The 3 Prerequisites to Scaling a SaaS Business

Silicon Valley culture is hyper-focused on growth and scalability. There is a right time to grow and scale. Many founder CEOs get the timing wrong. The three prerequisites to effectively scaling are:

1. Product/Market Fit
2. Sales Message Resonance
3. Favorable Customer Conversion Economics

Let’s discuss each one.

1. Product/Market Fit

Product/market fit means you’ve identified a problem that your target customer wants solved, and your product actually does solve the problem.

If your product sucks, you don’t want to scale and tell even more people how crappy your product is.

If your product works but you solve a problem that customers don’t actually care about, scaling means being irrelevant at a larger scale and cost.

In both of these scenarios, you do not want to scale. You want to focus on a customer’s high-priority problem (e.g., willing to pay money to solve it) with a product that works (e.g., actually solves the problem).

Also, it does not matter if you think you’ve solved the customer’s problem; it only matters if they think you did.

The core skills to do this well are: a) market empathy; b) product management; and c) product development.

Most technical founder CEOs are good at product development and often much weaker at product management. I find market empathy skills to be horribly lacking with many technical (and non-technical) founders.

2. Sales Message Resonance

When you have a product that solves a customer’s high-priority problem, the next issue you need to resolve is developing sales message resonance with your target market.

What are the “magic” words that can be presented to the target customer that get them to buy? How do you frame the problem that you solve in such a way that other alternative offerings aren’t even considered? How do you describe the outcome your product delivers as opposed to its feature set? If your product can deliver multiple outcomes, which is the one primary outcome that a customer is willing to spend money on?

This requires extensive sales message iteration.

Let me explain.

Some product development methodologies focus on building a rapid prototype, getting feedback, and iterating product revisions based on the feedback.

The premise of these approaches is that it’s easier to get the product right by putting something concrete in front of the customer to see how they react to it. Do they love it? Do they hate it? Do they look at you confused?

In many ways, this is a classic innovation research and development process.

Well, the same process needs to (but sadly doesn’t) occur around sales message development.

What message resonates with prospects deeply enough that they buy? What promise does the prospect want you to make that gets them excited enough to buy?

You need to figure out this message because it is this proven sales message that forms one of the three foundational pillars to scaling up.

Sometimes, you stumble upon the exact right message through sheer dumb luck. Maybe the world shifted, and you had exactly the right product and message at exactly the right time.

(If this happens, be smart enough to realize that you got lucky… and take advantage of it.)

Sometimes, you get a sales-oriented founder who has discovered the sales message that resonates, but they can’t get the product/market fit to work. These types of founders are phenomenal at making the promises that get customers to buy, but they fail to deliver on those promises.

Sometimes, the company’s first few salespeople have an initial surge of sales due to their personal network. They get in the door with prospects because of a prior relationship.

If your goal is to get sales by any means necessary, this kind of salesperson is fine. If your goal is to build a scalable sales model, this kind of salesperson is not helpful.

To scale sales, you need to know what message is going to open doors. Which webinar topics get prospects to sign up? What message is intriguing enough that it secures the sales meeting? What promise is so irresistible that it consistently closes the deal?

3. Favorable Customer Conversion Economics

The final prerequisite to scaling is favorable customer conversion economics. In the SaaS industry, we typically use the LTV/CAC ratio (the lifetime value of a customer/customer acquisition cost). In short, if you spend $1 to acquire a customer, how much money do you get back in sales over the customer’s lifetime?

If you spend $1 to get $3+ back, that’s a ratio that is scalable.

If you spend $1 to get $0.50 back, that ratio stinks. If you scale up big and fast with those kinds of economics, you simply go bankrupt faster.

Back in the late 1990s, there was an internet startup named Kozmo. They were a delivery service in New York City that allowed you to order groceries, books, movies, etc. for delivery within an hour. The most popular item they delivered was a single pint of Ben & Jerry’s ice cream. The price per order was $5. The fully loaded cost to deliver that order was $65.

The CEO decided that the best step was to scale up… you know, go big or go home. After raising $120 million in capital, the company went out of business. Umm… lots of cash can mask sh*tty math… but it can’t do it forever.

If you have favorable conversion economics, then it is the right time to scale.

If your data shows that you spend $1 million and get $4 million back, that’s a great deal.

If you can spend $10 million and get $40 million back, that’s also a great deal.

(Sometimes, the ratio changes as you grow, so you have to keep an eye on the math.)

When your product works, solves a problem that customers care about enough to pay to solve, you know how to sell it, and you have economics that work, then you scale.

With each level of growth, you want to recheck the fundamentals. If they still hold, you want to scale even more.

There is a time and place for everything. There is a right time to scale. If you try to scale too early, you need to have (and be willing to burn) a lot of cash until you get the prerequisites in place, in parallel with the scaling process. Most who try don’t pull it off.

In my view, the “first mover” advantage isn’t as important as the “first to get it right” advantage.