I commonly encounter boutique CEOs who are jealously eyeing high-margin, high-growth, and high-valuation SaaS businesses. Knowing they already have a client base and a great idea or two for an app, a platform, or SaaS, the CEO typically follows a well-trodden path of misery.
Typical SaaS Development Process Plagued with Missteps
The journey of developing a SaaS product is often riddled with unforeseen challenges and common pitfalls that can derail even the most promising projects.
Understanding these common pitfalls is crucial for boutique CEOs as they navigate the intricate process of bringing a SaaS idea to fruition, balancing their vision with the practicalities of software development, market demands, and financial constraints. Here’s how this development journey typically looks like and the pitfalls that can arise.
Ideation and the Honeymoon Period of Developing a SaaS Product
The CEO comes up with a great idea in the bath or at the gym about how to build a SaaS or another ‘passive income’ product. This moment of inspiration is often driven by hearing success stories in the industry or observing competitors making strides in the digital space.
They run the idea past a few friends, and even clients, who assure them it is a wonderful idea, and they will be among the first to sign up. This initial validation, albeit from a non-technical audience, adds to their confidence.
They hire a software firm (or sometimes just a ‘full-stack developer’) to build the SaaS. This is often done on platforms like Upwork or Fiverr and ends up with a firm in a developing country on a ‘surprisingly cheap’ fixed rate.
The choice of a low-cost developer is appealing but often overlooks the necessity for quality and experienced programming skills.
Challenges in Initial Development and Beta Testing
The firm starts building what the CEO has asked for. But along the way, some new ideas are introduced by the CEO, and it is found that the original requirements were incomplete or mistaken.
Costs begin to spiral, but, with one eye on the huge potential profits, the firm persists. The lack of a structured development process and changing requirements lead to scope creep.
After spending much more time and money on the SaaS than they expected, the software is launched, but it is clunky, and the UX is pretty awful. The PSF decides to call this a beta, and asks a few firms if they can trial it free of charge. The lack of a user-centric design approach becomes evident.
Unfortunately, the beta is actually an alpha. The friendly testers create a long list of improvements that are needed, but the CEO is reassured that once these are fixed, clients will be queuing up with their chequebooks open. This phase often exposes the gap between what the CEO envisioned and what the market actually needs or wants.
Financial Strains and Realization of Development Complexity
Often, around this time, the CEO starts falling out with the software developers. After all, why didn’t they foresee some of these problems, and why have their costs gone up so much??! A new, and more expensive firm, is bought on.
Perhaps at this stage, buoyed by the feedback from the test audience, the CEO seeks some debt to do a more professional job – after all, great software doesn’t come cheap!
This stage marks the beginning of financial strains and the realization of underestimating the complexity of software development.
Market Entry and Competitive Challenges
Finally, with a new development firm and newfound financial reserves, the software is out of Beta! Sure, there’s now a few competitors that weren’t noticed before, and the firm has needed to hire a SaaS salesperson and some internal support, but at least there’s that list of clients who said they’d love to buy it.
The market entry is often delayed, and the landscape may have shifted, with competitors possibly having already capitalized on the opportunity.
Reality of SaaS Launch and Market Reception
The launch, although a milestone, is met with lukewarm reception. The initial enthusiasm from potential clients doesn’t always translate into sales.
The SaaS product, now battling in a competitive market, struggles to differentiate itself. This phase is often marked by a slow trickle of users, with many of the early promises from clients not materializing into sustained subscriptions.
It’s hard to get survey figures for this problem because firms don’t like reporting failures. But in my experience, at least three-quarters of PSF ventures into building bespoke software fail (i.e., don’t pay for themselves, let alone make a net profit).
The Complexity of SaaS for Consultancy Firms
For your average people-based consultancy, developing software for either internal or external use is not a beast with which they are familiar. How to identify, prioritize, design, build, test, and most importantly, sell software successfully is a relatively complex, expensive, and, let’s face it, luck-laden process.
In addition, the software industry is evolving rapidly, with new technologies and methodologies emerging at a breakneck pace. Keeping up with these changes requires dedicated expertise and resources, something that professional service firms (PSFs) often lack.
Moreover, the sales and marketing of a SaaS product are vastly different from traditional consulting services. The need for a robust online presence, content marketing, and understanding of digital sales funnels is often a steep learning curve for these firms.
Plus, there’s the challenge of transitioning from a service-based mindset to a product-based one, which requires a fundamental shift in business strategy and operations.
Key Strategies for Successful SaaS Development
However, sometimes, the shift to SaaS can work. Here are some things you might consider to maximise your chances.
Hiring a CTO or SaaS Product Manager
This can circumvent many of the pitfalls in the SaaS development process. The CTO brings essential technical leadership and helps align the software development with business goals, avoiding the common trap of CEOs leading technical projects without sufficient expertise.
Agile methodologies, client-oriented development, and a deep understanding of the sales lifecycle are things that a CTO will be very familiar with that many consultancy leaders have never heard of.
Note that some CEOs will try to attract a CTO with promises of significant equity stakes in lieu of the pay that they’re used to, but this can be a risky proposition. Many CTOs have learned the hard way that equity in an unproven venture can be worthless.
Product Management is Different to Service Management
The mindset required for innovating and solving unique client problems in consulting does not readily transfer to the iterative, technical, and customer-focused nature of software development.
Product managers get Product-Market Fit (PMF), requirements management, and the nuances of a SaaS business model. For many CEOs, this requires dedicated training and a shift in mindset from traditional business models.
Product Development is Really Expensive and has Hidden Costs
Often the cost of product development gets hidden by cross-use of consultants and lack of formal budgeting. I suggest treating software development as a start-up company that you are investing in, as an owner, from your own dividends.
Research suggests that taking this approach allows for specialized focus, and clearer financial tracking, and the attraction of specialized talent and investment.
Build & Test a Minimum Viable Product (MVP)
The Lean Startup methodology, popularized by Eric Ries, emphasizes the importance of MVPs in testing business hypotheses around software with minimal resources. By building an MVP, companies can gather invaluable feedback from early adopters and iterate quickly.
Client-Financed Development Models:
Client financing models are becoming increasingly popular in software development. These models involve clients contributing to the development costs, often in exchange for customized features, early access or even as a shared-IP project.
This approach helps in mitigating financial risks for the developing company and aligns product development with actual market needs.
However, managing client expectations and balancing customization with general market appeal are crucial in this model. Companies must navigate these challenges to ensure that the product remains viable for a broader market.
Recognizing the Long-Term Investment and Impact on Profitability:
Software development costs more than most consulting CEOs think. It requires a long-term perspective, both in terms of investment and expected returns. You are likely to need to partner with Private Equity or other debt sources.
In your business plan (you do have one, yes?) CEOs often forget the costs of marketing, sales, maintenance, updates, and customer support, which are integral to the SaaS model. These recurring expenses can impact short-term profitability but are crucial for long-term sustainability and customer satisfaction.
Great Software, No Sales
Like most innovations, the real challenge with SaaS is less the quality of the product and more the route to market. There are thousands of pretty awful products out there (we use many every day) that are making the owners billions.
Being clear on your route to market, your sales system and people (which won’t be your consultants!), and the platforms and partnerships that will enable this, are crucial. This is doubly so as you probably have several competitors you haven’t heard about!
Conclusion
In conclusion, while the allure of SaaS can be strong, it’s a field fraught with unique challenges and complexities.
Boutique CEOs venturing into this space must recognize the need for technical leadership, a deep understanding of software development and sales processes, and the necessity of aligning their business model with the realities of the software industry.
By adopting these expert suggestions, CEOs can increase their chances of success in the competitive and evolving world of SaaS.
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