The unprofitable SaaS business model trap
blog.asmartbear.com
The unprofitable SaaS business model trap
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Re: The unprofitable SaaS business model trap
#2If your core business isn't profitable, SaaS won't get you there, but it is a great model if you can get big. If done right, the value from not having to re-implement at each customer site is huge.
Re: The unprofitable SaaS business model trap
#3Companies in this space are also in an arms race where there are very finite amounts of scalable channels. (Scalable means, in this instance, any way they can convert money into customers in a predictable fashion.) One would naturally expect that the channels largely go to whomever is interested in investing most in acquiring them. However, since many of the participants in the auction (some channels, like AdWords, are more-or-less literally auctions) have extra-economic reasons to prefer growing, often the auction's clearing price will be non-profitable.
Or, to put it another way: the marketing company which has done best from the investment in marketing companies is Google. (Second best, probably "sales guys." Successful sales reps at enterprise firms are some of the best compensated people in software.)
Re: The unprofitable SaaS business model trap
#4I love Jason's blog but I'm having some trouble understanding this post.
It's okay to spend $X on customer acquisition if $X is less than the lifetime value of a customer (where X ends up being rather high for enterprise customers). But if it takes (pulling this number out of the air) two years to recoup that initial $X, then each customer is unprofitable for the first two years. And if you're a growth-minded SaaS firm, it's going to feel like a lot of customers are in those first two years: but once your initial batch of customers pay off their debts, so to speak, their profit can be invested back into customer acquisition -- it's not like your profits have to be funneled outside of the company, or that your growth has to be rampant and unchecked (with enterprise sales, you're more or less determining your own rate of expansion by the quality and quantity of your sales fleet). Acquisition begets acquisition.
Besides the fact that you need a cash reserve (either through your own savings or outside investment) and patience, I don't see what's particularly wrong with this strategy.
Re: The unprofitable SaaS business model trap
#5I'm curious about that retention rate - most companies that I know that have gone with Marketo have made a long term beat - not just the software but in terms of implementation, training, data, et al. I'd be surprised if Marketo has a 75% retention rate - I'd expect it to be much higher. Now, they also sell at both the SMB and the Enterprise level, so his numbers maybe right on average.
Now that being said, I do think Marketo's business model seems to be upside down - and I'm a Marketo customer. What I expect to happen: crappy number over a number of quarter drive the price of the stock down to where they are worth about $500-600m (vs. about $1b now) - then someone buys them for $800m (about the same price as Eloqua went to Oracle). $800m would be close to what Eloqua went for (multiple-wise).
Re: The unprofitable SaaS business model trap
#6I'm curious about that retention rate - most companies that I know that have gone with Marketo have made a long term beat - not just the software but in terms of implementation, training, data, et al. I'd be surprised if Marketo has a 75% retention rate - I'd expect it to be much higher. Now, they also sell at both the SMB and the Enterprise level, so his numbers maybe right on average. Now that being said, I do thin…
I would have guessed closer to Jason's number, but they quote a retention rate close to 100% in SEC filings.
http://investors.marketo.com/secfiling.cfm?filingID=1047469-...
Subscription Dollar Retention Rate. We believe that our subscription dollar retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. Accordingly, we compare the aggregate monthly subscription revenue of our customer base in the last month of the prior year fiscal quarter, which we refer to as Retention Base Revenue, to aggregate monthly subscription revenue generated from the same group in the last month of the current quarter, which we refer to as Retained Subscription Revenue. Our Subscription Dollar Retention Rate is calculated on an annual basis by first dividing Retained Subscription Revenue by Retention Base Revenue, and then using the weighted average Subscription Dollar Retention Rate of the four fiscal quarters within the year. Our Subscription Dollar Retention Rate was approximately 100% for each of 2011 and 2012.
Or, if you're wondering how that accounting maps to operationas, "Marketo's upsells to customers in year N+1 almost exactly cancel churn in yearly subscriptions since year N, when aggregated."
[Edit: Whoops, now that I think about it, they're sort of juicing that metric by construction. In a growing company with 1 to 3 year payment terms, quarter-to-quarter churn could be very close to zero even without churn being near-zero.]
Re: The unprofitable SaaS business model trap
#7I found this pretty accurate. He might have overstated churn retention is closer to 85% but I think the author is pretty much "on" with this post.
Re: The unprofitable SaaS business model trap
#8It doesn't matter what business you are in, if you aren't turning a profit on each sale, you won't make it up in volume. In fact, volume will kill you fast.
I remember when Sony was selling the PS3 at like a $200+ loss at launch. I was surprised that Microsoft didn't take a couple billion dollars and buy PS3's. It would have cost Sony hundreds of millions of dollars and would have made the PS3 a money sink hole for even longer. Microsoft had enough money to probably put Sony out of business doing this.
Obviously, Microsoft could have got in a lot of trouble for attempting such a strategy, but the point is simple - an unprofitable business model makes you vulnerable, especially a growing unprofitable business.
If it don't make dollars, it don't make sense.
Re: The unprofitable SaaS business model trap
#9Companies in this space are also in an arms race where there are very finite amounts of scalable channels. (Scalable means, in this instance, any way they can convert money into customers in a predictable fashion.) One would naturally expect that the channels largely go to whomever is interested in investing most in acquiring them. However, since many of the participants in the auction (some channels, like AdWords, a…
That's what's interesting about this "arms race" to acquire customers: when startups aren't worried about profits, CAC can be arbitrary ("because we'll make it back later!").
The bi-product of all this is exactly as you describe: startups are artificially driving up the cost of AdWords (and maybe other channels, like salespeople).
Re: The unprofitable SaaS business model trap
#10It doesn't matter what business you are in, if you aren't turning a profit on each sale, you won't make it up in volume. In fact, volume will kill you fast. I remember when Sony was selling the PS3 at like a $200+ loss at launch. I was surprised that Microsoft didn't take a couple billion dollars and buy PS3's. It would have cost Sony hundreds of millions of dollars and would have made the PS3 a money sink hole for e…
You can sell razors at a loss if people buy your razorblades at a substantial profit.