Off late I have been researching the SAAS model for a few concepts that I have been working on . The learnings have been quite interesting and there seems to be a “hidden” or overseen aspect that I would like to share today.
So for those who didnt know
SAAS is a delivery model which states that the software is provided ready to use off the internet on a pay as you go model. There have been some big success stories like SalesForce.com with 63,000 customers and about $1Billion USD in revenues and smaller but hugely popular ones like Basecamp from 37Singals with may be $10M USD in [i am guessing here] revenue.
The SaaS Revenue Model
The main source of revenue for a SaaS business is subscription fees [Most popular model]. Subscription fees are usually charged as Revenue = $X/Month. Now thats pretty simple for anyone to understand.
Revenue= Users * Subsription Fee * months
This is where things are a little more tricky than it seems
The “Hidden” Monster
Depending on what your application does. You may have just 1 user per customer or multiple users per customer. Lets take an example. In a CRM application, it is essential that each sales person has his own account so you can track who is doing what and who sold to whom. How ever in a SAAS website analytics tool. Each company needs only one account so even if it has100 people in the analytics team they would be able to use the application without any problem with just one single account. Lets imagine two SAAS Companies TheFlyingPan Co. selling CRM and TheFlyingStick Co. selling analytics.
If you were charging $40 per user for the CRM application, a sales team with 20 people would fetch you
TheFlyingPan Co.: Revenue = 20people*$40*12month = $9600 per/year from this customer.
However with the same monthly fee , if you were the analytics SaaS tool you would make
TheFlyingStick Co.: Revenue = 1 user account *$40*12months = $480 per/year from the same customer.
See the difference. Now presumably your cost of delivering the solution is going to be the same whether you are the CRM guy or the analytics guy. Yet your revenue is going to be vastly different to the point that your business model may just not be viable.
Now lets dig a little deeper
When it comes to selling your solution, wether you do door-to-door sales or online sales. There is always a cost per sale. Getting into a new account is always difficult and the cost of the initial sale is going to be high. Hense the profitability of the first sale is low. Now how does this effect our two companies.
TheFlyingPan Co.: ([Low Profitability ] First Account + [High Profitability] 19 subsequent Accounts) * Customers
TheFlyingStick Co.: ([Low Profitability] First Account ) * Customers
So , apart from making less money you also make less profit .
If you are offering a SAAS solution, review your business model. Does your application lend itself for SaaS. Infact, You may be well off with traditional models depending on what you offer. Review your numbers and make sure that the model you chose works for your business.
