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4 Things Startups Have to Get Right to Survive Billion-dollar businesses are built one customer at a time.

By Tx Zhuo Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.


Running a startup is risky business. Three out of four startups fail, and those that manage to survive often struggle to retain customers and profit. A simple keyword search for "SaaS enterprise growth" will produce a litany of different (and sometimes conflicting) advice.

With the weight of potential failure and the inconsistent messages of how to overcome it, knowing where to focus your efforts can pose a serious challenge. Leaders of SaaS businesses should pay attention to these three aspects in order to grow:

1. Encourage auto-renewing contracts.

Auto-renewal can increase renewal revenue by almost 5 percent. Requiring customers to manually renew every year creates friction points for customers to keep paying. Instead of a seamless renewal process, customers must take time to make the choice to continue spending money. For some people, that's enough to end their subscriptions.

For auto-renewal to work, maintain a strong relationship with customers. Start by sending a 90-day notice of termination to the customer. Present the option to auto-renew as a benefit that saves time and also locks in the current price for another year. If customers agree to auto-renew, stay organized and send notices to remind them of their decision periodically.

Related: Considering 'SaaS'? What You Need to Know

2. Balance burn and upfront payments.

Many startups don't charge for contracts right away. Convincing someone to pay monthly installments is easier than requesting a prepaid annual fee, but annual payments are more beneficial. The additional money upfront allows you to reinvest into other aspects of your business. This way, you can fund additional growth with customer money. One of our companies, ChowNow, did this, and it improved cash flow tremendously.

When getting paid up front, the life cycle of the payment should be longer than whatever you're using the money for. As an example, if you receive a payment for six months in advance and plan to use that money to increase the sales force, make sure to accomplish this effort in less than six months. You will be in the hole for any time longer than that.

3. Monitor customer success.

Retention is better than acquisition. Courting a new customer can be five to 25 percent more expensive than retaining an existing customer. Keeping customers happy must be a priority when building a loyal customer base. Kissmetrics, a successful SaaS business, claims this strategy is by far the most important.

To ensure customers satisfaction, create a customer success team that tracks how people are reacting to products or services. Use tools such as Preact to monitor customer health. Encourage your team to interact with customers frequently. They should learn their likes and dislikes to have the chance to catch and retain dissatisfied customers.

4. Analyze the metrics of success.

The key to success in any strategy is to monitor its progress. In order to make sure these techniques are on track, SaaS startup leaders should monitor these metrics:

Measure churn and renewal rate. Churn is the number of subscribers lost in a given month divided by the total subscribers at the beginning of the month. Churn rates shouldn't be higher than 5 to 7 percent. If the rate is higher, customers aren't happy with the product, and they're leaving because of it.

Related: Why You Should Use a Subscription Business Model

Analyze payback period. Measure how long it takes to earn back the money spent acquiring the customer. The average payback period is about 15 months. Longer payback periods mean you are spending too much money on customer acquisition.

Perform a cohort analysis. A good technique is to divide customers into cohorts, such as the month in which they were acquired. By analyzing customers in this way, you can see if the product is still popular over time. You can also discover whether a drop-off occurs at a certain point. This analysis goes hand-in-hand with payback period. Ideally, customers should far outlive their payback periods.

These keys are all unique to enterprise, even though they're important for all types of businesses. SaaS businesses in particular have recurring contracts, high order value and frequent interaction with their customers. By focusing on these areas, you customer base and your company will grow successfully.

Related: Customer Retention Is No Accident -- How Small Business Can Get It Right

Tx Zhuo

Managing partner at Karlin Ventures

 TX Zhuo is a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.

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