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Breaking Through the SaaS Ceiling

The path to sustainable SaaS growth

It’s the dream of every Internet entrepreneur to build a business that goes viral. Yet the sad truth is that most do not. It’s hard to think of any other industry with such a winner-take-all mentality as Internet software. The volatile combination of small market entry costs and big network effects creates wave after wave of disruption and consolidation, and quite a few millionaires along the way. Alas, virality is an elusive goal, particularly in SaaS. For this reason, SaaS Don’t #10 insists that you should not depend on network effects. Instead you should focus first and foremost on satisfying each and every single customer. But, if you’ve done that…bring on the hockey stick!

This is the fourth post in a series that paves the path to sustainable SaaS growth. The first post in this SaaS growth series introduced the concept of the SaaS growth ceiling, as well as the three fundamental SaaS marketing levers for breaking through it: customer acquisition, customer lifetime value and viral customer network effects. This installment explores the third, final and most funnest SaaS marketing lever: network effects, offering three proven SaaS marketing strategies to drive SaaS growth by getting your customers to sell themselves.

The Roof is On Fire!

saas growth marketingYou don’t need a PhD in economics to understand network effects; you just need to know how to throw a party. No one wants to go to a lame party. The more people that are going to a party, the more other people want to go. And, the more they are willing to pay to get in. If you’ve ever tried to get people to move from one party to the other, say from dinner to dancing, then you know that you have to get them ALL to move at once, or nobody moves. Finally, if your party gets big, crowded and mainstream, the hipsters start leaving to find the next big thing. So, let’s party!

We know that the biggest your SaaS business can ever get is determined by the SaaS growth ceiling: a simple function of customer acquisition rate, average recurring revenue per customer and percentage churn.

max SaaS company revenue = acquisition rate x average subscription value ÷ % churn rate

Where are the network effects in this formula? Where’s the SaaS growth lever? Everywhere! As with our partygoers, network effects kick in for your SaaS customers when the value they see in your service increases with the number of other customers using your service. The greater the number of customers that use your service, the greater the number of prospects that want to use your service (acquisition rate), the greater the price they are willing to pay for it (subscription value), and the more difficult it is for them to leave (churn rate). Unlike other SaaS marketing strategies that attack individual stages of the purchase process, network effects have a pervasive impact across the entire customer lifecycle.

saas network effects

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SaaS Marketing Strategy #8 | Nurture Community
It’s not a party if no one’s dancing. A big crowd that isn’t interacting is just a crowd. Network effects require a network, a community. It’s not sufficient to just get customers in the door. Every good party planner knows that you have to facilitate interaction by creating the right environment. So it goes with SaaS marketing. Your SaaS marketing plan should nurture community by enabling communication, sharing and collaboration between your customers and prospects. Luckily for SaaS marketers, the Internet is built for just this purpose.

SaaS Marketing Strategy #5 | Reduce Churn points out that unlike other products, SaaS offers a direct, dynamic, personalized two-way communication channel with your customer. By the same token, SaaS offers a direct communication channel between your customers. SaaS customers are always just one click away from each other. While traditional offline tactics, such as user conferences, may still play an important role of your SaaS marketing strategy, online community nurturing that energizes your customer network offers considerably more bang for the buck. Online SaaS communities can be as straightforward as a forum or as sophisticated as a marketplace, but the best ones all have one thing in common: they facilitate sharing the knowledge and investment of one customer’s use of the product to increase the value of using the product for other customers. That is, they create network effects.

SaaS Marketing Strategy #9 | Crowd-source
It’s never the music or the food that makes for a really great party; it’s the people. People creating value for other people through their interactions. Crowd-sourcing fun! Crowdsourcing is very near the pinnacle of great SaaS marketing, just shy of virality. It’s very powerful and very difficult to pull off, because it requires actual work on the part of your customers, community service if you will. You are unlikely to get a customer to perform community service if that customer does not see value in the community, hence SaaS Marketing Strategy #7.

Assuming that you have nurtured a strong community, how can your SaaS marketing strategy put that community to work? Make it easy. Make it fun. Make it profitable! And most importantly, build it into the product. SaaS Success Do’s #8 & #9 | Enable Mass Customization and Open Up to the Cloud are the foundations of crowd-sourcing. Before customers can share their unique product knowledge and experiences with other customers en masse, they must first be able to create unique knowledge and experiences en masse. While crowdsourcing may be a distant dream for the early SaaS startup, it must be planned in advance and baked into the architecture of your SaaS product.

SaaS Marketing Strategy #10 | Catalyze Virality

Getting a party to go viral is hard. Getting a SaaS product to go viral is even harder. Virality and network effects go together like chocolate and peanut butter, especially in SaaS. For a party to go viral, it might be enough that you tell two friends and they tell two friends, and so on. In B2B SaaS, there better be beer. In other words, word of mouth alone is unlikely to set your SaaS business on fire. Business buyers generally require economic incentives and network effects provide the fuel for the economic flame. Your job is to be the spark.

saas viral network effects

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SaaS marketing cannot create virality, it can only catalyze it. In the end, your customers must create the value and spread the word, you can only facilitate. That said, a catalyst can make all the difference. If you’re SaaS marketing strategy has successfully nurtured a community and crowd-sourced new value from that community, then you’re 99% of the way to catalyzing virality: you just need to facilitate use of crowd-sourcing by your community! When clients have good things to say about your service, let them tell the world. When clients have solutions to support issues, let them build a knowledgebase. When clients create useful processes or analyses, let them share the templates. When clients build apps on your open APIs, let them promote them to other clients. And, so forth. Lead, follow, but most importantly get out of the way.

More Stories By Joel York

Joel York is an Internet software executive and popular SaaS / Cloud blogger at Chaotic Flow and Cloud Ave. He is well known for his work in SaaS / cloud business models, sales and marketing strategy, and financial metrics. Professionally, he has managed global sales and marketing organizations serving over 50 countries, including local offices in the United States, United Kingdom, Germany, and India. He holds degrees in physics from Caltech and Cornell and received his MBA from the University of Chicago. Joel York is currently VP Marketing at Meltwater Group and Principal at the Internet startup consulting firm affinitos.

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