Via Hacker News: The Unprofitable SaaS Business Model Trap
Jason Cohen walks through how SaaS operations can get into a trap where they keep growing customer numbers but earning back the acquisition costs doesn’t happen because of cancellations and rapid cost acceleration.
I recommend reading the full piece because he breaks down how this could occur for a firm that doesn’t make it as easy as possible to join (low acquisition costs) as well as keep average contract length high. (retention through an awesome product)
If the payback period for a new customer is 24 months and you have a retention rate of 75% – each year you must acquire 25% of your starting customers from previously untapped sales channels who will be unprofitable for the first 24 months of the customer relationship.
Upselling and earning as much revenue from current customers as possible is a key strategy for shortening that payback period. The economics of SaaS demand constant fine tuning of acquisition strategy, a strong handle on cost growth and aggressive customer retention ideas.