Writing a business plan is an important step for any entrepreneur. But, if you’re starting a SaaS business, the business plan plays an outsized role because the money required to fuel growth can be much more than you would guess. Instead of flying by the seat of your pants and hoping it will all work out, take a day or two to build out a plan so that you have a strategy in place to build your business.
But, shouldn’t all business plans include a financial plan? Yes, of course. But for a business that relies on monthly subscriptions, cash flow can become a real issue. Instead of getting all of your customer’s payment upfront, those payments are spread out over months or even years, so it can take time to break even on marketing and development costs. This means that you’ll most likely need more money up-front to get your business off the ground than you initially assume.
Why write a business plan for your SaaS business?
For entrepreneurs who just want to dive in and start building something and solving customer problems, a business plan can seem like a waste of time. It can even seem like a form of procrastination. Why spend time “planning” when you can spend time “doing”? Here are the key reasons why you should spend a day or two on your business plan.
Writing a business plan will help you think through and clarify your business strategy. Are you going to require subscriptions up-front? Will you offer a free trial? Or perhaps you’ll explore the “freemium” route where some features of your product are always free and others require an upgrade to a paid price tier.
By writing down your initial strategy, you’ll be able to get your team all on the same page and have clarity around your direction. This doesn’t mean that you can’t change your strategy in the future, it’s just about defining your starting point.
Cash is king
For many subscription businesses, the cost of acquiring a customer is far more than what that customer pays you in their first month. In fact, it may take several months or even more than a year to recoup the cost of acquiring a customer.
Because of this, it’s critical to create a plan that includes a solid financial forecast. A good financial plan will let you experiment with different scenarios so you’ll know exactly how much cash you need to have on hand to handle both the worst-case and best-case scenarios.
Customer acquisition plan
A good business plan will outline how you plan to acquire new customers. This could come in the form of a detailed marketing plan that you include in your plan. You can’t just take a Field of Dreams approach and hope that “if you build it, they will come.” Occasionally this works, but most of the time acquiring customers takes more work than that.
Acquiring customers is just part of the game with a subscription business. SaaS businesses need to keep earning their customer’s loyalty each month, especially in a competitive market. Your business plan should help you think through and create a plan for how you’re going to keep your customers in the long run.
Market research and knowledge
Your business plan will ask you to think about who your customer is and how you’re going to reach them. Knowing your customer is key to your success, and having a deep understanding of your customers will help you develop the right product for them over time.
What to include in your SaaS business plan
While all business plans share common components, a business plan for a SaaS business needs to pay special attention to the customer acquisition section and the financial plan. Below, you’ll find the details of everything you need to include in your plan:
Despite coming first in your business plan, you should write your executive summary last, after you’ve thought through the rest of your business plan. A good executive summary can stand alone, without the rest of your plan, and summarize the key components of your business, without going into too much detail.
The real trick of getting an executive summary right is to not repeat everything that’s in your full plan, as tempting as that might be. You really need to cut down to the core details so that your reader is left asking for more.
A good executive summary is often used as a stand-alone document that you can email to lenders and investors as part of the fundraising process, so you want to make sure that it’s short and to the point. Make sure to include these key elements:
- The problem you are solving. Make this into a story and engage your audience.
- How your product solves this problem.
- Who your target audience is
- Your sales and profitability projections
- Who you are and why you’re qualified to build this business
- How much money you’re raising (if you’re seeking investment)
All successful businesses solve a problem for a customer. For SaaS businesses, your customer may be another business or potentially a consumer, but either way, your service needs to solve a problem for your customer. If you’re Netflix, you’re filling the need for affordable, instantly available entertainment. If you’re Salesforce, you solve the problem of disorganized sales pipelines and poor customer communication.
The key to a good problem statement is making it “real” for your audience. You want someone who reads your business plan to instantly have empathy for the customer who’s experiencing the problem. You want your audience to understand the problem and relate to it.
You can accomplish this with storytelling and real examples of how customers are currently solving their problem. For example, if you’re building a new project management tool, you can talk about how your potential customers currently try and solve their problem with spreadsheets and email, and how that leads to confusion and poor communication.
Arguably the most fun part of business planning is writing about your solution. For a SaaS business, this is where you describe your service and how it solves your customers’ problems.
In addition to talking about your solution, you’ll want to include a section to talk about your competition and how you intend to differentiate your service from other alternatives.
Be sure to also cover pricing and your solution’s positioning in the marketplace. By this, I mean that you should describe if you’re the budget offering in the market, or perhaps the premium price player. If the market is relatively young and there aren’t many direct competitors, then you can compare the price of your solution to how your customers are solving their problem currently.
An important section in any business plan, the target market section is used to describe who your customers are. Depending on the type of service that you’re selling, you will want to highlight different information. For a service that consumers subscribe to, you’ll probably want to describe common demographics, interests, and other key attributes that help you identify a good target customer. If you’re selling to other businesses, you’ll want to describe the typical size of the business you are selling to, the industry they’re in, and the typical decision-maker.
Regardless of whether your target market consists of consumers or businesses, you’ll want to make sure that you include the total number of potential customers in your market. This is especially useful for investors as they’ll want to get a good understanding of how large your market opportunity is. You can use the TAM, SAM, SOM method for determining market size.
Customer acquisition strategy
Acquiring customers for your SaaS startup is key to your success. Without sales and customers, it doesn’t matter how good your service is.
When we talk about customer acquisition, we’re talking about marketing and sales. This is the part of your business plan where you detail how you’re going to reach your prospective customers and what your sales process will look like.
Your target market will determine your marketing and sales strategies. Do your prospective customers learn about new products by searching for solutions to their problems on Google? Do they go to trade shows? Or perhaps they are heavy Instagram users and advertising on that platform will be the best way to reach them.
Your marketing plan should detail how you plan to reach your target customers and where you expect to spend money on marketing and advertising.
For your sales plan, you need to explain if your sales process requires a sales team or if your sales will be self-service. If you are selling to businesses, you may need a sales team and the sales process will take several weeks, or perhaps even months. If you are selling to consumers, you may be able to have a self-service sales model where customers sign up for your service without communicating with your company.
If you are seeking outside investment, the Team section of your business plan is crucial. Investors want to know who is behind the company and why they have the skills and experience to turn an idea into a successful business. Investors will also want to understand any gaps that you have in your management team that you are looking to fill. Being aware of these gaps shows maturity and honesty about the current state of your business.
If you are using your business plan for internal, strategic purposes, the Team section is still important. You don’t need to include detailed biographies of everyone on your team, but you can outline the gaps that you still hope to fill and even outline the organizational structure of your company so you and your partners can understand who is in charge of what.
For a SaaS business, the financial plan has some important components that a traditional business plan may not include. Subscription businesses will need the requisite subscription sales forecast as long as some key metrics that savvy investors will want to see.
Subscription sales forecast
A subscription sales forecast for a SaaS business will show how many customers sign up each month as well as how many customers cancel each month. You’ll also include the average subscription amount as well as any setup fees that you may charge new customers. Subscription forecasts can be a bit tricky because your revenue from annual contracts has to be recognized over time as opposed to all up-front. If you’re new to forecasting subscription sales, check out our guide.
This is usually included as part of your sales forecast. It’s the percentage of existing customers that cancel their subscription in a given month. This is a key indicator of the health of a subscription business. If a high percentage of customers are predicted to cancel, that indicates that the value of those customers is low and that your solution isn’t a good fit for your customers’ problems.
Lifetime value (LTV) is the total amount of money that a typical customer will spend on your service during the time that they are a customer. If your service is fairly young, you may not have real data on what the typical customer lifetime looks like.
Fortunately, you can predict a customer’s expected lifetime by dividing 1 by your monthly churn rate. This will give you a prediction of how many months a typical customer might be a subscriber to your service. Multiply this number by the average amount that you charge your customers and you’ll have a predicted LTV number.
LTV is an informative number because it can help you figure out how much you might want to spend to acquire a customer. Typically, you’ll want to spend less acquiring a customer than they will spend with you over their lifetime, so knowing your predicted LTV will help guide your spending.
Customer Acquisition Cost (CAC)
Along with LTV, as mentioned above, your business plan’s financial section should detail your average customer acquisition cost. This is the total amount of money that you spend to acquire your average customer. You can figure this out by looking at your marketing and advertising spending and then dividing that number by the number of customers you expect to acquire with that spend.
Your financial plan will certainly include a profit and loss forecast, but even more important is your cash flow forecast. For SaaS businesses, it can be surprising how much cash is needed to fund initial growth. This is because your customers are typically paying you monthly, instead of upfront.
Unlike a business that sells products and collects all of their sales revenue right away, a subscription business is collecting money from customers month after month, year after year. So, while your typical customer may be worth quite a bit over time, it may take a while to recoup the money you spent acquiring that customer.
A cash flow forecast will help you identify how much money you’ll need to raise to keep your business afloat while you acquire your first customers.
A business plan can help you manage your SaaS business
Writing a business plan for your subscription business is an important part of starting your business. The visibility you’ll get into your strategy is well worth the investment and having a roadmap to follow as the chaos of starting a business takes over can provide the guiding force that you need to grow.