What is positive cash flow?
Launching a SaaS startup can often mean a significant financial investment. Even for the hardiest of bootstrappers, savings accounts get raided, loans are taken out, and any profits need to be continually pumped back into the business to keep it moving.
There’s a lot riding on your choice of sales model and your ability to sign up customers to paid plans and keep them there. The SaaS model requires subscription payments up front, but that doesn’t necessarily mean the business is cash flow positive – even if it’s growing rapidly.
Positive cash flow means you have the capital to create more opportunities for growth and can keep up with your basic business needs – like paying your team and keeping the lights on.
It can take the average SaaS company six years to reach a true cash flow positive status. We take a look at some of the ways you can speed up the process. Here are 6 tips to help generate a positive cash flow for your SaaS business:
1. Keeping your costs down
Do you need that premium office space? Does your team need the latest in Herman Miller chairs and fresh kombucha delivered daily? Come to think of it, it might be time to put that Lambo order on hold too.
One of the things that can strangle profit margins and decrease cash flow for SaaS startups is their spending. It’s the sort of thing that can creep up on companies unless close attention is paid to tracking expenses.
When you’re looking at your monthly and quarterly financials, keeping a close eye on your spending (and overspending) is a critical part of managing your funds. A common problem is investing too much capital in sales and marketing expenses at an early stage.
Try to figure out where you can cut costs and pinpoint any areas of your business that might have rising costs that you need to address as your business grows.
The more in tune you are with your SaaS finances, the better chance you have of achieving positive cash flow.
2. Testing the Freemium model
For some SaaS companies, leveraging the power behind the psychology of “free” has paid off in terms of rapid growth and positive cash flow. It can be risky, but it’s always worth testing as part of your growth strategy.
The freemium model (free + subscription) gets people signing up to use and fall in love with a product with no limitations and at no cost to them. Once users have tried, tested, and found the value in a new product they’re more likely to upgrade so they can use the entire suite of premium features.
If your brand targets a large market (like Spotify and Dropbox) the opportunities for moving customers from free to paid increases substantially.
The average conversion rate from a freemium to paid plan is 4% – Dropbox sits in this range. Spotify, on the other hand, boasts a 26.6% conversion rate. Out of 75 million customers on their freemium plan, 20 million of those are now paying customers.
If you can target enough users with the freemium model at a rapid rate and figure out how much to give away for free and what to hold back for your upgraded plans – it’s possible to move to a cash flow positive state at a faster rate.
3. Enterprise companies
Companies with whale-sized budgets have the financial means to pay an annual account upfront. They might even be happy to pay for multiple years in advance! These customers can provide you with significant amounts of ready cash to boost your business in the early stages when you most need it.
The other benefit is that once enterprise companies are up and running with your product, they’re less likely to switch to the competition. They’re deeply invested financially and technically, and the downtime and hassle to churn out and find another product can be more trouble than it’s worth. The result is recurring revenue on a healthy scale.
4. Annual payments
Incentivize your subscribers to sign up for an annual account instead of monthly. This is a popular option for many SaaS companies. You’ll often see pricing pages where the subscription price is 10% less for a yearly plan than month by month. This can be enough motivation for customers to take the option that saves them money in the long run. It’s a win for them — and a win for you.
You could offer an even more substantial discount for multi-year subscriptions. A 20% discount across two years can turn heads for your customers, and as you’ll still be growing as a business during that time it won’t feel like you’re taking an immediate loss. Two years’ payment of cash up front is a significant bonus when you’re trying to generate a positive cash flow for your business.
5. Customer retention
Paying attention to retention is one of the easiest and most cost effective ways to keep your SaaS revenue more stable. Customer acquisition cost is an ongoing expense that quickly eats into startup capital. Leveraging the customers you already have for predictable recurring revenue can offset that.
If a customer is unhappy with your service, you can bet they’re thinking about canceling their account – losing you both recurring revenue and the cost it took to acquire them. Nurturing your customers to make sure they’re getting the full value from your product can be as easy as checking in by email or phone call every now and then. Ask if they have any questions or concerns, or if there is anything you could be doing as a company to serve them better.
Keeping track of your customers before they make the decision to leave is one of the most important things you can do as a SaaS startup to ensure that your finances are as stable as possible.
6. Upgrades and upsells
The concept of upsells and upgrades is common to every business, but it’s especially relevant to the SaaS model. It’s a fact that warm customers are easier to sell to, so figuring out new products and extra features that you can offer to your existing customers can be a smart way to increase your monthly revenue.
Sending emails with special offers and upgrade deals can incentivize your customers to pay a little more each month for a better service. Likewise, offering integrations with other popular SaaS products for a complete marketing stack can be an alluring feature of your top-tier plans.
If you’re a Buffer user you might have noticed their mysterious “Upgrade to Awesome” button on the dashboard which absolutely begs to be clicked on. Mysterious button copy and creative thinking drives customers to click the button and hopefully take up the offer of a more fully-featured plan.
New user acquisition costs are estimated at five to seven times more than the cost of keeping existing customers. It’s a no-brainer situation to spend some time thinking of creative ways to get your customers to bump up their monthly spending a little and free up some extra cash flow for your business.
Final thoughts on generating positive cash flow
Having positive cash flow in your SaaS business means being able to provide excellent service and expand your business.
Taking care of your existing customers is one of the easiest ways to get to a cash flow positive state. By listening to and learning about the needs of your subscribers, you can keep your business growing and reduce your churn rate.
You can also increase your existing revenue by offering upsells to your customer base. Moving your business to a cash flow positive state can also be reached faster by securing bigger companies as customers and testing out the freemium model as part of your growth strategy.
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