Over the next few weeks, I’m going to write a series of posts offering a sort of “behind-the-scenes” look at the creation of a software/app business from my perspective building CrewFire and SimpleCrew.
(Shameless plug: subscribe here if you want that series emailed to you)
Since both apps are “SaaS” and what that actually means is probably a mystery to a lot of people, I figured digging into that would be as good of a place as any to start.
That, and I read a quote from Joel Spolsky’s book last night, which roughly said “Learn things. Put them on the Internet,” and I like that idea.
So let’s do this.
What is SaaS?
SaaS (pronounced like “sass” as in sassy, like Sweet D in that “ain’t nobody got time for that” YouTube video) is short for “Software as a Service”.
You can think of SaaS as basically a business model for software, one where you pay regularly (monthly, annually, etc…) for continued access to the product, instead of paying a one-time, up-front fee for it.
Think Dropbox, Spotify, and Evernote (the paid/premium versions), as opposed to Photoshop, Windows, or paid iPhone/Mac/iPad apps that you paid for once up front before you download them.
At the heart of the SaaS is that idea of regular payments for access. In the bizness, that concept is also known as “recurring revenue”, and it’s a glorious, glorious thing.
The beauty of recurring revenue.
When customers pay regularly, the business collects that sweet, sweet nectar, recurring revenue – the holy grail of business models.
With recurring revenue, unlike with one-time payments, your monthly revenue is much more predictable, meaning cash flow is less of an issue.
Cashflow is an issue with other models such as one-time purchases, e-commerce, and others, where in one month you can earn, say, $10,000 in sales, and the next month you have a slump and you only collect, say, $2,000 in sales.
This unpredictability in other business models can make it budgeting and management tricky.
Budgeting for things like employee salaries, advertising spend, office rent, and other expenditures becomes tricky if your monthly cash inflows vary greatly as they can with other business models.
So, for SaaS, cash inflows month-to-month are extremely predictable.
There are slight fluctuations as new customers subscribe (growth) or existing customers cancel (churn), but for the most part revenue month-to-month is stable, and in the most mature businesses even growth and churn become very predictable variables.
(Note that SaaS isn’t the first or only business model to take advantage of recurring revenue. Businesses like magazine/newspaper subscriptions, utilities like electricity/water/phone/internet/cable, subscription physical goods like Dollar Shave Club, among plenty of others also take advantage of regular monthly subscriptions.)
The glory of centralized “cloud” hosting.
Along with the benefits of being a recurring revenue business model, most SaaS products these days have the added benefit of being centrally hosted (in the “cloud”).
Usually, that means a SaaS app is something you log into online, as opposed to being downloaded natively to your computer, phone, or other device.
CrewFire is a great example of this. Because our customers don’t download anything to their computers:
- If we find bugs, it’s easy (easier, at least), for us to identify problems.
- If we build a new feature, everyone gets it immediately next time they log in.
- If we find a typo, it’s easy for us to just fix.
In all these examples, we just update the code ONCE where it lives (on our server), and the next time any of our customers log in via their web browser, viola, they see the updated version of the app.
Think about how much easier this is to manage then distributed software like iPhone apps or downloaded programs like Photoshop.
If a company like Adobe realizes that there’s a bug in Photoshop, they have to fix the app, then put it out there for download, and then encourage all of their users to download the new version.
It’s a multi-step process that makes getting updated versions of any app into the hands of users a total pain in the ass.
Just think of how many times you’ve seen that one of your iPhone apps has an update available, and you hit “ignore” because you’re just fine with the current version.
Every time you do that, a developer cries.
Centralized “cloud” hosting for the win.
Downsides of SaaS
Obviously, it’s not all sunshine and roses.
There are some downsides to software as a service, mostly as it pertains to what Gail Goodman, CEO of constant contact, so eloquently described as the “Long, Slow, SaaS Ramp of Death.”
This means two things.
The first is that with, software as a service, growth curves tend to be slower, more gradual.
SaaS products, because of the business model and the customers and the market, typically don’t exhibit explosive hockeystick-style growth curves like social networks (Facebook, Instagram, Snapchat), marketplaces (Uber, Instacart), or e-commerce.
That’s simple enough. And it can be a real bummer when comparing your young SaaS’s current monthly revenue rate to that of an ecommerce company that started the week after you.
This can hurt. Trust me.
So there’s that thing. Then, the other thing (certaintly related, but different):
Because the customer pays you monthly (or in whatever interval) over the course of many months or years, you don’t really realize what’s called the “customer lifetime value” (LTV) for a long time.
With a one-time payment, let’s take Photoshop for example, Adobe knows that it can make $300 on a sale, so they can spend up to that much money advertising the app and still make a profit on the sale.
If they spent $200 in advertising to sell the $300 product, they can immediately realize a profit of $100 once the customer makes the purchase.
For software as a service, not so much.
Let’s say a customer pays us $100 per month for CrewFire, and they stay a customer on average for a year and a half.
That means they’re worth $1800 to us over the course of their lifetime. Their LTV = $1800.
So, in theory, we could spend up to $1800 to acquire each new customer and still be profitable on every sale.
But because we realize that $1800 over the course of 18 months, we don’t actually realize the profit on any new customer until months down the road.
Say we spent $1000 to aquire a new customer. In the long run, over the next year and half, we’ll eventually profit $800 on the new customer.
But for the first 10 months, we’re actually negative on a new customer.
In its own way, this presents a cash flow issue for software as a service when it comes to investing in customer acquisition. Boo.
Oh SaaS, I love you.
For me personally, what really attracted me to the SaaS model was that ecurring revenue.
In a video I watched before starting SimpleCrew, software entrepreneur DHH (partner @ Basecamp) broke down the numbers it would take to create a million-dollar business if you averaged $50 per customer.
The math is beautiful.
That presentation made it clear to me that if you want to make $1M/year in revenue (if it’s recurring, we call this “Annual Recurring Revenue” or “ARR” for short), you need $84,000 per month.
If each customer of yours is paying you $50 per month, you need just under 1700 customers to clear that $1M ARR threshold.
1700! That’s totally doable!
When you’re just starting out, $1,000,000 can be just this big, daunting number.
But when you break it down to its component parts and multiply it by the magic of recurring revenue, that number – and other BIG numbers beyond it – become completely digestible and attainble.
(I elaborated more on this concept in an older essay, “How to build a million-dollar business.” Check it out.)
So that’s SaaS.
So that’s what were doing. Both SimpleCrew and CrewFire are Software-as-a-Service products, and now you know exactly what that means.
SimpleCrew and CrewFire both also happen to be what we call “B2B” products, which will be the topic of the next post.
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