One of the most popular posts I ever wrote was “how do SaaS companies make money?” The title was rhetorical in that I analysed the underlying economics of a SaaS company. Judging by the amount of hits and threads (Smoothspan and SaaSBlogs), its something that people are interested in. So,now a year on, I thought I would write a series on …well how to make money as a SaaS company. Here goes.
Step 1 – Be really clear on what problem your service is solving
Just because its SaaS doesn’t mean its a winning proposition. If your service is a substitute for existing processes or software you will have to convince people your way is better. Better being faster, cheaper, more functional. If your service is radical, solving the previously un-solvable, then you could be on a gold mine if you can sell it. As part of this article I’ve tried to think of who is a well known example of this, not easy. Potentially Google with Adwords. There is a downside to being radical too, you may have to educate the market which is an expensive proposition. Pingar.com is an example of this to my way of thinking. (hat tip, some of the thinking borrowed from Ben Kepes)
Step 2 – Be clear, you are in the scale game.
You really need to spend a bit of time finding out how big a market your SaaS could service. It better be large because you are entering the scale game. Scale drives down your costs, scale drives up your profit, scale is everything in a multi-tenant world. If you can’t get to a scale position I would look at other delivery methods.
Large markets are important for revenue too. Look closely at Telco’s, they are the poster child of the subscription revenue game, you make a small amount of a lot of customers .
You also need to think globally, its the internet stupid….its ubiquitous. Some poor soul might discover you and if you are set up to only deal with one small geography you got an issue. It’s called client dissatisfaction, a killer in the SaaS world.
Challenge existing market definitions and sizings especially from name analysts, take time to think. The reason for that is things like the long tail, things like untapped markets. It could actually be that your service, will substituting an existing offering is better suited to the masses. That is you could grow the market.
Take away message, know how big your market is.
Step 3 – know how you are going to make money
Be crystal clear on what value your clients are going to pay for and create a service that gives them that. Google knew cost per click was their game, and this hasn’t changed.
More to come….