Breaking the million dollar ARR ceiling – a very Kiwi problem

Starting a SaaS business in New Zealand is relatively easy thanks to our business-friendly legislation, but building a successful one is incredibly hard.

With insight into more than 70 Kiwi SaaS businesses, we’ve seen some interesting trends over the last five years and one that we think is worth exploring is what we’ve dubbed ‘million dollar ceiling’.

Let’s explain.

It’s our experience that there are a significant number of SaaS businesses in NZ that have successfully hit $1M in Annual Recurring Revenue but are finding it really difficult to get beyond it. It’s almost as if there’s some kind of invisible barrier through which only a few lucky businesses break.

Of course, there’s nothing wrong with a million dollar SaaS business. That’s an amazing achievement in its own right and founders should be proud – particularly if it’s profitable, but it’s not the promised land. And for many founders, it’s a real frustration.

As we all know, the goal of any SaaS business is to find that magic tipping point where growth is compounding and CAC (Customer Acquisition Cost) starts to go down, not up. However for many businesses the growth curve is a very stubborn line that’s really hard to shift in any meaningful way after the basic pattern has been formed.

So what’s going on? Why does this barrier exist and what can founders do to break through it?

There are four general themes we’ve explored that explain at least some, if not all, of the pain founders are feeling.

1. When it gets harder

The first relates to market focus. Organisations have mopped up the ‘easy’ customers – the early adopters or the ones actively trying to solve the particular problem the company’s solution solves. While largely in the local market, there may be some international ‘accidental’ customers which hint at a real global market. But in reality, they have got to $1M ARR by luck as much as good judgment and they really haven’t found either Product Market or Go-To-Market fit.

It’s often because the next wave of customers is harder to reach, more discerning and generally less interested. Being able to demonstrate a measurable ROI helps cross the famous chasm but it’s no silver bullet..

It’s more often because the organisation doesn’t have go-to-market fit and doesn’t understand where their best customers are to be found. A well-designed tech stack can help you understand where to double down on your marketing efforts and how to deliver an optimised customer journey.

2. When it takes too long

The second relates to time. There are plenty of Kiwi SaaS businesses that have been grinding away for seven or more years and have reached the magic million – whilst running themselves into the ground getting there.

After seven years, there’s a fair chance the market has moved. The original assumptions on which the business was founded have changed and more modern competitors have entered the space – making customer acquisition increasingly challenging. In effect, the organisation hasn’t reached the tipping point and is swimming against an incoming tide without really knowing it.

There’s a famous Rod Drury anecdote that says if you haven’t reached the tipping point (where growth becomes compounding) inside three years then you should give up and start a new business, because it’s never going to happen. Obviously that’s a very extreme view of the world, but it makes the point that time can be the enemy of SaaS success. If you are fixated on creating a unicorn then you need to be very aware of the passing of time.

3. When it costs too much

The third relates to the CAC Payback Period. In SaaS, the rule of thumb is that CAC should not exceed a full year of revenue – which is very sensible and surprisingly difficult to achieve. This is particularly true in a competitive market where the cost of buying GoogleAdwords (as an example of a pretty standard SaaS customer acquisition tactic) is high.

If you can’t buy the keywords you care about cost effectively, your chances of growing revenue quickly (and profitably) is very challenging – and things start to slow down pretty quickly. This actually happens more often than not and is a real handbrake for organisations that rely on inbound to acquire customers. Less so for organisations that use an outbound acquisition strategy – they face a different set of challenges.

Unless your SaaS business is well funded and you can afford burning cash to gain market share fast, you should consider which other marketing levers you can pull as part of your go-to-market strategy.

4. When the bucket leaks

The fourth and final theme relates to churn. Because the SaaS model is based on subscription renewals, besides converting new clients, it’s fundamental to keep the ones you already have happy. There is no point in acquiring more customers if you can’t retain the ones you have.

Just a 5% increase in customer retention can make your profits grow by 25% and to as much as 95%. It’s also significantly cheaper to retain customers than acquiring new ones – which can cost over 30 times more. A lack of focus in this area inevitably results in expensive churn and adds additional pressure on the acquisition engine.

As Winning by Design puts it “Recurring revenue in and of itself is not a goal. It is the result of recurring impact. Without recurring impact, there will be no recurring revenue.” In practice, this means that SaaS organisations need both a customer acquisition strategy AND a customer marketing strategy to ensure customers get the value from the solution and are so satisfied they advocate for it.

So what do you do if you’re a founder and you’re stuck in the $1M ARR no-man’s land?

First up, Don’t panic. But also don’t be complacent. You should accept you’re going to have to grind your way out of it. The chances of breaking out into wild non-linear growth if you’re more than three or four years-old and capital-constrained are actually quite small – unless you are extremely lucky. And we all know – the one thing we can’t buy is luck.

Here are six short- to mid-term steps we recommend to our customers:

  1. Make sure you’ve plugged every possible leak in your bucket. Churn is the mortal enemy of SaaS businesses. Investing your scarce resources to retain the revenue you’ve already won is SaaS 101. Dedicate roughly 5% of your budget and 20% of your marketing resource to customer marketing.
  2. Calculate and demonstrate the impact or ROI your customers are getting with case studies, testimonials, interviews, etc. measurability and referenceability go a (very) long way.
  3. Invest in optimising the middle of your funnel to make sure you’re capturing every available dollar of ARR. Improving conversion inside your funnel by just 1% will have a meaningful flow on effect to MRR and it’s worth spending time on.
  4. Go back to basics at the top of your funnel and review your messaging / website experience. Your website is your shopfront and it’s amazing how bad websites are. For B2B there’s a tried and tested formula for websites. Use it.
  5. Check you are ranking on page one in Google for the keywords you care about (organically or paid) and your website is as good as it can possibly be at engaging and converting the traffic you are getting. Like it or not, SEO is one of the most important keys to growth for most SaaS companies.
  6. Make sure you capture the email addresses of the people that don’t buy or convert in their first pass through your website. They are your next wave of customers and you should be able to convert them over time at a much lower cost than cold customers dropping into your funnel for the first time.

Once you’ve got those basic things under control it’s possibly time to take a more strategic review of the business / opportunity you are chasing and figure out whether there are more fundamental changes that might need to be made in order to grow faster.

If your pricing / go-to-market model is more than 18 months old there’s a fair chance it’s out of date and your competitors are doing something different (eg freemium models vs good/better/best). The world of SaaS pricing models changes fast and you’ve gotta run to keep up. Study how your competitors are doing it and work out what you can learn from their models.

Once you’ve done all that… It’s time to start exploring your ecosystem and looking for the partnerships/points of leverage that allow you to break out of the 1:1 acquisition into a 1:many model. This can be a very successful strategy and be transformative if you get it right. For many organisations, it’s the key to unlocking the second (or third) wave of customer growth.

These things won’t turn you into a Canva overnight – not even close. But they will, if you do them right, give you a shot at changing that stubborn growth line and accelerating your revenue growth so that $1M can become $1.5M, etc.

One more thought! If you would like to see how you currently rate against the ten pillars of SaaS Marketing – take the latest SaaS Marketing Capability Survey now (it’s a great way to see where the gaps really are).

And if you have read the subtext to this correctly – we are here to help with all of this. We’ve been there a number of times and can help you get there faster.