November 15, 2024
by Alok Goel / November 15, 2024
Do you know where the bottlenecks are in your business?
Chances are that there’s a bottleneck somewhere that’s either directly or indirectly hampering your growth. The problem is, in a SaaS business, bottlenecks can be pretty tough to find.
One of the most commonly asked questions in a board meeting is, what are the bottlenecks?
This article will help you understand how to spot the bottlenecks hiding in your business so you can eliminate them. We’ll also give you some tips on how to avoid them in the future.
Running a SaaS business is very similar to running a factory. In a well-run manufacturing facility, your assembly line will work very smoothly, with each step finishing precisely when the next step needs to begin.
But what happens when one of your machines slows down? All of a sudden, production backs up, and your factory’s ability to meet its production schedule comes to a halt until that machine is either repaired or replaced. In this setting, it’s usually pretty easy to see where the bottleneck is.
While the topic of bottlenecks in manufacturing is very well-researched, bottlenecks in SaaS businesses – where and how they occur – are far less understood.
Unlike the physical machines built into an assembly line, SaaS businesses rely on a “growth machine” that makes bottlenecks far more difficult to spot. This is because no two SaaS businesses are the same. Each operates with a different growth machine powered by a complex mix of interrelated processes, teams, and tools, making it much harder to see where things are breaking down.
When you consider all the complexities inherent in running a SaaS business, the opportunity for bottlenecks is huge. Some will have a bigger impact than others. But ultimately, they all have the potential to impact your growth in some way, either through direct losses in productivity or in terms of opportunity costs.
The time you spend on finding and eliminating a bottleneck is time you could otherwise spend on value-added activities that could grow your business faster.
Bottlenecks in business are often described as any disruption to a workflow that causes it to slow down or, worse, stop altogether. Technically, that’s true. However, in SaaS, it’s more useful to think of bottlenecks as anything that holds you back from growing faster.
Thinking about bottlenecks in this way helps you to look beyond individual workflows to see what is and isn’t working in your business.
One of the first signs that you may have a bottleneck is when your business is running smoothly, but your net results are not what they should be. For example, if most of your account executives (AEs) are on track to meeting their quotas but your annual recurring revenue (ARR) is still well below what it should be, you have a leaky bucket you need to fix.
One of the fundamental (and maddening) truths about bottlenecks in SaaS is that they move around.
Think of a water pipe in your basement. The water in that pipe is under constant pressure. When you find and repair a leak in one place, it may move elsewhere to another weak point in the system. Not knowing where all the weak points are in your pipes, you probably won’t find the new leak until some damage has already been done.
SaaS companies are under pressure, too, due to a constant and never-ending growth imperative. You set your targets, you work hard to meet them, and when you do, you set new, higher targets. As you work to achieve each new target, you can expect to encounter many of the same bottlenecks you did before and probably some new ones along the way.
Let’s look at typical examples of how bottlenecks can shift within a SaaS business.
In the early stages of a SaaS business, it can be difficult for a company to generate leads because it’s still developing the product and figuring out where it fits in the market. During this stage, lead generation is the bottleneck to growth.
Of course, this becomes easier once a business finds its product-market fit. At this point, the company knows its ideal customers, making it easier for the marketing team to zero in on its messaging and figure out where to find them.
Fast forward a bit, and the company is generating more leads. But, it’s now having a tough time converting them into sales – a new bottleneck impeding growth.
But what’s causing it? Is the marketing team not generating good leads, or is it a lack of experience on the sales team? Or maybe there’s a new competitor that no one saw coming, threatening to take a bite out of your market share. Or could it be that there’s a problem with your product giving rise to negative reviews or that it’s not quite ready for prime time?
This problem can be a particularly perplexing bottleneck, and it will likely require quite a bit of investigation to figure out the source and address it effectively. But let’s say you do, and you’ve conquered the problems preventing you from closing new deals. You’re winning new customers right and left and feeling pretty good about it until the complaints start coming in and customers start churning.
In this case, the new bottleneck is easier to see – your customer success team isn’t big enough to effectively meet the needs of all your new and existing customers.
So, you get to work fixing that part of the machine. You’re hiring more customer success managers (CSMs), streamlining your onboarding processes, and building a knowledge base with great documentation to make your product more self-serve.
At last, your business seems to be running smoothly. One after another, you successfully addressed every bottleneck along the way, and you’re meeting your targets. But now your investors are challenging you with new, highly ambitious targets.
At this point, you may feel reasonably confident in your ability to scale up your processes to meet them. Given your experience the first time around, if any of the same bottlenecks get in your way now, you’ll probably spot them quickly.
It’s important to stay vigilant because you may encounter new ones along the way.
Here are a few of the most common bottlenecks you can expect to encounter in your journey as a SaaS company.
A lack of redundancy can create huge issues for a business, and startups are particularly vulnerable to this problem. For example, if your lead engineer leaves and you don’t have anyone with the skills to step into that role, product development and maintenance will suffer.
This problem isn’t exclusive to engineering teams. It can affect any business area, including sales, marketing, finance, and administrative roles.
People-related bottlenecks come in many forms. For example, bottlenecks happen when leaders unintentionally get in their own way by being unwilling to delegate tasks that others can do.
You may also find that you lack people with the right skills as your business evolves. If your onboarding process is inefficient, new hires will take longer to become productive.
Communication can also be a huge problem. If your teams aren’t communicating effectively with each other, bottlenecks such as work delays and setbacks due to mistakes are bound to occur.
Financial resources are critical to any business. And when they are lacking, it can become an existential threat.
For example, sales are the lifeblood of any SaaS company, and it costs money to make money. Without adequate funding, it will be difficult to cover all the operating expenses necessary to generate revenue, including the marketing activities necessary to generate leads and the salespeople to turn those leads into revenue.
When you begin to scale your startup, it’s critically important to evaluate the cause and effect of each new activity you undertake and plan accordingly. Otherwise, you’ll create new bottlenecks.
Scaling up quickly can also lead to taking on too many new processes, only to find you’ve created a bottleneck as your people begin to feel overworked and overwhelmed. Then you start losing staff, which only adds to the problem.
What do you do when you discover the bottleneck in your business?
First, you have to figure out what’s causing it. Sometimes, this is obvious, and other times, it's not so obvious.
Understanding a bottleneck will usually require a root cause analysis (RCA). While the term “root cause” implies a single cause, in SaaS, a bottleneck could result from multiple causes, all contributing to the problem in different ways.
To get to the bottom of it, you have to look at every part of your business that can possibly contribute to the bottleneck you have identified. You’ll need to have conversations with the teams in those areas of your business to understand the challenges they may be facing and their relative contributions to the problem you’ve identified.
Once you’ve identified the problems creating the bottleneck, the solution usually boils down to people, processes, or tools. One or more of these three things have to change to fix it.
Hiring more people may be an effective way to eliminate some bottlenecks. Often, however, it’s not just about hiring more people but hiring the right skills.
Whether you need more people, different skill sets, or both, remember that it’s always a good idea to build in as much redundancy in key roles and skills. This will help prevent new bottlenecks when people leave your organization.
Often, bottlenecks can be eliminated by evaluating and streamlining one or more processes in your organization.
Sometimes, however, the problem is less about cumbersome processes and more about inconsistent processes. This is usually the result of different people on a team having their own ways of doing certain tasks, which is inefficient and can create bottlenecks when something goes wrong.
To make matters worse, the time it will take to find the source of that bottleneck will be multiplied by the number of people doing their own thing. Standard operating procedures (SOPs) are the best way to eliminate bottlenecks caused by these cases.
If you’ve identified productivity issues in your business, adopting software tools that will eliminate repetitive manual tasks can quickly resolve many of those issues.
Common examples would be using a purpose-built financial planning and analysis (FP&A) tool to streamline your finance team operations. Another example would be project management software for the engineering team or a CRM tool for your sales team. With so many SaaS solutions on the market today, the opportunities to eliminate different bottlenecks with the judicious use of technology are endless.
Unlike redundancy in key positions and skills, redundancy in tools is usually not a good thing. When different teams use various tools that do many of the same things, you have cost inefficiencies that reduce the resources available to address bottlenecks and grow your business effectively.
So, while the right tools can help you eliminate bottlenecks in your business, carefully evaluate any potential purchases against the other software your company uses in different business areas. The solution you need may be hiding in plain sight.
While it’s important to always be on the lookout for existing bottlenecks in your business, developing the ability to predict where they are most likely to occur can help you proactively plan to avoid them.
Developing this ability starts with gaining a thorough understanding of all the processes and workflows in your business as well as their interdependencies.
For example, let’s look at how SaaS businesses generate new revenue. Understanding how all the activities involved in different areas of your business work together to generate new ARR can help you better predict costly bottlenecks. It can also help you proactively plan to avoid them.
In most SaaS businesses, top-line growth relies on at least two different teams – marketing and sales. And both need to work together like a well-oiled machine in order to achieve your targets.
While bottlenecks can occur in your marketing, sales, or both activities, let’s take a look at how sales capacity can quickly become a limiting factor in your revenue generation, especially if you’re not planning for it.
Let’s say you need to generate $25 million in new ARR this month. Your marketing team has put together a campaign expected to generate more than the number of sales-qualified leads (SQLs) your sales team needs to reach that target.
However, you just lost two of the eight AEs on your sales team. Even if you could fill those positions instantly, you’ll still have a tough time reaching that $25 million because your new AEs won’t be ramped up yet. As a result, you won’t be able to take advantage of all those SQLs, which means you’ll be leaving money on the table.
So, in order to take advantage of all the opportunities your marketing team can generate, you also need to proactively plan for sales capacity, factoring in your ramp-up time.
There are also other functions in your business that are proportionate to sales capacity, including the number of customer success managers (CSMs) and business development reps (BDRs).
Let’s say you’re good on your sales capacity and have just the right number of AEs to go after the leads your marketing team is generating. How many more people will you need in these roles to accommodate the growth you expect to achieve?
If you’re not thinking about and planning for these related areas, too, chances are good that you’re going to end up with a bottleneck – either with more new customers than you can adequately serve or more leads than you have BDRs to nurture them.
This example illustrates how understanding the different “assembly lines” in your business and knowing what is required at each step of the processes that keep them humming can help proactively plan for and avoid bottlenecks.
The most successful companies are those that have adopted a continuous improvement mindset. This is particularly true in the SaaS industry where the market can change very quickly. SaaS leaders must not only be open to change but actively seek it to ensure they remain efficient and competitive.
Of course, when new bottlenecks arise, you should always tackle them head-on to minimize their impact on your business.
However, there are also three key things you can do as part of a process of continuous improvement that can help you avoid them in the first place.
Seek to understand your business, inside and out. If you do, you will be able to identify the causes of bottlenecks more quickly and be more likely to see them coming.
Remember that your business is a living thing. Some bottlenecks are easier to spot than others, and bottlenecks can shift as your business evolves. The only way you can hope to stay ahead of them is to know how your business functions.
When you make profitability your North Star, it becomes much easier to evaluate activities and processes in your business that are undermining productivity.
We all know that doing work doesn’t always mean you’re making money. By connecting activities and processes directly to the bottom line, you can more easily distinguish productivity from busy work. You can also work smarter, not harder, focusing on those activities that generate the greatest ROI.
Avoiding bottlenecks requires a deep understanding of your business's different processes that contribute to growth and the critical dependencies between them.
Now equipped with this understanding, you can proactively avoid bottlenecks, optimizing the individual processes that impact growth and how they all work together to achieve it.
In SaaS businesses, bottlenecks are inevitable, but how you go about understanding and managing them will make all the difference in your growth trajectory.
From identifying early-stage bottlenecks like lead generation to scaling customer support issues, each bottleneck offers an opportunity for improvement.
Maintain flexibility and foster a culture of continuous improvement, and you will not only overcome growth hurdles but also establish the foundational grounds for long-term success.
Customer retention is key to SaaS success. Learn effective techniques to reduce churn and boost loyalty, helping your business grow sustainably.
Edited by Shanti S Nair
After leading roles at Google, Freecharge, RedBus, and as Elevation Capital partner and managing director, Alok Goel founded Drivetrain. Fueled by a deep interest in technology and business, Alok writes about finance and metrics, benchmarks, and growth strategies for B2B and SaaS company success.
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