saying you have a gross churn rate of 8 % doesn’t give you the right information to work with. But once you start looking at the churn rate of specific customer segments, you’ll get a clearer picture of what’s going on. I like to segment by three things: pricing tiers, marketing channels, and time.

Your business achieves net negative churn when your expansion revenue outpaces the revenue you lose from churning customers.

Seeing churn based on marketing channel is an advanced approach, but the results can be eye-opening.

Another interesting way to segment churn is by time-based cohort. The easiest way to do this is by setting up a retention grid, which sorts customers based on their tenure with your company and their paying relationship.

To figure out why people are churning in the first few months, ask yourself: Is it taking too long for customers to find value? Are they finding that the product doesn’t actually meet their needs?

• It’s Taking Customers Too Long to Find Value. When you have a high price point, hiring someone to help with onboarding can go a long way toward helping your customer find value. Essentially, you’re trying to help new customers find your minimum path to awesome (MPA). Basically, the moment when everything clicks and your customer says, “This is amazing!”
• Customers Are Realizing Your Product Doesn’t Meet Their Needs. Sometimes this is a messaging issue.

SaaS Cheat Code: Net Negative Churn

SaaS Cheat Code: Net Negative Churn.

If you are able to achieve net negative, you have an incredible business. It’s challenging to get to net negative churn purely by growing expansion revenue, though.

Mindset

How Do I Achieve Success?

Success comes down to three factors: hard work, luck, and skill.

You can control two of these factors: hard work and skill.

Successful Founders Have a Bias toward Action. When in doubt, they do something.

Successful Founders Develop Their Gut. I’ve talked a lot about “founder gut” in this book, that instinct that helps you tune out the noise and find the right path.

Successful Founders Manage Their Own Psychology. For years I’ve been saying that more than half of being a successful founder is managing your own psychology.

Where Should I Focus My Time?

In the early days, your priority is doing whatever it takes to figure out one thing: How do you build something businesses want and are willing to pay for?

Before you find product-market fit, you’re mostly scratching and clawing and (as Paul Graham famously said) doing things that don’t scale.

As you move toward escape velocity, you figure out how to get more of these things systematized.

Eventually, you get to a place where the hundreds of tasks that used to be clogging up your to-do list are someone else’s responsibility.

Efficiency vs. Effectiveness. You can be highly efficient by doing 10 tasks in a day, but if you didn’t need to do eight of those, you weren’t very effective. Effectiveness is when you do only the two tasks that actually drive your business forward.

How do you know what to work on? Risk vs. Certainty. In SaaS, there are risks, and there are certainties. Certainties are things that need to get done, and you know how to do them. Risks are the things you’re not sure of. Risky areas require founder-level thinking.

Should I Raise Funding?

In your personal life, money saves you hours. In your business, money saves you years.

Funding can be a powerful tool — but you need to know what you’re getting into.

I generally don’t recommend raising funding before you have some semblance of product-market fit because (A) your valuation is lower at this stage, and (B) you’re likely to burn through most of that money just trying to find product-market fit.

Your capitalization table is a list of who owns what percentage of your company.

Your cap table can get complicated if you start taking multiple rounds of investment.

When you let early investors take too much, you end up shooting your business in the foot by making it uninvestable.

As Craig Hewett, the founder of Castos, told me, funding allows you to “live in the future” by making investments you otherwise would have had to wait for.

There are three main drawbacks to outside funding.

• The first is the time investment. A typical angel round can feel like a part-time job, taking 10 hours a week for three to six months.
• The second is the added complexity. Anytime you add someone to your cap table, you have one more entity involved.
• Finally, there’s the fact that you are selling part of your company to someone else.

Am I Turning Speed Bumps into Roadblocks?

“It sounds like you’re taking speed bumps and turning them into roadblocks.” As a founder, you can choose to look at an obstacle as something that keeps you from moving forward (a roadblock) or as something that slows you down for a minute as you continue along your path (a speed bump).

The tricky part about speed bumps is they masquerade as roadblocks. They do this by taking advantage of your lizard brain. The stress and uncertainty we experience as we build companies leave us vulnerable to believing things that simply aren’t true.

Making the mental shift from “everything will end” to “we’ll switch to plan B, C, or D” has been one of the biggest leaps in my own psychology.

Where Can I Find Community?

While a mastermind is a group of your peers — people who are on the same path and facing similar challenges — a mentor is someone who’s been down the path before. A mentor gives you advice from a place of success: they’ve successfully bootstrapped a startup or two, or they’ve been in business for years.

How Can I Avoid Burnout?

Jason Cohen did a talk at SaaStr in 2018. In one circle are the things you’re happy doing. In the second are the things you’re good at. And in the third are the things your company needs. The sweet spot for your work should be where all three intersect. If you’re focusing solely on things you’re good at that bring you joy, you can get stuck galloping down paths that are detrimental to the needs of your company. If you’re doing things the company needs that bring you joy (but you’re not good at), then you’re dragging your company down. But if you’re stuck doing things the company needs that you’re good at (but don’t like), that leads to burnout.

What Are Founder Retreats?

As a founder, it’s important to know yourself. Even if you started out with firm self-knowledge, the fast pace and pressure of bootstrapping a business — not to mention the pressures of the rest of your life — can make it difficult to see your path. A founder retreat is a way to reacquaint yourself with yourself every so often.