Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The unprofitable SaaS business model trap

blog.asmartbear.com

Post reply on HN
Print view View original

81–90 of 99 posts

Re: The unprofitable SaaS business model trap

#81

Post by josephlord »

dkrich wrote: post #62

While the general assessment is correct, I think the core argument confuses marginal and fixed costs. Say the average customer represents R dollars in annual revenue. That’s: $4R of revenue over the lifetime of the customer. But: $1.5R is spent to acquire the customer (the pay-back period). $1.2R is spent in gross margin to service the customer (4 years times 30% cost). $0.6R spent on R&D (15% over 4 years). $0.6R sp…

This bit also strikes me as double counting:

"And that is without any growth at all. But you need to grow enough to keep up with cancellations at minimum, so that consumes the last notion of profitability."

Growth to keep up with cancellations is covered by the $1.5R acquisition cost.

Although to disagree with you slightly I would say that Admin at least would be partially proportional to the number of staff (which is likely to be related to the number of customers) although improving the system so that less support was required (better documentation, easier to use software) should have a knock on effect here. Some parts would be fixed costs though.

Re: The unprofitable SaaS business model trap

#82

Post by josephlord »

rubinelli wrote: post #23
programminggeek wrote: post #8

It 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…

Sony didn't see the PS3 as a console. It was a heavily subsidized Blu-ray player, that also happened to play games. So they lost that generation's console war, even though they were losing money on every sale, but won the much more strategically important video format war. Also, thankfully for them, the PS3/Xbox360/Wii generation lasted twice as long as previous generations, so they had plenty of time to recoup this…

Did Sony lose the generation's console war? On a global basis it looks[1] like a stalemate between Xbox 360 and PS3. MS clearly won the US and maybe just about the UK but Sony won in many other markets. Sony burnt cash on it as an early loss leader and MS on warranty replacements. I haven't checked whether they both eventually reached profitability.

[1] http://uk.ign.com/articles/2013/01/10/report-ps3-surpasses-x...

Of course the Wii was the sneak attack from the previous generation that made Nintendo possibly the real winner although they are looking vulnerable now.

Re: The unprofitable SaaS business model trap

#83

Post by andrewcamel »

I disagree - there exist SaaS companies that have successfully executed and are on the path to successfully executing the profitable B2B SaaS model. Take Constant Contact, Responsys, and Blackbaud. While not all of these companies are highly profitable, they are all proof (and will be increasingly so) that B2B SaaS companies can reach profitability. The names we all know (e.g. Salesforce, Workday, etc.) simply need more time to reach that point of profitability, but they're on their way.

Looking at Jason's example specifically, I have a couple issues:

1) Assuming a fairly strong churn rate (~20%/year), the base of customers for which CAC has been repaid will make up an increasingly large portion of the user base as the company grows (in later stages). Forgive me if I'm wrong, but it seems much of Jason's argument is based around the assumption that acquiring new customers (S&M) in conjunction with ongoing R&D and G&A will always outweigh the gross profit generated by the existing customer base. Maybe if he defines "healthy growth rate" as 50%+, then yes, sure, it will always be outweighed, but let's be reasonable.

2) If Jason is going with 30% COGS, his LTV metric is off. No startup business in its right mind would continue operating with a CAC/LTV of 2.53. We're talking double that in most cases with a bare minimum of 3.

Finally, while this is a good discussion to have, I think we're all a bit naive to think that a bunch of small-scale startup entrepreneurs have enough knowledge, experience, or expertise to questions the decisions of many large, long-standing investment firms and successful individuals that all have supported these unprofitable companies with expectations of their eventual profitability. Having worked at a late-stage investment firm, I looked very closely at 100+ of the leading, big-name SaaS companies (we're talking 1000+ pages of diligence in aggregate). From experience, I can tell you there is plenty of work, far more than just a short article and some speculation, that points to the fact that these companies will reach profitability.

Re: The unprofitable SaaS business model trap

#85

Post by _k »

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).

They are adding Success Services / access to their customer success team. Any idea what this looks like ? A consultancy service or general support ?

Re: The unprofitable SaaS business model trap

#86

Post by guy_c »

rscale wrote: post #64
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…

I agree with you. It's perfectly reasonable for a firm to pour money into its customer acquisition machine so long as the return is greater than the cost of capital plus a risk premium. Failure to reinvest every dollar under those circumstances is a Type I error.

This risk premium is an important part of that equation.

"So out of the original $4R, we’re left with $0.1R in profit. That’s 1/40th of the revenue making its way to actual bottom-line profitability, and even that takes 4 years to achieve", Jason Cohen.

That a very tight profit margin, but still could be valid business mode. Especially when you hope that over time 'brand' grows in strength and average customer acquisition costs may lower, conversions can be optimised, R&D costs will be shared across a larger user base. You might even 'max-out' the customer base.

The issue is that revenue is at risk. You might spend $300m acquiring customers for that $0.1R profit 4 years down-the-line. 2 years into that 4 year, a competitor suddenly innovates and steals the customer before you've realised the required revenue.

It doesn't even need a massive innovation. A margin that tight is very sensitive to very small changes. A competitor enters the market and your annual retention drops from 75% to 66.7% and that will probably be enough to destroy any hope of profitability.

Re: The unprofitable SaaS business model trap

#88

Post by rgrieselhuber »

andrewcamel wrote: post #84
rgrieselhuber wrote: post #60

Great post but the 75% retention thing was odd. All of the SaaS companies we know would flip their shit if annual retention dipped below 98%. Even 98% would be very painful.

Annual retention is honestly considered fairly strong <20%.

For SaaS? That means you're turning over your entire customer base in less than six months.

Re: The unprofitable SaaS business model trap

#89

Post by amac »

kmnc wrote: post #70
lifeisstillgood wrote: post #27

Earlier quoted context omitted.

Thank you.

www.getapp.com. Search any business term (eg, Procurement) and add "Management" + "SaaS" or "Cloud" or "Software" and you will find a wide array of companies that I bet no one here has heard of.

And a lot (including my app) that plenty of people will have heard of. I do agree though, there's a lot of apps in that directory and elsewhere that will end up being well known (or at least acquired) in the next 5-10 years.

The network (cloud) is where you sell your consumer or enterprise application now, not Windows.

Re: The unprofitable SaaS business model trap

#90

Post by rdl »

bgertonson wrote: post #17
j_baker wrote: post #12

Earlier quoted context omitted.

What are you talking about? This is standard practice. Microsoft also sells its consoles at a loss: http://www.neowin.net/news/report-microsofts-xbox-division-h... The idea is that once you get your console in peoples' homes, you can make money off of the accessories and games.

This was covered in the post, but under the heading of "Undoing the effect of cancelations" > Undo the effect of cancellations through up-sells/upgrades. Salesforce.com and ZenDesk charge more for every person you add, and more per person when you increase the features in your plan. Their customers grow (on average). Thus, their revenue over four years is not 4R, but rather it might be R on the first year, 1.5R on th…

Also, somehow keeping your competitor's console from being available to real buyers will dramatically reduce the sales of actual games, since all of the sold-at-a-loss consoles will be sitting in a warehouse somewhere.

The really sneaky thing would be to figure out some non-game thing to do with the "enemy" consoles, like turning them into a supercomputer, or scrapping for parts, or whatever.

Post reply on HN