The SaaS Playbook: Build a Multimillion-Dollar Startup Without Venture Capital

Think about it this way: for every $1,000 of monthly recurring revenue (MRR) you generate, you generate $60,000 of value in your company (assuming you sell at five times annual revenue). That is an unreal multiplier on your effort.

With SaaS, product-market fit starts very weak and often begins to strengthen when you’re around $10,000 or $20,000 MRR. It then transitions to the next level, what I call escape velocity, once you’ve built one or more repeatable growth channels. The process of moving from “a product people love” (product-market fit) to “a product people love, and you can find more of them every week” (escape velocity) involves building your product for your ideal customer, finding one or more marketing channels that work, building moats, reevaluating pricing, building your team, unlocking SaaS Cheat Codes, and finding and fixing bottlenecks in your funnel.

So much of your company’s success will depend on developing a deep understanding of your market and ideal customer. Often, this understanding becomes a moat of sorts and is one of the best ways I know to strengthen the love your customers have for your product. Although there are many ways to develop this understanding, one of the most reliable is having conversations

typical questions might include:

• Can you walk me through a sample flow?

• What problem are you trying to solve?

• What do you currently use to solve this problem?- What did you use in the past?

• What are some of your biggest frustrations about this solution? As a general rule, ask open-ended rather than leading questions. If you say, “We’re thinking about building this. Check out this mock-up,” most people will have a hard time being honest. They don’t want to hurt your feelings, so they go along with it and you don’t get useful data.

This involves learning how to separate valuable ideas from distractions, and until you hire a product manager (something that typically happens north of $1 million in ARR), you’re the person who needs to decide which features will strengthen your product-market fit. I filtered them by putting them into three buckets: The Crackpots, No-Brainers, and In-Betweens.

Pricing is the biggest lever in SaaS, and almost no one gets it right out of the gate

Most founders price their product too low or create confusing tiers that don’t align with the value a customer receives from the product.

low average revenue per account (ARPA). You’ll have more breathing room (and less churn) if you aim for an ARPA of $50 a month or more. In niche markets—or where a demo is required or sales cycles are longer—aim higher (e.g., $250 a month and up).

If you’re making true enterprise sales that require multiple demos and a procurement process, aim for $30,000 a year and up (into six figures).

enterprises and service their accounts. A loose rule of thumb is to charge 10 to 20 times more than your standard plan. If you are only charging two or three times more, you won’t be able to hire that customer success person or salesperson you need to manage the high-touch sales process, let alone cover the cost of acquiring enterprise clients.

Freemium works best with a simple product that doesn’t require much work for the customer to get value, where the support burden is reasonably low and there’s some level of virality built into the product.

If your freemium users aren’t at some level helping push growth of your paid tiers, offering a freemium plan isn’t the right call.

Should I Ask for a Credit Card Up Front? One of the most common questions I get about trials is whether or not you should require a credit card up front. Dropping the credit card requirement is an attractive option because you can get ten times as many trials if you don’t ask for a credit card. Although I typically default to asking for a credit card up front, it helps to understand the pros and cons

When thinking through requiring a credit card up front, ask yourself: How high is my support burden for each customer going through the trial? Do I have the bandwidth to multiply my support burden by 10, knowing there will be many more tire kickers?

Just remember the golden rule of experimenting: Only change one variable at a time. If you’re going to remove the credit card requirement, don’t also increase the price. Don’t also introduce a free plan. Let the metrics stabilize so you can identify the patterns before you do the next thing

I recommend revisiting your pricing every six to 12 months because if you’re like most founders, you’re probably charging too little

But there is a second-order effect that most people miss. Across all SaaS marketing approaches (which I talk about in the next chapter), maybe five are available if your ARPA is, say, $20 a month. If you charge $500 a month, it’s closer to 10. And if you charge $5,000 a month, you have every SaaS marketing approach at your fingertips.

That said, there are ways to raise your prices that cause the least amount of shock to your customers. One simple option is to decrease the value metric of your plans but keep the prices the same. If today, customers get 3,000 subscribers for $49, switch it so tomorrow they get 2,500. Your pricing in dollars stays the same, but people need to upgrade to higher tiers faster. Another option is to hide your lowest pricing tier on your pricing page. This should be relatively quick to hide, and you’ll see the impact of sign-ups relatively quickly.

Here are a couple of tips:

Never promise to grandfather customers for life. Next time you raise prices, you might not want to. Or you might sell the company and the new owners don’t want to honor that deal.

Lifetime deals are for one-time sale stuff, not for SaaS.

Enterprise customers expect annual increases of 5% to 10% as standard, so build that into your contracts.

Measure. One mistake I see founders make at this stage is that they don’t measure the effectiveness of each channel. They buy ads but don’t track how much it costs to acquire each new customer based on that ad. They do SEO but don’t attribute where the traffic is coming from. Track as you experiment, and don’t rely on your gut instinct of whether a marketing approach is working. You’ll want to track your cost (in dollars and time) and the results. Compare the results of each marketing approach with your initial rating in the ICE framework. How close were you in your original estimation? What assumptions did you start with, and how correct were they? What issues did you uncover? What did you learn?

What If I Don’t Plan to Hire? If you’re a lifestyle bootstrapper who’s happy without scaling, you may not be planning to hire. And that’s great, but I’d still challenge you to consider hiring at least a support person. Why? Because for bootstrappers, a lack of money isn’t what kills businesses. It’s founder burnout.

One objection I hear repeatedly is, “My product is so technical, I’ll never be able to find a support person who can handle it.” This is rarely true. It’s not that your product is too technical; it’s that you need to take the time to set up documentation, systems, and training.

In the long term, handling support will likely lead to burnout, and hiring a frontline support agent will free you up to keep doing the work you love.

Two “North Star” Metrics Your two most important metrics are MRR and month-over-month growth rate. Those are the top-line numbers that indicate how far you’ve traveled and how fast you’re going. Every SaaS founder should look at these numbers on at least a weekly basis.

Tracking the 3 High/3 Low Metrics (six in total) will tell you two important things: How healthy your business is When your revenue is going to plateau

You’ll notice that many of these six are in tension with each other. You want the Low Metrics to be as low as possible and the High Metrics as high as possible, but often when one is going down, it’s causing another to increase.

3 High/3 Low Metrics Framework The 3 High/3 Low framework includes the next six metrics you should be tracking after MRR and growth, and you want to push three of them upward (i.e., high) and three of them downward (i.e., low). We’ll start with the three Low Metrics. LOW: Cost to Acquire a Customer (CAC) In its simplest form, CAC is all the costs associated with landing new customers (e.g., marketing, advertising, sales) divided by the number of customers you acquired during that period.

Most successful bootstrappers I know are in the two- to six-month payback period (depending on how much cash they have in the bank).

You can also streamline the back-and-forth of providing more sales materials, getting on second calls, waiting for input from the committee—and on and on. Educate your customers as much as you can ahead of time so they have the information they need and develop checklists to gather the information you need to close the deal quickly.

Focus on revenue churn. To calculate this, divide the gross MRR that canceled in a given month by the starting MRR for that month:

month and have a churn rate of 10%, that’s 5,000/0.10 = $50,000. If you don’t change something in your business, you will plateau at $50,000 in MRR. This plateau number should strike fear in your heart because SaaS plateaus are brutal. They are often difficult to fix, as they might require a strategic overhaul of your product, customer focus, or marketing approaches. I recommend every SaaS founder calculate their plateau number. You could feasibly have a dashboard that calculates it in real time. It gives you a window into the future and lets you start troubleshooting early to push that plateau further out.

cost. A lot of SaaS resources will point you to tracking LTV, but ACV is actually the more valuable metric for SaaS bootstrappers. Here’s why. The simplest equation for LTV is your ARPA divided by your churn. For example, if you’re getting $50 a month from a customer and have 5% churn, your average LTV for each customer is $1,000. This is far from a perfect formula, but it’s the simplest one to get insight into your LTV. Let’s say you lower that churn to 1%, which makes your LTV $5,000. Pretty good, right? Except that you’ll be getting that five grand over the next eight years. If you have millions in venture capital in the bank, maybe you can afford to wait

One of the biggest ways to keep your ACV high is to sell to businesses rather than consumers—usually the larger the business, the more they can pay (though that depends on the problem your product solves). This metric in particular is usually in tension with CAC and sales effort because selling to more significant customers requires more sales effort, which is naturally more expensive. You can also increase ACV by raising prices, which we covered in-depth in the Pricing chapter.

The best way I’ve seen for determining how many referrals you’re receiving is to ask how a customer heard about you at their point of sign-up.

Asking for Referrals. Not every product can have word of mouth baked into the product, but every founder can—and should—be proactive about asking for referrals. When you see that trials are converting well and customers are happy with your product, set up an automated email that goes out around the 60- or 90-day mark. Say something like, “So much of our business is based on referrals. If you’re enjoying our product, could you please pass the word along?”

How many of those unique visitors convert to trials? How many of those trials convert to customers? What’s the open rate on that mailing list?

Segmenting Churn If I tell you a product has an average review of 2.5 stars on Amazon of over 1,000 reviews, it probably sounds mediocre. But if I tell you that it has 500 five-star ratings and 500 one-star ratings, that’s a different story. Half of the product’s users love it, and half are the wrong audience. It’s the same with churn rate. Saying you have a gross churn rate of 8% doesn’t give you the right information to work with. But once you start looking at the churn rate of specific customer segments, you’ll get a clearer picture of what’s going on. I like to segment by three things: pricing tiers, marketing channels, and time.

How Do I Achieve Success? Success comes down to three factors: hard work, luck, and skill.

What Can You Control? You can control two of these factors: hard work and skill. Although we can attempt to create our own luck, we do that by working hard and acquiring or improving our skills.

Successful Founders Have a Bias toward Action. When in doubt, they do something. They don’t wait around; they don’t procrastinate. They don’t think of reasons it should take longer—they start shipping.

Successful Founders Manage Their Own Psychology. For years I’ve been saying that more than half of being a successful founder is managing your own psychology

In the early days, your priority is doing whatever it takes to figure out one thing: How do you build something businesses want and are willing to pay for?