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The unprofitable SaaS business model trap

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Re: The unprofitable SaaS business model trap

#71

Post by kmnc »

cwilson wrote: post #55

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).

Primarily for talent (the big guys are dying for innovation and they are paying for it) and client lists (prove your end user customers actually like using your software versus just being a business need). Sometimes it indicates the potential of an "untapped" market and I would see these acquisitions as getting a horse in the race (when Gamification/Social Enterprise blew up for a bit and you saw everyone buy a horse).

Prove people love using your software and you can get acquired if you want.

Re: The unprofitable SaaS business model trap

#73

Post by inthewoods »

CBC440 wrote: post #57
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…

I have to ask: what did they spend millions of dollar on in terms of Salesforce integration? The software is integrated with SFDC right out of the box (it is, as they say, a native SFDC app - whatever that means). It took us a total of 6 weeks to launch and about 1-2 weeks of work on the SFDC side.

Are you counting just their services, or other things?

Just my opinion, but if your company spent that much money on integrating Marketo with Salesforce, something is deeply, deeply wrong.

Re: The unprofitable SaaS business model trap

#74

Post by matlecu »

cwilson wrote: post #55

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).

Actually if you push the reasoning in the article a bit it can make sense.

When they buy the company, they buy:

- the users and the revenue (which may be losing money for growth as explained)

- and also a product that should be easier/cheaper for them to sell to their existing customers. So they can have a very cheap batch of customers that grows their revenue a lot without increasing their upfront cost too much

-> it's like the up-sells/upgrade in the article: it's much cheaper to acquire but makes the same money

( eg:

- you have 1M clients

- you lose money because it costs you 1.5R to acquire a customer and you're growing

- the company buys you with 10M clients, and it's only 0.1R for them to sell it to these clients because it's an up-sells/upgrade

-> they'll make money with your product even if you can't! )

Re: The unprofitable SaaS business model trap

#75

Post by inthewoods »

lifeisstillgood wrote: post #34
ryanbrunner wrote: post #29

Earlier quoted context omitted.

It is often really difficult to hear about some of the enterprise players, unless you happen to work in a department they're targeting, simply because the vastly lower user base (usually orders of magnitudes below B2C or even SMB companies) generates a lot less buzz and mainstream coverage. But you probably know about a few of them. If you're a developer, something like JIRA is probably roughly equivalent to Marketo…

so if I described it as a dashboard-of-patio11's-brain would it be so wrong? I just get the sneaking feeling that an awful lot of the companies are simply trying to land-grab what half a dozen good open standards would solve to the 80% level I think by that I mean we are going to see a desire to build your own walled garden, but unless people succeed to the facebook level, there will be standards and consolidation, t…

"so if I described it as a dashboard-of-patio11's-brain would it be so wrong?"

Frankly - yes, you would be wrong. Not that these companies won't face commoditization like the rest of software, but they aren't simply dashboards - they're tools for managing all aspects of online and offline marketing. That includes email, landing pages, on-site forms, reporting, Salesforce integration, notifications/alerts, lead scoring, et al. There is a lot going on.

Re: The unprofitable SaaS business model trap

#76

Post by inthewoods »

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…

"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.)"

Just wanted to say - a very smart comment - and something that most people and frankly even VCs don't seem to get: that what works at $5m in bookings won't likely scale to $25m in bookings. This is why you see so many companies moving up to selling to the "Enterprise" - the Adwords driven, low-touch sales approach may scale for a handful of companies who were early and in extremely horizontal business - but for most more niche SaaS offerings, the writing is on the wall - that approach will get you only so far.

Re: The unprofitable SaaS business model trap

#77

Post by inthewoods »

josephby wrote: post #14
Major_Grooves wrote: post #11

Interesting given Get Satisfaction's recent approx. 10x price increase: http://blog.getsatisfaction.com/2013/07/16/the-latest-about-... I just exchanged tweets with them this afternoon saying it would be interesting to see how this change affects their revenues (maybe if/when they IPO).

This also explains why we're seeing services like KISSmetrics, Dropbox for Teams, etc. moving to annual, pre-paid pricing rather than monthly with free versions

Yes exactly - churn rates too high, free versions not converting to paid, et al. And for companies like KISSmetrics and Dropbox, those free customers come with an infrastructure cost that goes up fairly linearly with the number of customers you add. Tough going if you can't convert from free to paid. And then you add high monthly churn rates and, ugh, you're in a world of hurt.

Re: The unprofitable SaaS business model trap

#78

Post by fishcakes »

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…

Any SaaS B2B company with network effects does this easily because the revenue from each customer is a function of the value they derive from the software, which increases with the square of the number of customers.

Think Excel (network effects derived from its communication properties), CoreLogic (derived from having all the data), Addepar, etc.

These companies also typically have high fixed costs across all of their customers once they are at scale.

Re: The unprofitable SaaS business model trap

#79

Post by pinaceae »

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…

they exist, i know of at least one example. but they are not public (yet), hence their financials are not widely known. soon though.

your techdisruptive article is very much focused on the SAP take on this, transforming themselves into SaaS.

there is big demand in SaaS for real turn-key solutions, rather than the classic generic enterprise software that needed an army of consultants to even boot up. customers want this and won't buy non-SaaS anymore.

Re: The unprofitable SaaS business model trap

#80

Post by mbesto »

pinaceae wrote: post #79
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…

they exist, i know of at least one example. but they are not public (yet), hence their financials are not widely known. soon though. your techdisruptive article is very much focused on the SAP take on this, transforming themselves into SaaS. there is big demand in SaaS for real turn-key solutions, rather than the classic generic enterprise software that needed an army of consultants to even boot up. customers want th…

> there is big demand in SaaS for real turn-key solutions, rather than the classic generic enterprise software that needed an army of consultants to even boot up.

"classic enterprise software" is turn-key....

The challenges for SAP to transform themselves into a profitable SaaS are no different than any enterprise SaaS trying to be profitable.

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