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The unprofitable SaaS business model trap

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Re: The unprofitable SaaS business model trap

#51

Post by cm2012 »

mijustin wrote: post #9
patio11 wrote: post #3

Companies 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).

Big brands do the same thing. Terms like "Diamond Ring" can't be profitable online since the big brands are willing to lose money to make sure they keep brand equity.

Re: The unprofitable SaaS business model trap

#52

Post by bch »

mbesto wrote: post #26

I still don't know a single SaaS B2B company - at scale - that is actually profiting right now.[0] The general assumption is that the cost of sale will continue to go down (and thus become profitable), but once the market gets saturation (it is in CRM-SaaS for example), then the cost of sales goes right back up. > The other company has to bust ass for measly 20%/yr maintenance fees. This is a funny assumption. On-pre…

What does "selling jackets" mean in this context?

Re: The unprofitable SaaS business model trap

#53

Post by monkeyspaw »

bch wrote: post #52
mbesto wrote: post #26

I still don't know a single SaaS B2B company - at scale - that is actually profiting right now.[0] The general assumption is that the cost of sale will continue to go down (and thus become profitable), but once the market gets saturation (it is in CRM-SaaS for example), then the cost of sales goes right back up. > The other company has to bust ass for measly 20%/yr maintenance fees. This is a funny assumption. On-pre…

What does "selling jackets" mean in this context?

From the end of the article:

>It’s like the old Jackie Mason joke — A man is selling jackets at cost. The customer asks “how can you sell at cost, how do you make any money?” Answer: “I sell a lot of jackets!”'

Re: The unprofitable SaaS business model trap

#54

Post by monkeyspaw »

Some food for thought in here. But I'm not sure it's necessarily a problem with SaaS businesses. His conclusions depend on the arbitrary numbers in the example analysis.

It seems to me that his criticism is with the pricing rather than the actual model. If you could have charged $100k up front plus 20% maintenance fees, and are only charging $5k per month, your pricing probably has issues.

You could also charge setup fees for customers who need high touch introduction / initial setup to help recoup those costs.

And the sliding pricing scale (eg Salesforce, where you pay more as you have more success with their software) can help you grow customer revenue per customer, over time.

Still, some good points to think about. I just don't think it dooms the SaaS space to crash. It just depends on the value you offer, and how you structure your pricing.

Re: The unprofitable SaaS business model trap

#55

Post by cwilson »

An interesting question to ask is why do unprofitable SaaS companies get bought for very large amounts of money by other enterprise companies? The answers to that question are going to be my goals when building a B2B tool (because my ultimate goal is to make myself rich, let's be honest), not profitability (why would it be, when it's so hard to do and acquirers seem to not care).

Re: The unprofitable SaaS business model trap

#56

Post by crazytony »

lmartel wrote: post #35
jmduke wrote: post #4

I 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 fi…

The tl;dr version is that your company will never get to a size where the executives will suddenly go "oh, well, we're big enough" so you'll always be in that customer acquisition phase, and thus you'll never be profitable.

huh?

If the average customer brings in $500 and the cost to acquire the customer is $200 then you'll be profitable as long as the provisioning* cost is less than $300.

*everything else associated with a customer

Re: The unprofitable SaaS business model trap

#57

Post by CBC440 »

inthewoods wrote: post #5

I'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…

Marketo's costs for enterprise level service requires a long term bet. The company I work for has invested millions in Salesforce integration but 8 months later I've received 1 lead which was dead wrong.

Our industry doesn't lend itself well to social marketing so that may be part of it, but I wonder how many businesses will actually see a return from using Marketo. Executives stuck in the sunk cost fallacy will keep them going for a few years even in their worst accounts. Their market presence is so recent that their retention rate has nowhere to go but down.

Re: The unprofitable SaaS business model trap

#58

Post by hncommenter13 »

patio11 wrote: post #6
inthewoods wrote: post #5

I'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 t…

As a public market investor, this sort of thing drives me batty. Many companies won't release an actual churn rate, but only a "dollar retention rate," as above. Yelp is one of them.

While the dollar retention rate is certainly nice to know, knowing the actual customer (logo) churn is critical to evaluating the cost of acquisition and overall profitability.

As Jason points out, if it costs too much up-front to acquire each customer, you can still go broke even with a nice-looking dollar retention rate--you still have to pay to acquire the customers you lose.

Re: The unprofitable SaaS business model trap

#59

Post by smalter »

This reminds me a lot of the example that Bezos used in his April 2005 Amazon shareholder letter (http://www.scribd.com/doc/111244354/Amazon-Shareholder-Lette..., page 27).

I'd love to hear from people who know finance better whether the comparison is apt.

The analogy seems to be that when you have upfront expenditures that get paid back over time, you may not have positive free cash flow if you're continually paying up front for later pay back, and you end up with a business that paradoxically generates higher cash flow with slower growth.

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