SW engineering, engineering management and the business of software

The Math of SaaS

There are tons of Software as a Service apps out in the world. A big part of the reason is that the math of SaaS apps allows for single founders or small teams to achieve livable wages with low risk.

How achievable? If your SaaS app solves a business need or produces some desired outcome, and you charge an average of US $60 a month, you only need ~150 customers to break 6 figures in annual revenue. 150 customers is small enough that you can almost brute force a customer base with old-school tactics like trolling niche meetups and even cold-calling customers to setup demos.

So, if you don’t want to try your hand in the App Store Casino or the Build-The-Next-Instagram Lottery, but you also don’t want to work for the Man/Woman, SaaS is a fairly well-trodden path.

However, SaaS means less risk, not riskless. Where does SaaS break down? First, it’s got a potentially painful, long, and shallow growth curve. This was masterfully described by Gail Goodman in her talk, The Long, Slow SaaS Ramp of Death (my notes here)

Small team SaaS apps have the usual problems, such as being responsible for the customer development, product sales, and marketing, despite the fact that you may only be a domain expert in one or two of the three. This is one of the biggest problems with SaaS, especially in the early stages of development when there isn’t much cash flow.

Cash is King

With a SaaS app, the more cash you have, the more your options open up. You can spend cash on customer acquisition for long-term revenue bumps, or you can spend it on improving your product to help with customer retention.

In other words, working SaaS apps are magic green boxes that eat Cash and Time, and spit out more money.

Cash flow in a SaaS app, however, is incremental. Each new customer only gets you ~$60. The total lifetime value of the customer is locked up in the future.

The traditional workaround is to offer a month or two free if the customer pays for a year in advance. With annual prepay, each customer brings in ten times more delicious lucre than the otherwise incremental $60.

Now you have ten times as much cash to blow on customer acquisition, requested features, or that new ping pong table.

Enter PaSH apps

A more recent phenomenon I’ve seen in the wild is the notion of Product & Service Hybrid apps.

PaSH: Product & Service Hybrid

In this case, we are talking about:

Product: stand-alone products or traditional SaaS apps

stand-alone products or traditional SaaS apps Service: in the sense of trained human consultants

The typical PaSH app can be thought of as a SaaS app with a micro-consultant add-on to help you leverage the SaaS app.

For example, Optimization Robot is an upcoming combination AB testing platform and set of experts to help you run tests, suggest new tests, and monitor the results. Lead Genius is a combination of lead gen lists as well as lead gen army. Churn Buster is a combination of email dunning as well as humans who call expired accounts. No SaaS app can compete with voices on the phone.

The more traditional path is to actually come about it the other way. Starting with a consulting service and adding product over time. Copy Hackers might be the epitome of this, productizing their consulting w/ ebooks, videos, courses, and more.

Jump the Long Slow Ramp of Death

If you’ve been reading closely, the Long, Slow Ramp Of Death refers to the slow wind-up times that SaaS apps typically run into.

PaSH apps always have the option to charge for the service component. The basic premise is that the service component delivers more value than just the monthly cost of the product, but costs less than an equivalent consultant or contractor. This can lead to large cash flow spikes and incremental monthly revenue much higher than the $60 you could charge for a code-only solution.

This potentially allows you to ride out the most grueling part of the ramp. Even one or two service add-ons might mean the difference between crashing into the end of the runway versus achieving takeoff velocity.

You will still have the awkward points while your customer count is <= 10, or when you start thinking about your first hire. PaSH is more risk mitigation and less sparkling, magical, silver bullet.

Concierge is a fancy word for Human-Assisted Onboarding

The Service part doesn’t have to be ongoing nor does it even have to have an explicit cost. The term “concierge service” is making the rounds and can have a measurable effect on customer acquisition and churn rate. Drip does this very well, and their concierge service is free as in beer, but awesome as in customer experience.

Lastly, despite being an unemotional husk, even I won’t discount the value of human contact with your customer. If you or your workers spend any time interacting with users, that’s the perfect opportunity to build trust, discover desired outcomes, and ultimately turn customers into advocates.

What then?

In the early days of a product, think of PaSH as life-support/plan B.

As your business evolves and matures, you should also be evolving the service component as well. One common direction is that the service component becomes less high-touch one-off, and a bit more scalable maintenance type work. Ideally, it evolves into an ongoing thing that benefits both parties. The SaaS operator gets higher monthly revenue and the customer reaps the benefits of improved business outcomes without the hassle of a W-2 or W-9 form. You want the customer to be thinking: “really, really inexpensive/highly optimized out-sourcing.”

At the end of the day, your options are not limited to the typical indie playbook of contractor moving into download or SaaS product. As long as you have customers who value business outcomes, a hybrid product/service is a potentially less perilous option.





Thanks to Micheal Buckbee, Tim Cull, Andrew Culver, Aaron Francis, Jeffrey Abbott for reading drafts & providing feedback.