Marginal cost of SaaS is not near-to-zero

I just happened to see a post on LinkedIn referring to a strategic advisor’s page on SaaS strategy. The picture wants to focus the reader on stimulating growth to outpass the operational fixed costs of a start-up in SaaS. I agree that one has to ensure the turnover gets bigger than the operational costs. Not arguing that part of the picture at all. But … the same picture shows the biggest lie in the SaaS industry. The marginal cost is NOT near to zero. And that is really bad news.

The first months are all about servicing the customer to keep them

Let’s redesign the above picture to a graph that is closer to reality. Often, SaaS companies will offer their software as a service for free for a while. You can plan that part, and estimate the cost for developing and marketing the offering. That’s the guaranteed cash burn. That’s why you attract investors in the first place. The issue is, customers will not stay if you do not spend time with them. You have to help them capture the value from your offering, and that costs a lot of time. Huge amounts of time, in comparison to the price you are planning to charge for the software in the future. Marginal cost at that point is far from zero. It’s probably the unexpected and biggest cash burner for months in a row. That’s really bad news.

 

 

From a certain moment in time, you will decide that you have had enough of the free users, and want to start charging money. Of course, you will loose some users, but hey, you also gain money from the others, so why bother, because the biggest challenge in the planning is to estimate the turn-over for the coming months. Again, you do not want to loose clients, and by now you will have learned that these clients need services too. Be sure though, that the clients will also be needing much and much more services than you expected in the beginning. Do not forget, they are now paying for the offered SaaS, and you do not want to loose the scarce clients you have convinced to stay with you until this point in the history of your start-up. So be sure, again, the marginal cost will be huge, and much more than anticipated.

Result: the lie about marginal costs puts break-even beyond expectations

There is a way to cope with the marginal cost: include it in the financial plan from day one. Or, even better, sell customer value services to the clients, and add the SaaS subscription as a plus. That way, your client services generate a real gross margin, and your SaaS increases the repetitive character of the generated margin per client.

Yes, this is the business model that is Participium’s favorite. And no, it is not easy. As is no business model that ever leaves the academic books, and is put to the test in real life.

Watch out for the poppies

It is great that there are so many start-ups and incubators. Starting and doing business is hip. Yes! Enterprising Flanders will wake up after all. It is relatively easy to build an app, put together a powerpoint (or prezi), win awards and even make it into the news with a fun project.

Unfortunately, we also see too many poppy flowers blossoming: companies with a business model that can hardly stand a little adversity from a larger party for example, that suddenly comes up with a comparable innovation and pulls the rug out from under the startup with an extensive customer base, a solid reputation and sufficient resources to last a few years. Let’s hope that the very short flowering period of these poppies does not dampen the enthusiasm of entrepreneurs, journalists, investors, friends and family. And for those who still can: check the SWOT analysis and remember the business model!

The same challenge applies for Participium. For each company they evaluate different business models that scale quickly enough in order to be able to become a serious company with European opportunities in the short term. At the same time, we are looking for a business model that is also reasonably solid and can withstand a collision. Do we have a monopoly on the truth? Obviously not. That is why, for every project, we surround ourselves with a few external observers that help us remove the blind spots. We also regularly ask our financiers to think about the companies we want to build. And then we stay down to earth and keep our fingers crossed for our projects to survive the first storms.

Free whitepaper on growth in b2b companies

At the end of last year, management consultancy company Forte published a whitepaper on growth for B2B companies. The document provides an effective way to reconnect with growth. Clue: it starts at the top, with a strategic focus on realizing customer value. On these few pages you will find out how your company can start thinking about growth again.

This whitepaper was given to all participants of the share # square event at Forte today. The document provided the attendees with a synopsis of the enthusiastic presentation of Jan Lagast (Managing Partner of Forte and Participium).

Quickly request your free copy!

Quarturn vision ensures a better growth

The more you focus on shareholder value, the worse a company performs in the long term. Conversely and paradoxically, the more you focus on customer value, the better it goes with… the shareholder value.

Added value for customers

You can observe that in various companies the focus on customers is the only good choice for achieving a nice growth. Making profit is important, but by setting the profit as the highest goal, shareholders and directors are just getting the opposite. By considering the profit as a consequence for another highest goal, the same profit turns out to be much easier to achieve. That other “highest goal” is the added value for customers.

By considering added value for customers as the most important goal in a company, things will get better for everyone: for the customers who feel that the focus is on them, for the employees who are involved in an interesting adventure and for the shareholders who will notice that the company is doing better and better.

This vision arose after a few months of brainstorming, in the course of 2010, when Jan Lagast was looking for a new dynamic for Forte. You’ll find a short piece of that history on the website of Quarturn. Participium will now continue to carry out this vision and, together with the non-profit organization Quarturn, it has taken the initiative to start a movement to promote this vision – at least throughout Europe and possibly far beyond these borders.

The old business model no longer works

Jan Lagast spoke this afternoon for the assembled guests of Packo Inox in Zedelgem. This company was celebrating its 50th anniversary in a beautiful pop-up lounge. Jan was asked to give managers in logistics, production and quality insights in the challenges that await them in food and pharma.

One of the lessons learned is that these challenges are not located inside of the factories, but all around us, right here in the context in which we will work. Fundamentally, the old business model that made us rich in the West since the 1960s is no longer applicable. For years we have been buying cheap raw materials in third world countries, adding some cheap labor on the spot, transporting that half-finished product cheaply to the rich West after which we add some expensive final labor to it. Finally we sold the end product to rich customers.

A global village

Today, rich customers are all around the world, also in Africa. In addition, the world literally becomes a big village, with on top of that the social media that send both positive and negative messages around the whole world in just a few seconds. Even the slightest mistake, made by a large company travels around the world in hours. As a company you feel the effect of that worldwide.

But on the other hand, this also opens up perspectives, because as a result of the many nutritional issues, Asians are now more interested in products from the West. With the right quality approach, it should also be possible for our (expensive) Western companies to win over (rich) customers in former third-world countries.