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.

We are looking for a business leader (m/f) for Funky & C°

About Funky & C°

Funky & C° is on the drawing board, and we are looking for a business leader who wants to help us design, create, and start Funky & C°, the final corner stone of our “Funky” branch of companies.

Funky & C° wants to help services-focused companies, that are now introducing new ways of organizing and structuring their operations. Funky & C° wants to develop the software tools, dashboards, and cockpits that are required to allow teams to self-steer. Todays preferred sectors for Funky & C° are engineering & architecture, ICT, consulting, legal & finance, R&D services, marketing services — but of course, while drafting the business plan, we might discover that there are better market segments.

What’s so new? This kind of self-steering support software is far away from the classic ERP systems. That’s why a lot of modern companies are now basing their internal information flows on Excel. We want to provide them with much much better tools, and gradually create our own portfolio of software products that are needed for the self-steering organizations of tomorrow.

So now, we are looking for someone who wants to take the lead from the very early stage of the creation of this company.

Could that be you?

Do you want to start from (almost) scratch? Do you have the guts, the experience, the attitude, and the skills to create and run a venture and make our joint vision come true? The business leader of Funky & C° is not standing alone. He or she reports to the investment company (Participium), and is supported by our company creator Jan Lagast to build a great services team and design a future-oriented software portfolio.

We have two products already in another company of the Funky branch, and that’s where we also have a some early-stage clients. This allows you to scale-up much faster and run positive on a shorter term, than you would be able with a start-from-totally-zero start-up. Even more, we have the network to get in touch with self-steering companies, from day one, and there is Forte, that is also addressing your potential clients with a portfolio of advisory services that urge many companies to switch to self-steering mode.

About the role of the business leader

The business leader will first help us design the business plan, check the market, and assemble the first team. After the creation of the company, he or she ensures the Funky & C° potential reaches the clients and keeps our small team focused on making the promises come true. After a while, the business leader will hire more commercial people (in more countries), grow the team, and imply more and more partners to get more and more clients motivated. But first, we want you to develop a battle plan together with us and start rolling up the sleeves.

Are you an inspiring leader or a classic manager?

Our investors at Participium are promoting self-steering organizations. So they want the company Funky & C° to be organized accordingly, and proof that self-steering brings results. That means there is no classic hierarchy, no command & control structure, no boss-to-boss-to-boss reporting. We want the individual co-worker to be a team player and understand his or her responsibility in relation to the purpose of Funky & C° – leading to all of the collaborators to love their work.

Do you have the right experience?

You’d have to feel at ease with the combination of advisory services and IT project management in a services and knowledge worker business environment. You’d better also love adopting modern technologies of the web, such as web services, blockchain, and APIs. We need a hands-on start-up mentality at first, but beware, we also need you to grow the team and the business towards financial profit on a short term.

Sounds interesting? Get in touch with paul.indekeu [at] participium.com.