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Sourced from Seeking Alpha.

  • Software-as-a-service stocks are considered extended by many analysts.
  • Financial media regularly cover the idea of a SaaS bubble, creating wide ranges of expectations and significant movements post earnings.
  • In this context, investing in high-flying SaaS stocks can be daunting and requires a leap of faith.
  • Looking for the right favorable features can help you find the winners in this category and invest confidently, even when they are highly volatile.
  • I break down five essential traits that you should always look for before you invest in a SaaS business.
  • I do much more than just articles at App Economy Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Since Marc Andreessen published his essay Why Software Is Eating The World in 2011, software companies have been some of the very best-performing public equities. Companies like Salesforce (CRM), Atlassian (TEAM) or ServiceNow (NOW) are fantastic success stories of the past decade.

In recent years, Software-as-a-Service (or SaaS for the rest of this article) has really taken the spotlight. And for good reasons. IT purchasing has become decentralized, sales cycles are now shorter and product adoption is more nimble than ever.

Most SaaS companies offer the best aspects of a digital business:

  • Virality with freemium models targeting developers and teams.
  • Scalability with large TAM (total addressable market).
  • Optionality with rapid innovation in machine learning and AI.
  • Profitability with gross margins often north of 70%.
  • Predictability with an increasing level of recurring revenue.
  • Accelerated tailwinds created by the COVID-19 global pandemic.

Recently, research firm ARK Invest provided an update on their software market forecast, showing an expected 21% compound annual growth rate for SaaS businesses in the coming decade. They explain:

Despite incumbents and startups embracing Software-as-a-Service, the SaaS market still makes up just 25% of the enterprise software market. According to industry forecasts, annual SaaS revenue growth will decelerate from 16.1% in 2019 to 13.6% by 2022, reflecting, in our view, “reversion to the mean” thinking. Instead, as shown above, we believe that at 25% share, SaaS probably hit an inflection point during the coronavirus crisis and, according to classic S-shaped adoption, is likely to capture an increasing share of the enterprise software market. If our forecast is correct, SaaS revenues will grow at a 21% compound annual rate for the next decade, topping $780 billion or 80% of the enterprise software market by 2030.

The notion that SaaS is likely to become the dominating category in software really resonates with me. With lower barriers to entry and a product adoption moving from top-down (management-driven) to bottom-up (team-driven), the ongoing disruption is likely to continue its path forward.

Now, a category entering the “scale” part of the S-curve can create tremendous investment opportunities. But they come with their fair share of risks. In a nascent industry, the ongoing disruption can turn today’s winners into tomorrow’s losers for reasons that can be virtually impossible to predict.

For many investors, the idea of investing in companies that are not generating a net profit or positive cash flow is unbearable. And that’s okay. If you are not fully on board with the bullish thesis behind an investment, chances are that you will bail as soon as the stock loses its momentum.

Given the potential growth ahead and the inherent risks of continued disruption from existing players and newcomers, investing in SaaS requires a mindset that can only work for some investors. You need:

  • strong stomach, since most SaaS stocks are extremely volatile.
  • leap of faith, since many of these businesses are still losing money.
  • long time horizon, since gains will compound for the best performers.
  • diversified approach, since the winners are likely to more than offset the losers over the long term, but there is no guarantee to own the biggest winners without having a basket approach with several prospects.

After the recent runs of the S&P 500 (SPY) and the Nasdaq (QQQ) to new highs in the midst of a recession, it has become increasingly important to know what you are doing before making your next investment decision. Companies like Alteryx (AYX), Fastly (FSLY), Datadog (DDOG) or BlackLine (BL) had pullbacks of more than 20% after their most recent earnings report.

With all this in mind, I wanted to cover today the essential traits you should be looking for before buying a SaaS stock. They are important quantitative and qualitative traits that should enable you to stack the deck and put the odds in your favor for the long term.

Let’s review.

1) Strong track record of revenue growth

Returns over time can come from two main sources:

  1. Earnings growth.
  2. Multiple expansion.

The latter seems to generally coincide with the former. Accelerating earnings growth will usually receive a higher valuation from Wall Street. The ebb and flow of valuation multiples is usually driven by the strength of the underlying business.

For earnings to grow, a company can do two things:

  • Grow its revenue
  • Improve its profitability

Since margins can only improve up to a certain point, the big winners that can generate outstanding alpha will tend to have a capacity to grow their revenue at a consistent and elevated pace for years. When you invest for the long term, consistency matters just as much as the velocity of the growth.

Let’s look at the revenue trend of a group of relatively young SaaS companies that are disrupting a wide range of industries such as communication, productivity, inbound marketing, database management or cybersecurity.

This is what the top line of a company you want to invest in should look like. Up and to the right.

ChartData by YCharts

 

In the chart: CrowdStrike (CRWD), DocuSign (DOCU), HubSpot (HUBS), MongoDB (MDB), Okta (OKTA), Slack Technologies (WORK), Zoom Video Communications (ZM)

That’s the revenue trend you should really be looking for when you invest with a multi-year time horizon. And over an extended time, the stock price chart is likely to follow the fundamentals as they improve.

ChartData by YCharts

 

As these businesses grow over time, the pace of the revenue growth is naturally fading due to the sheer size of the revenue base. A slowing revenue growth is inevitable. It should be expected and put in context:

  • Is revenue growth fairly consistent to a point where it can be extrapolated?
  • Has growth re-accelerated in the past?
  • Does the current trend appear sustainable?
  • Is the recent slowdown a temporary hiccup or the beginning of the end?

These are questions you want to answer before moving forward.

2) Margin expansion

In an effort to screen SaaS businesses and separate the wheat from the chaff, most investors are familiar with the rule of 40, the principle that a software company’s combined growth rate and profit margin should exceed 40%.

As explained by Thierry Depeyrot and Simon Heap, partners at Bain & Company:

“The Rule of 40 […] has gained momentum as a high-level gauge of performance for software businesses in recent years, especially in the realms of venture capital and growth equity. Increasingly, software industry executives are embracing the Rule of 40 as an important metric to help measure the trade-offs of balancing growth and profitability.”

Now, it can be very misguiding to write off entirely a company simply because it fails the rule of 40. Many companies with an operating margin in deep negative territory can show tremendous improvement in a matter of a few quarters. And the stock of such a company will tend to rally long before the fundamentals put the business favorably on the rule of 40 map.

The SaaS companies that are able to grow very fast tend to re-invest in themselves aggressively. This re-investment can take many forms, such as a hiring surge in new research & development headcounts or some aggressive spending in marketing to acquire new customers.

When strong revenue growth is involved, you are likely looking at a company that is still in its hyper-growth phase. As explained previously in my article about 10 Semi-Controversial Traits Of Some Of The Best Stocks, it’s somewhat useless to try to evaluate a company that is still in its hyper-growth phase based on backward-looking profitability ratios.

Instead, what can be insightful is to look at how the profitability ratios are evolving over time and how the company has been able to show economies of scale and improve its margins as revenue grows.

For a company in its growth phase, margin expansion matters immensely more than where the margin is in the most recent quarter. To illustrate, let’s look at a few examples.

ChartData by YCharts

 

First is Slack Technologies, a software platform focused on productivity and communication. Slack has always looked bad when evaluated on the rule of 40 due to its massive operating losses. But things may not stay this way for very long:

  • Gross margin has steadily improved reaching an outstanding 87%.
  • Operating margin recently shot up from -56% to -38%, an improvement of 18 points in a matter of two quarters.

ChartData by YCharts

 

Second is HubSpot, a cloud-based marketing, sales, and customer service software platform that focuses on inbound marketing. The company has a track record of expanding its margins at a steady pace:

  • Gross margin improved by 7 points in the past five years, reaching a very impressive 81%.
  • Operating margin went from -28% to -7%, an improvement of 21 points since 2016.

ChartData by YCharts

 

Finally, CrowdStrike (CRWD) is bursting through any expectations set by Wall Street quarter after quarter, showing economies of scale to die for:

  • Gross margin improved by 15 points in the past two years, reaching 74%.
  • Operating margin went from -70% to -12%, a staggering improvement of 58 points in a matter of a few quarters.

All in all, you have to look beyond what the income statement looks like today and focus on what it may look like at the end of a multi-year time horizon. When you look at the margin trend of companies like Slack, HubSpot or CrowdStrike, there is no doubt that their margin profile will significantly improve in the coming years.

3) High dollar-based net retention

Over time, some customers pay for more services, some decide to scale back their usage, and some decide to leave altogether. The dollar-based net retention rate (or net revenue retention rate) is the ultimate performance indicator that tells you how much money a company is still making from a cohort of customers after a full year.

Sammy Abdullah, co-founder of Blossom Street Ventures, explains:

Net dollar retention tells you what percent of revenue from current customers you retained from the prior year, after accounting for upgrades, downgrades, and churn.

If the dollar retention rate is above 100%, you are looking at a company that would be growing its top line even without adding new customers.

Some companies use their own definition of this metric or name it differently. It’s essential to read the fine print and understand the KPI you are looking at. For example, a company like Twilio (TWLO) shares its dollar-based net expansion rate as part of its earnings reports. At the end of the day, you want to make sure a company is including the impact of churn in its calculation.

Churn measures the rate at which you are losing customers. Most of the time, it is measured as the percentage of customers who discontinued their subscription in the past year. The churn rate is immensely important in an industry that relies on a subscription model. That’s why you should always focus on metrics that include the impact of churn to evaluate a SaaS business.

Jamin Ball, VP at Redpoint Ventures, does a fantastic job at synthesizing SaaS company earnings and comparing their KPIs. After the first earnings season of the year, he posted a summary chart of the net revenue retention.

Source

A high (and ideally improving) net revenue retention rate should be the most critical KPI to look for before investing in a SaaS business. It’s a tangible way to assess the health of a service, its sustainability and relevance for customers.

Since this KPI is so important, you’ll find a strong correlation between the dollar-based net retention and the valuation multiple of a company. In other words, be careful before investing in SaaS companies that have a cheaper valuation. As most things in life, you often get what you pay for.

4) Sales Efficiency

You can create tremendous revenue growth if you sell one-dollar bills for 90 cents. But that won’t necessarily be the foundation of a sustainable business. That’s why you want to dig deeper into the unit economics.

If you are looking at a company that is 1) growing its revenue fast, 2) expanding its margins, and 3) growing its existing accounts over time, things are already looking pretty good.

But one more KPI needs to be evaluated. One that focuses on a company’s potential to sustain its revenue growth and margin expansion over time. And that factor is sales efficiency.

Is the company able to acquire customers in a way that is accretive to its bottom line fast? That’s what the CAC Payback Period can help you find out.

The CAC Payback Period is a concept I came across in the gaming industry, working on free-to-play games. Video game publishers spend money on ads to generate downloads. As long as the LTV (Customer Lifetime Value) is over the CAC (customer acquisition costs) over time, this is money well spent. The CAC Payback Period (expressed in months) illustrates how many months it would take to recoup your investment in sales & marketing based on your current revenue run-rate.

The velocity at which the CAC is recouped can confirm that you have a strong product – market fit with a growth that is sustainable.

Source

You can find different ways to calculate the CAC Payback Period of public SaaS companies. For the most part, you need to know two things:

  1. Sales & Marketing costs from previous quarter (which is the CAC)
  2. Net new ARR (Annual Recurring Revenue) in the most recent quarter.

While sales & marketing costs come straight from the income statement, it can be a little bit trickier to estimate net new ARR added in the most recent quarter. Some SaaS companies report directly their ARR as part of their earnings report. For some others, you might have to calculate it yourself by using the subscription revenue added sequentially in the most recent quarter, and multiply it by four to get an annual number.

In order to factor the cost to maintain the service into the equation, you can then apply the gross margin to the Net New ARR to obtain the new recurring gross profit expected to be generated in the next 12 months:

[(Sales & Marketing costs from previous Q) / (Net new ARR x Gross Margin)]

This will tell you how many years it would take for the sales & marketing costs from the previous quarter to be recouped with newly created gross profit looking forward. Multiply this formula by twelve, and you’ll get the CAC Payback Period in months.

Using CrowdStrike’s most recent earnings reports as an example:

  1. S&M costs Q4 FY20 = $75.8M
  2. Net New ARR Q1 FY21 x Gross Margin = ($686.2 – $600.5M) x 77%= $66M

[75.8 / 66] x 12 = 13.7 months.

This means that it takes slightly more than a year for CrowdStrike to recoup its sales & marketing costs via new gross profit generated. This is particularly good, since most public SaaS businesses have a CAC Payback period of more than two years, as illustrated below with Q1 CY20 data when applicable.

Source

5) Inspiring leaders with a lot at stake

Beyond these quantitative KPIs, one of the best ways to put an investment to the test is to evaluate the people in charge. To do so, you want to answer three questions about the leadership team:

  • Are they part of the founding team?
  • Are they still heavily invested in the company?
  • Are they a source of inspiration to their employees?

In an ideal world, if you are looking at a best-of-breed SaaS business, you should be able to answer “yes” confidently to these three questions.

According to Bain & Company, companies where the founder is still involved performed 3.1 times better than other companies over a 25-year period (1990 to 2014). As explained by Advisory Partner Chris Zook:

We found that the companies most successful at maintaining profitable growth over the long term were disproportionately companies where the founder was still running the business.

Source

It all makes sense. Founders are guided by an extreme sense of purpose, with the business representing the fruit of their labor. They are more likely to be fully engaged with their role and the impact of their business on the world at large. They will want to lead by example, be pragmatic and focus on getting the work done. Founders are willing to take risks to take their company to the next level.

You’ll also find an owner’s mindset within a leadership team that has a lot at stake. It usually takes the form of a high insider ownership. Slack is again a perfect example, with founder-CEO Stewart Butterfield still owning 8.6% of the company at the time of the direct listing.

Source

Finally, an obvious and easy way to evaluate the culture at the top is to look at the Glassdoor reviews. Glassdoor is a platform where employees can review their companies and CEOs. Lackluster reviews can lead to profound challenges to hire and retain talent, particularly in competitive markets such as the San Francisco Bay Area.

The platform enables outsiders to evaluate if a company is recommended by its own employees and celebrated for its culture.

History shows that the way employees praise their company might be a much more compelling investment factor than P/E ratios, free cash flow margins, or any other financial metrics. This is a conclusion I’ve reached after reviewing the performance of companies appearing on the Best Places To Work on an annual basis based on Glassdoor’s rankings.

Source

A word on valuations

If you are willing to expand your time horizon to years or decades (as opposed to days or months), what you buy matters much more than the price you bought it for.

The best SaaS companies eventually “grow into” their valuations. The ones that fail to deliver on their original premise will tend to under-perform the market, no matter how cheap you were able to pay for them.

Some conclusions should come to mind:

  • Focusing solely on valuations is a mistake that will likely keep you away from the best performers of this group, the very companies you should be invested in based on their fundamentals.
  • Given the extreme volatility of high-growth SaaS companies, the question shouldn’t be if you should buy stock XYZ, but how you should buy it.
  • Significant draw-downs of 20% or more happen several times a year for most public SaaS companies, regardless of the market volatility. As a result, major pullbacks will generally be opportunities to accumulate shares.
  • Position sizing matters immensely when investing in high-flying SaaS businesses. The winners will tend to more than offset the losers, but only if you adopted a balanced and diversified approach by giving several positions the opportunity to bloom.
  • Always assume that you could be wrong. If you put more than 20% of your portfolio in a single company that is yet to be profitable and makes less than a billion in revenue per year, you only have yourself to blame if you end up losing money or trailing the market.

If you are looking for a portfolio of actionable ideas like this one, please consider joining the App Economy Portoflio. Start your free trial today!

The rise of the App Economy is disrupting many industries: retail, entertainment, financials, media, social platforms, healthcare, enterprise software and more.

Sourced from Seeking Alpha.

Sourced from BOSS Magazine

Software as a service (SaaS) has enjoyed significant growth as a market over the past decade, with more and more businesses and consumers making use of cloud-powered solutions to run…

Software as a service (SaaS) has enjoyed significant growth as a market over the past decade, with more and more businesses and consumers making use of cloud-powered solutions to run apps and services.

Today, new pressures are shaping the SaaS ecosystem, with artificial intelligence (AI) arguably being the most impactful and disruptive of the bunch.

Here is a look at how AI is already unleashing the true potential of SaaS and what features it is making available to the mainstream today which would have been impossible to offer just a year or two earlier.

Customization

There are growing expectations surrounding the provision of bespoke experiences that are tailored to the needs and habits of individual users, and with the help of AI in software development, it is simpler for SaaS to meet this demand.

AI has been especially impactful with regards to enhancing the natural language processing abilities of SaaS software, allowing apps to adapt to user behaviours and habits rapidly, and without the need for extensive reworking at the back end by developers. Machine learning algorithms allow apps to get better at serving the requirements of users over time, making on-the-fly customization and personalization a breeze to offer.

Support

Another labour-intensive aspect of running software in the cloud is the need to provide support for users so that you can troubleshoot problems and answer any questions that they might have. AI is being used to automate the support process, with the widespread adoption and ever-improving sophistication of chatbots being the best example of this.

Rather than needing a whole team of human workers on hand around the clock to field questions, AI-fuelled chatbot solutions can provide in-app support with no additional overheads at any time of the day or night.

This does not mean that human customer service agents can be eliminated entirely; rather AI helps to augment existing support resources and give businesses more flexibility when handling common complications. There is even growing support for chatbot amongst consumers, showing that SaaS is helping to normalize this aspect of digital services.

Analytics

SaaS solutions can be used to generate a huge number of data points relating to user behaviors and actions, but the process of analyzing these vast volumes of information manually to draw actionable conclusions is almost impossible. AI can, therefore, be invaluable as a means of providing excellent analytical capabilities that not only let you digest data after the fact but ultimately use it to predict how things will play out in the future.

In turn, this allows for flaws in the software to be ironed out before they lead to user dissatisfaction and disengagement while ensuring that the valuable data which flows from each app does not go to waste.

Security

Security has always been a concern in the digital sphere and is even more pertinent now that the majority of apps and services are being migrated to the cloud rather than installed or hosted locally.

As with data analytics, the challenge of facing up to the ever-evolving security threats that face SaaS solutions is almost insurmountable for human experts alone. However, AI offers up the answer in the form of security platforms that are not only ever-vigilant to existing risks but also capable of learning from and adapting to new threats as and when they emerge.

The IT security industry is large and still growing, but AI promises to make defensive services not only more effective but also more affordable, as well as ensuring that they are as widely available as possible.

Sourced from BOSS Magazine

By Kalo Yankulov

In the first chapter of our “Complete Guide to SaaS Marketing”, we discussed how to validate a SaaS idea as a marketer and why marketing is so vital in the validation stage of every startup.

I shared my 7-step validation framework with you – a framework that could help even the most desperate of wantrepreneurs.

If you’ve applied this framework, you should’ve validated your idea and even have some pre-orders in your bank account.

You’re probably not rich enough to run off to the Bahamas, yet, but you have enough fuel to push yourself to the next milestone of your startup journey: building and launching the real product.

But before that, there’s one more step: the pre-launch.

In this article I’m going to show you:

  1. How to create a Go To Marketing Roadmap.
  2. How to build a successful pre-launch landing page.
  3. How to start a conversation with your pre-launch audience.
  4. How to get traffic to your pre-launch landing page.
  5. And how to grow your pre-launch email list.

On top of that, I asked 8 startups that have built a pre-launch subscriber base to share their best pre-launch marketing tip with us.

I’ve accompanied each pre-launch marketing tactic in this guide with a real-life mini-case study.

But it doesn’t all end there.

I’ve also packed this guide with a few goodies for you. Download them all below:

Unlock The Pre-launch Pack

Pre-launch landing page template – Photoshop and HTML files included. Kickstart your pre-launch marketing with a conversion rate optimized landing page.

Go To Marketing Roadmap – Google spreadsheet swap file. Prepare and execute a solid pre-launch plan with this roadmap.

List of all ProductHunt upcoming products with 500+ subscribers – Examine the best performing upcoming products and learn from them.

+ All other marketing resources from Encharge

So let’s get rocking!

Why Pre-launching and Pre-launch Marketing

Today I was catching up with an old friend of mine.

He’s a developer.

I was talking about my pre-launch marketing efforts at Encharge when he interrupted me:

“Isn’t it a bit too early to market? I mean, you don’t have a product, yet.”

I don’t blame him.

He’s a developer.

I blame the hundreds of startup teams that slave away for months developing a product before they push the Go button on their marketing.

The highest achievers spent more time crafting what they did and said before making a request. They set about their mission as skilled gardeners who know that even the finest seeds will not take root in stony soil or bear fullest fruit in poorly prepared ground.
– Cialdini, Robert B.. Pre-Suasion

You might’ve seen this video of the co-founder of Dropbox showing a “fake” prototype of Dropbox.

This video skyrocketed Dropbox’s beta list from 5,000 subscribers to 75,000 literary overnight.

Or you might have heard about the Robinhood story.

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS

A plain pre-launch landing page with a concise value proposition helped the 2 founders get over 1 million pre-launch subscribers.

Now:

I don’t care if you want to be a big unicorn success like Robinhood or a tiny bootstrapped operation.

Your SaaS must be pretreated and readied for growth.

You must have a pre-launch marketing plan. And you must engineer that plan the moment you decide to pursue your SaaS idea.

Before we get into some actionable tactics:

Why the hell you need to bother with pre-launch marketing? Why not slouch around for a few months until your tech co-founder or developers build the product?

5 Reasons to Do Pre-launch Marketing for Your SaaS

1. You will have an audience to launch to.

Say no more, Sherlock.

This one is obvious, but a lot of startups still get it wrong.

They’re way too confident. They believe because it was hard and took a lot of time, it must be important.

The truth is simple – if you don’t have an audience, you can’t sell shit.

“If a tree falls in a forest and no one is around to hear it, does it make a sound?”

If you have the best software in the world, but no people to try it, do you have a product?

For Simvoly (one of the SaaS companies that I’ve consulted) it took 3+ years to get to a few hundred in MRR.

When they were doing that much in monthly recurring revenue they had a product that was up to par with behemoths like Wix (yes, a solid product!) Yet, they struggled with customer acquisition. Now, a few years after the first line of code, they’re doing pretty well for a bootstrapped SaaS.

Question is:

Do you have that much time on your hands?

I guess not.

Which leads us to the next reason to pre-launch…

2. You will enter your market faster.

You can’t allow lazy marketing to slow you.

It’s our job as marketers to help the market find our product sooner than later.

Pre-launch marketing can be the difference between $0 and $10,000 MRR in your first 2 weeks.

Sathish from LimeVPN – another great SaaS marketer and founder that I’ve worked with – did a great job with his pre-launch marketing strategy. They had a bunch of customers lined up long before they launched the actual product:

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS
Pre-launch marketing works!

3. You will build relationships with your (future) customers.

Let’s face a universal truth:

Except for Al Pacino’s speech in The Devil’s Advocate – conversations are more interesting than monologues.

Pre-launching gives you the time to be human and start a conversation.

Ask questions, answer questions, talk to people.

Do the opposite of screaming “Buy my STUFF!!1”

Opening a dialogue with your potential clients is an example of what I call “the shot across the bow,” and it’s a great way to start your prelaunch campaign.
– Walker, Jeff. Launch (p. 24). Simon & Schuster UK. Kindle Edition.

4. Your customers will become more receptive of your product message.

The best persuaders become the best through pre-suasion—the process of arranging for recipients to be receptive to a message before they encounter it.
– Cialdini, Robert B.. Pre-Suasion (p. 3). Random House. Kindle Edition.

After the pre-order campaign for Encharge, I did a little exercise. I opened our Autopilot and sifted through the activity log of all people that have made an order.

I noticed a simple pattern:

All the pre-order buyers have opened at least 3 of my emails.

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS
If a person opens my email broadcasts 3 or more times there’s a high chance he will become a customer.

By providing value in your email sequences, you’re building anticipation and increasing the receptiveness of your audience.

It’s simple: the healthier your email list metrics are, the better your SaaS launch will be.

5. You will get feedback on a larger scale

While you exposed your MVP to a handful of people (from a couple dozens to a few hundred), the pre-launch idea is to go all out and create buzz for your product on a much larger scale.

The goal of your pre-launch should be to reach thousands of people.

This is an excellent opportunity to confirm your hypothesis from the MVP and collect some quantitative product feedback.

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS
MVP vs Pre-launch marketing

The Go To Marketing Roadmap

Below is the Go To Marketing Roadmap (GTMR) we use to launch SaaS products.

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS
The Go To Marketing Roadmap which includes the Pre-launch marketing stage

The GTMR could be used for launching brand new SaaS products but also for launching new features and releases.

The purpose of the GTMR is to:

  • Provide an actionable plan that shows how your product and marketing are likely to evolve.
  • Align your product people and marketing people.
  • Help with prioritizing your marketing activities and provides a general continuity of purpose.

At Intercom teams now hold themselves to a new rule: If we’re launching a product and want to spend more than a week on it, the product manager and product marketing manager must align on the story we want to tell come launch.”
– Matt Hodges, Senior Director of Marketing at Intercom

Unlock The Pre-launch Pack

Pre-launch landing page template – Photoshop and HTML files included. Kickstart your pre-launch marketing with a conversion rate optimized landing page.

Go To Marketing Roadmap – Google spreadsheet swap file. Prepare and execute a solid pre-launch plan with this roadmap.

List of all ProductHunt upcoming products with 500+ subscribers – Examine the best performing upcoming products and learn from them.

+ All other marketing resources from Encharge

This is the exact Go To Marketing Roadmap we’re currently following at Encharge:

SaaS Marketing: The Complete Guide. 
Chapter 2: Pre-launch Marketing for SaaS
The Go To Marketing Roadmap of Encharge

Stage

I’ve divided the roadmap into 3 main stages:

  • Validation – the stage in which you validate your product or feature. We already covered what you should as a marketer in that stage.
  • Pre-launch – the stage in which you’re building your new product or feature. Later in this article, we’ll explore different tactics for pre-launch marketing.
  • Launch – The most exciting and scary stage of your product or feature’s life. The day you’ve been building up to. The moment you click Launch.
  • Post-launch – not included in my template but it’s a good idea to add a post-launch stage. That stage is dedicated to evaluation and following-up with the leads that didn’t convert in your Launch stage.

Release

These are your product releases – as in the releases you’ve set for the development in Jira or wherever.

It’s entirely up to you decide on the number of releases and their names.

At Encharge we’ve broken down our pre-launch into 4 releases:

  • Alpha – this is for internal use. We’re already using the barebones of Encharge to send one-off broadcasts
  • Beta – a release for close friends and people that will not get angry by a buggy product.
  • Gamma – this is the first time we’re going expose our pre-order customers to the product. Fingers crossed and prayers to the gods of startup.
  • Gamma – a larger release. We’re going to send an email to a small segment of our email list
  • Public release – the big bang. We’re going to launch Encharge.

Marketing efforts

Output Goals

This is a quantifiable goal that you’re in control of. What are you going to produce as a marketer in each stage? While it’s difficult to be in control of the outcome, outputs give you the opportunity to be disciplined and achieve your goals.

  • Validation – for Encharge we set to have 50 customer development conversations. Design a landing page. Plus write regular broadcasts to warm up our email list audience for the pre-order.
  • Pre-launch – for our pre-launch (the stage that we’re currently at) I’ve set myself some stretch targets for the marketing deliverables. I’m tracking these on a weekly or monthly basis:
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My marketing tasks in Todoist

Here you can also include your pre-launch landing page

  • Launch – for the Launch stage we aim to launch using the Product Launch Formula (more on this in our next article). Create 1-2 product launch webinars and provide some extra service packages to sell with the software.

Outcome Goals

These are your marketing goals. What do you actually aim to achieve at each stage?

  • Validation – for Encharge we aimed to have 50 conversations with potential customers, collect 1,000 emails and have 100 credit cards (i.e., trials).
  • Pre-launch – now, for the Pre-launch our target is to collect 3,000 emails and grow to a stable 150 daily visits.
  • Launch – for the Launch we aim to get 300 people to trial Encharge – 10% conversion rate on our email list. Convert 30 of those to paying customers. Add $1,000 in initial MRR and also make another $6,000 in collateral revenue from personalized service packages.

Outcome Achieved

The last column in this table is what you’ve actually achieved. A.k.a delusion check.

Do not mourn if there’s a big discrepancy between your goals and your results. As you become a seasoned launch expert, your results will match and outperform the goals you set.

Your Landing Page

Ok, let’s clear something out of the way.

I don’t care how good of a marketer you’re and what smart marketing tactics you have in your bag, you must have a pre-launch landing page with a clear call to action.

Even if you don’t have a full-fledged idea, create a landing page.

It becomes real when you create a landing page.

That’s when you can start getting feedback.

You can put a big, bad mission statement. But what I really want you to do is collect email addresses.

This is important because as you grow your email list, they (your subscribers) can help you launch and do other things.And frankly, if you can’t collect email addresses and people don’t resonate with your idea it’s a time to change either your messaging or maybe your idea doesn’t have legs.

Sujan Patel

The purpose of your pre-launch landing page is to:

  • Build an audience or pre-sell your product
  • Test your product messaging with a broader audience
  • Start a conversation with potential customers

Should I collect emails or try to pre-sell my product on my pre-launch landing page?

It depends.

It depends on how far are you with your product development, on whether you have any screens to show, and whether you’ve validated your idea or not.

Ideally, by the time you launch your SaaS, you’d have both a raving email list and people that have passed the walled test.

Yet, you should only have a single call-to-action (CTA) on your landing page. Do not try to collect emails and make pre-orders at the same time. That’s a terrible idea.

Whichever goal you set for your landing page, it’s important to have it written in your Go To Marketing Roadmap.

Next thing – putting the landing page together.

Before you get muddled into what software to use for your brand new landing page, let me show you a different approach.

Copy First, Design later

Every letter matters.
– “Getting Real” by 37 Signals

As a designer, I could tell you that letters matter more than pixels.

How you communicate the story and the Why behind your product is going to have a way bigger impact on your pre-launch success than the look of your page.

Think of how Amazon does launches. You might’ve heard about their “internal PR release method.”

Instead of building the product first, product managers at Amazon start by writing an internal press release announcing the finished product.

You can treat your landing page as an internal PR release and apply the same practices Amazon’s PMs use.

Start from the epicenter of the page and write outwards.

Focus on the essence of the page and ignore the peripheries: logo, navigation bar, footer, and so on.

This is the Pre-launch landing page copy I wrote for Encharge before I designed the page.

I use visual elements to separate sections and outline buttons/CTAs, but my goal is to keep my writing distraction-free as possible and focus on the messaging, not the style.

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I always start writing the copy of a landing page first

Designing and Building the Landing Page

I don’t want you to spend weeks designing and coding your landing page, so I’m going to do you a favor here.

I had a bold idea to share the design and code of the Encharge landing page for free. It will save you some time and headaches. That’s how nice I am!

Feel free to use it for your SaaS product or any other commercial projects.

Leave your email below, and you’re going to get our landing page design – Photoshop and HTML files included + the rest of the bonuses.

Unlock The Pre-launch Pack

Pre-launch landing page template – Photoshop and HTML files included. Kickstart your pre-launch marketing with a conversion rate optimized landing page.

Go To Marketing Roadmap – Google spreadsheet swap file. Prepare and execute a solid pre-launch plan with this roadmap.

List of all ProductHunt upcoming products with 500+ subscribers – Examine the best performing upcoming products and learn from them.

+ All other marketing resources from Encharge

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Encharge landing page

Between 14 November 2018 and 17 January 2019 (around 60 days)

  • 1,698 people visited this landing page.
  • 42 people made 50 orders on this landing page.

That’s 2.94% conversion rate on a visitor to buyer. I’d say it’s a satisfactory result for a non-existing product.

Note: We’re currently not accepting pre-orders. If you land on the recent homepage of Encharge, you’re going to see an email collection form instead.

Let’s break down and analyze the elements of this landing page and why it works.

Headline and Sub-headline

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A clear and concise headline and sub-headline that describe what’s the product (“marketing automation software”) and “what is in it for me” (“make your marketing apps speak to each other).

The target customer can easily understand what the product is all about.

Personalization and Identification

The landing page speaks to a single customer persona – SaaS companies.

Narrowing the message by using contextual keywords like “marketing” and “SaaS”, the target buyers can identify and relate with this offer.

Clear CTA

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Clear call-to-action immediately visible above the fold.

No “blocking” words such as “Signup” used in CTA.

Product Visualization

Customers can see what they’re going to get.

The deliverable is illustrated with a solid product image that depicts the most exciting part of the product – our visual workflow builder.

Video Sales Letter

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Hello there, it’s your boy Kalo!

A brief (2-3 minutes) video that summarizes the landing page messaging.

These are the stats from our Wistia video.

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  • 28% of the landing page visitors watched the video
  • On average people watch 43% of the video
  • Most surprising for me was that 21.8% of the viewers click on the call to action at the end of the video.

Yes, with Wistia you can have CTAs in your videos.

My tip is:

If you’re going to have a CTA in your video, make sure to apply the same best-practices you use for the rest of your page CTAs.

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CTA at the end of the video

Personal Letter from the Founder

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Personal elements on the landing page

A sincere personal letter from the founder (me) that speaks to the customer.

The message depicts the customer current’s situation and problems:

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It demonstrates my understanding of the problem and entices trust in the reader:

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It describes a better future for the customer:

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Lastly, we made it look like a real human message by having my snapshot at the end. It’s almost as I’m chatting with the reader through the landing page:

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Value-oriented Headlines

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Here, we could’ve done better by quantifying the value (i.e., highlighting numbers.)

Skimable Sections

Sections are separated visually with clear headlines, section backgrounds, and other visual clues such as icons and screens.

List of Benefits

Instead of using bullet points, our Use Cases section explains our software. We focused on the benefits, rather than features.

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Use cases with benefits

Live Chat

Let’s not forget this. People are going to ask you questions about your upcoming product. Be accessible – include your email, a live chat button, and any other contact information.

Start a Conversation With Your Pre-launch Audience

Opening a dialogue with your potential clients is an example of what I call “the shot across the bow,” and it’s a great way to start your prelaunch campaign.

– Walker, Jeff. Launch (p. 24). Simon & Schuster UK. Kindle Edition.

There is just one last thing you need to do before you start marketing your pre-launch landing page.

And this is to set-up a basic Welcome/Introductory email automation.

The goal of this workflow is to start a conversation with your potential audience.

It’s also an opportunity to learn more about your subscribers.

For Encharge, I used our own tool to set up this automation.

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A simple workflow in Encharge

Like what you’re seeing above? Subscribe for early access to Encharge.

This is the conversation-started email I send to all pre-launch subscribers immediately after they leave their email on our pre-launch page:

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The email editor in Encharge

The email starts with the reason why they’re getting this email in their inbox:

Hey { person.firstName | default: “there” },

You’re receiving this email because you’ve subscribed to early access of Encharge or downloaded one of our free marketing resources.

Then I go on to introduce myself:

My name is Kalo – I’m growth marketer and co-founder of Encharge.

You can read more about our story and why we’re creating Encharge by clicking here.

Then I proceed with the most important bit of the email. The conversation-starter, where I ask them a couple of questions.

Enough about me.

I’d love to learn more about you.

Click reply to this email and let me know:

1. What are you currently working on?
2. What’s the biggest challenge in your business?

And I finish by setting-up the expectations for the following broadcasts.

P.s. I’m going to send you 1 or 2 weekly updates with content about SaaS marketing, marketing automation, and marketing news.

Watch the full video on setting up welcome sequences and starting a conversation with your audience.

8 Pre-launch Marketing Strategies for SaaS Companies

Let’s put our growth hacking hats on and get jiggy with it!

You have your landing page up and running.

Your conversation-started sequence is in place.

Now it’s the funny part – driving traffic to your page and growing your list (or pre-orders if that’s your goal).

I did some hard work and got 8 startups to share their best pre-launch marketing strategies with us.

All these guys have managed to collect hundreds (and in some cases thousands) of pre-launch subscribers, so they must be doing something right.

Start Publishing Relevant Content On Medium Before You Launch

Brad Redding, Elevar

Results: 10,000 reads in the first 6 months

We started writing on Medium a mix of “how to” guides that were specific to pain points and learnings I had and thought leadership articles.

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Elevar’s Medium blog

Now, we’re targeting Shopify eCommerce business owners but when we started eCommerce managers were our primary target.

For the topics, we did a little bit of keyword research on competition of target queries. Otherwise, I tended to write about what I was actively doing and learning about at the time.

For keyword research, I used KeywordKeg and Ahrefs

We also amplified our articles through Facebook ads:

I created audiences on Facebook that matched interests (e.g., Shopify, Google Analytics and eCommerce) and posted/boosted articles from our Facebook page to these audiences.

We tried collecting emails, but it was dismal to succeed with this on Medium.

It was nice to have a built-in audience looking for analytics content to help get started, but the lack of retargeting, pixeling and prompting for emails was the big turning point for us to switch to a native blog.

Later we changed over to WordPress on our main site and canonicalized the Medium pages.

It also turned out to be very good for organic search as well.

Before and after the transition to our primary domain (note organic channel only):

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Do a Webinar (Or Two)

Aazar Ali Shad, Ecomply.io

Results: 5 pre-launch customers for $560 in MRR

My pre-launch marketing strategy was pretty simple since cold emailing or calling was not working for me.

Ecomply.io is a GDPR software, and I wanted to earn a reputation in the market as a specialist even though I was not a lawyer.

I wanted quick traction, but I didn’t have customers – Ecomply was still in Beta.

I put together 3 webinars on different topics. I promoted the webinars on relevant Facebook groups and invited people to join.

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Webinars work for pre-launching

As a result, people started trusting me.

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In total, it was 40 hours of work, including promotion and organization.

I got 5 sure customers who paid me €100/month each.

If you ever want to pre-launch your app, either do a webinar or create a user base through blogging.

Don’t Forget the Basics: Sort Your On-page Optimization and Track Conversions

Waleeg C, Bodo
Results: 2,300 subscribers in 12 months

To get to over 2,300 subscribers in a year, I had to focus on the low hanging fruits.

SEO

Probably the most obvious advice, yet, often ignored or the hardest to see any result from in the short term.

You should cover the basics:

  • A good page structure and keywords optimization.
  • Register your website on the Google Webmasters Tool (now Google Console) and observe for keyword opportunities.

Google search is my number one traffic source, and I am far from ranking first on my keywords. Patience is key.

Track Conversions

About 25% of all Bodo visitors sign up to receive product launch announcements.

The option to sign up for the email list has been there since the very first version of the site.

I later improved that conversion rate to 50% by tweaking the design and copy of the page and focusing on user’s pains rather than features.

To increase your conversion rates, you must have a design that inspires trust – forget the quick, unpolished landing pages.

Conversion optimization is just like SEO, it might only increase your sign-ups by a few people a day; but over a long period, this could translate to hundreds if not thousands of new subscribers.

Kalo’s note:

If you’re looking for a lead generation/form builder with advanced conversion tracking look no further than ThriveLeads.

In my personal experience trying more than 5 different pop-up/form builder tools, I’ve found that ThriveLeads has the most robust conversion rate reports:

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Turn Your Subscribers Into Ambassadors

I always try to please my users above and beyond.

I involve them when building new features, and make sure to understand their pain points.

I, also, don’t shy away from big discounts for the most engaged users. I found out that they would usually recruit more people around them.

Attend Events or Host One

Duane Wilson, Founder Academy

Results: 596 subscribers

Don’t waste time/$$ on ads, or commenting to the void on social media, trying to find an initial customer or build a community from scratch.

Try attending an event, or hosting one, and find those initial customers in real life.

Start by browsing Facebook events near you, searching Eventbrite.com and meetup.com, and check out the calendar at your local co-working space(s).

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Use Facebook to find relevant meet-ups and events

Look for groups where you can find some people who have the same problems, then share your solution and see what resonates, and what doesn’t.

Can’t find a group? No worries, make an event on Eventbrite or Meetup about your thing, and meet a few people one afternoon at a cafe to talk about it.

Build up your mailing list and start your community from here.

Digital is awesome! It would be ideal for most of us to make an ad, which gets customers signed up online, and they start paying us… but your job (especially in the beginning) is to talk to people and understand them… know their needs and wants and to build a product you (and they) will love.

Once you know who your people are, then you can target some ads for more people like them and use online to drive sales and engagement for you.

Doing this might get you both a customer and help you start a community too.

Keyword Optimize Your Landing Page Title

Jonny Platt, A B Rankings

Results: 538 subscribers

Signing up to the Product Hunt Ship feature had a significant impact – once I enabled promotion and people could discover the page, I found many subscribers naturally through Product Hunt.

However, I think the biggest impact came from carefully choosing my upcoming page’s title to match the keywords prospective users would search.

In my case, this was:

SEO Split Testing Tool: Optimize your Organic CTR with A/B Rankings

Product Hunt is a highly trusted site, so without really needing to do any further promotion, my upcoming page would rank in Google for some queries related to the product.

Keyword optimizing my title helped me reach far more people before the launch than I would have through PH’s listings alone.

Run a Giveaway

Drew Bartek, Groove Vest

Results: 2,800 subscribers

At first, it was just me having ten to fifteen-minute conversations with people. We made it a little bit more efficient by having a survey on our website where I could send people to. We did that to get 700 people. After that, we just wanted to automate it because our end goal was to get 10,000 subscribers.

That’s when Drew turned up to UpViral to run a viral giveaway.

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GrooveVest’s UpViral campaign

Groove are using a custom-designed landing page and share page:

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They promoted their giveaway across their website in areas such as the header, slider, across product features.

They also used catchy videos to share the giveaway on Instagram.

This campaign resulted in over 2,800 email subscribers and 1,856 social interactions.

Although, not a software product, the same giveaway tactic could be applied to your SaaS to gain some early traction and build a pre-launch audience.

Read the whole case study on UpViral.

Write a Huge eBook

Kalo Yankulov, Encharge

Results: 683 subscribers

This is yours truly.

I’m a seasoned pre-launch marketer.

I did it once with HeadReach and more recently with Encharge.

My marketing superpower is long-form content (as you might have noticed from this post).

My strategy with pre-launching is:

  1. Write a long (5,000-15,000 words) eBook that is relevant to my target audience.
  2. Promote the hell out of it.

“From an Idea to Exit” helped us collect over 600 emails of marketers and entrepreneurs. We did that by distributing and syndicating content to other social networks – Facebook, Reddit, and IndieHackers. You can read the whole case study here.

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A lead magnet

Launch on Product Hunt Ship/Upcoming

Andrew Egenes, Layr

Results: 2,105 subscribers

We decided to promote our Upcoming listing in a more integrated manner versus using the widget provided by Ship which is more invasive and feels like live chat.

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Layr’s website

I attribute a lot of our subscriber growth to people who landed on our website through some other means and were enticed by the idea of getting a behind the scenes look into something new we were building.

We used our marketing automation software to send targeted emails announcing the same opportunity to gain a behind the scenes look into something new we were building to 3 different segments:

Current Customers

Because this is our most loyal segment, we also asked them to amplify our Ship campaign by re-sharing our social media posts announcing the effort.

Prospective Customers

We used the Ship campaign as a way to re-engage with our prospects.

  • Because they aren’t customers, perhaps there was something about our current product they didn’t like?
  • What better way than to try and win them over than by offering a behind the scenes look into the new product we’re building?

Prospective Investors

Like most startups, we have a segment of investors who have asked to be kept up-to-date with our progress.

Again, we used the Ship campaign as an “excuse” to engage with them.

Further, investors often have unusually high follower counts on PH so as they followed our Upcoming listing; their networks were organically exposed as well.

An engaging first communication with new subscribers that set expectations is vital. You want your subscribers to amplify our Upcoming listing across their network so getting them excited about what you’re building is key.

We made sure that our first message isn’t just a short “Thanks for subscribing, we’ll keep you updated.” Instead, we provide concise bulleted examples of what we’re building along with tentative dates of when we’ll be engaging with the Ship subscribers. In a way, we almost want subscribers to look forward to receiving their next Ship update from us.

Bonus Case Study: How Crowded Got 1,407 Subscribers for a Side-Project

Robert Van Hoesel, Consently

Results: 1,407 subscribers

Several channels are driving pre-launch signups for Consently right now:

1. Product Hunt Upcoming

We signed up for Product Hunt Ship, through which we can list Consently on their upcoming page.

It’s great because it has a viral component built-in. If someone subscribes, followers on the platform will be informed.

We capitalized on this effect by using Ship’s sign up form option as an email capture on our website.

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Consently’s website

When someone learns about Consently through another channel and signs up via the website, they are signing up through Product Hunt.

The cool thing is, if someone is a PH user, it will also show up on their Product Hunt profile/feed. This works really well!

2. A Viral Effect in the Product

While we are still building Consently (it’s a side-project at our startup Crowded) we do already help people with our product.

There are no interfaces yet, so we help people set up Consently manually.

When people subscribe, they get an invite for our private beta. People then can get our consent pop-up on their website.

Our product is used on other websites, and this is a marketing channel for us:

In the popup itself, we show a little link saying “We’re powered by Consently.” This referral link amounts for 15% of our visitors now.

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Consently’s viral widget

The conversion rate of people that end up subscribing to Consently is 4.4%. We’re pretty excited by this specific metric once we start rolling out Consently and have our pop-up on more website

3. SEO Optimized Blog

One of the biggest names in our industry is Cookiebot.

Inherent to having a huge customer base, there’s also a group of people looking to move away from Cookiebot.

To rank high in search for people searching for “Cookiebot Alternative”, we wrote a post “Cookiebot alternative for tracking consent tool.”

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“Cookiebot alternative” has 590 monthly views

We didn’t actively push signups in this post using pop-ups and lead capture; we just link to our main website from the post.

The conversion rate from this post is an astounding 27%. The post got 700 page views from Google. Of those, around 200 went to our website, and 50+ people signed up.

4. Friendly Features in Newsletters

Now and then a bunch of new visitors come to our website because we got picked up in a newsletter.

For example, Kai Brach featured us in “DenseDiscovery”. That feature brought 750 visitors and 90 signups!

We’re keeping an eye on our analytics to see who is writing about us.

SaaS Pre-launch Marketing Resources

Articles

Videos

Tools

Conclusion

Hope you enjoyed reading this and already have some tactical tips for your pre-launch marketing campaign!

In the next chapter of the Complete Guide to SaaS Marketing we’re going to discuss launching a SaaS product, so make sure to follow.

Don’t forget to grab the pre-launch goodies below:

Unlock The Pre-launch Pack

Pre-launch landing page template – Photoshop and HTML files included. Kickstart your pre-launch marketing with a conversion rate optimized landing page.

Go To Marketing Roadmap – Google spreadsheet swap file. Prepare and execute a solid pre-launch plan with this roadmap.

List of all ProductHunt upcoming products with 500+ subscribers – Examine the best performing upcoming products and learn from them.

Sourced from excharge

By Kalo Yankulov

Co-founder and marketer at Encharge. Former co-founder of HeadReach, a SaaS that I bootstrapped and scaled to 7000+ users. Now, I’m working on my next big thing — Encharge, marketing automation platform for SaaS companies.