A dummies guide to the SaaS business model

Just as our accounting software is designed to be understood by people (like me) that aren’t accountants or have any formal accounting training; this is intended to be a brief and simple explanation of the Software as a Service (SaaS) business model for people (like me) that don’t have an MBA or formal business training.

My first business was in web development. Essentially we’d develop a website for you – we’d do all of the techie programming bits (but none of the design aspects).  Whilst it was a good little business, I never knew where my income was going to be coming from in 3 months time. New work always came in, but it was never guaranteed to happen. With uncertainty like  that it’s very difficult to grow the business and take on staff and other commitments like offices.

Now contrast that with KashFlow, a SaaS company.

The Difference to Traditional Software
Our software isn’t downloaded on to your computer. It’s all accessed via a web browser. Essentially KashFlow is a website with lots of functionality rather than a piece of software as you’d traditionally know it. So we don’t have to create a CD or distribute boxes and manuals to anyone.

Business owners come along and subscribe to using our software (‘as a service’)  at £15.99 a month. Assuming the cost to us to provide the service (servers, bandwidth, etc) is £1,600 a month then until we reach 100 paying customers, we’re making a loss every month.

But as soon as we pass 100 customers, something magical happens. The £15.99 that customer 101 pays us every month is pure profit. In accounting terms it goes straight to the bottom line (the “bottom line” being the last line on a Profit & Loss statement that shows you the actual profit or loss made). and of course the same applies to customer 102, 103, 104 and so on.

All of a sudden you start making a decent profit every month. Once you pass the 100 mark, there’s no pressure to constantly go out and bring in new sales all of the time.  You now have a business that is virtually guaranteed to make a profit every single month.

You do of course need to keep your customers happy – a key element to which is providing good, fast and friendly support. Something I think we excel at and has contributed to our growth.

Traditionally, supporting software is an expensive and complicated nightmare. You have lots of different versions of the software to contend with, other programs on the customer computer can interfere with yours, different operating systems  and so on.

With SaaS, there’s no concept of ‘different versions’. Everyone is using the same thing from your web servers. There’s much less worry about other programs or the operating system too – if the customer can access the web, then they should be able to use your software. So you can provide excellent support for a SaaS product relatively cheaply.

Going for Gold
Now let’s step it up a gear. You’re not content with growing slowly, you want to make money a bit faster. So you invest some of that profit in sales and marketing and start to bring in new business. Let’s assume you had £100k of income in your first year. In your second year you’ll have that £100k again (your customers are paying you on a subscription basis, remember?) plus any new business you pick up in year two. So if you brought in £150k of new business in year two, you’d turnover a total of £250k in year two.

Now on to year 3 – first you’ve got your guaranteed £250k from your previous years customers. plus any new customers you pick up in year 3. And on and on it goes.

How attractive is that? OK, I’ve simplified it a little. Some of the customers will drop off and not renew. You have slightly increased bandwidth costs for each user. But these are negligible factors.

There’s also the cost of building the application/service in the first place. If you’re a techie, like me, then that’s just your own time and isn’t a big deal. Otherwise it could cost anything from a few thousand to a few hundred thousand. How quickly you’d recoup that expense would of course depend on your monthly subscription price and how many customers you can get.

Getting going
If you already run an existing software business based on the old model of software delivery. Sorry, you’re screwed. You can’t move over to this model without cannibalising your existing income (unless you went after a different market of course). Even your existing channels to market don’t work with the new model. Didn’t you feel the earth move under your feet?

If you do run one of the many big software businesses out there then you know much much more about business than I do. But I’d have thought you have a choice to either embrace this model and take the short-term grief from shareholders and the initial drop in revenue, or you can choose to bury your head in the sand,  pretend the world hasn’t changed and let new SaaS companies (and existing competitors that go for option 1) gradually chip away at your customer base until there’s nothing left.

But if you’re starting from a scratch, with some prog4ramming skills. Now is the time to start a SaaS business.

As KashFlow has grown to 10+ staff,  it costs considerably more than £1,600 a month to run. But thankfully our customers number int he thousands, not the hundreds.

So when I look up from my desk, I don’t need to worry about how I’m going to be paying everyone’s salary in a few months time. I know exactly where the money is coming from each month and I know how much money we’ll make next year if we don’t get a single new customer this year.

Unfortunately dozens of new business owners are signing up for a free trial of KashFlow every day, so in reality I haven’t got a clue how much money we’ll make next year. But I know it’ll be more than we make this year.