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 – essentially 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.
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Tags: SaaS
This entry was posted on Thursday, March 19th, 2009 at 11:24 am and is filed under Cloud Computing / SaaS, Small Business, Technology, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Hate to dampen your thunder – it’s a good post but there’s a lot you’re missing out. Oracle posted their results yesterday. 46% operating margin headed to 50%. Free cashflow in 2008: $8 billion. They’re a ‘traditional’ vendor. Highest margin position ever. Salesforce.com: saas: $1 billion in revenue, profit barely tipping 0.5%. NetSuite: saas: scraped its 1st profit in 10 years.
It’s not about whether you’re saas or on-premise (you get to profit with on-premise far more quickly when measured against capital inputs), it’s about the business model you choose to employ because that dictates scaling ability. And in saas – scale matters.
Times are changing Dennis. When Salesforce.com started, the infrastructure would have cost way more than Duane’s £1600 per month, particularly given the scale they targeted. These days £1600 gets you 16 servers on the Amazon cloud and easy, almost infinite scalability at low cost. No doubt Salesforce.com will still be paying the price for legacy infrastructure and associated architecture decisions. Anyone got a breakdown of why each customer costs Salesforce £2000?
To clarify, the £1,600 figure was plucked from thin air as it’s easy for the example of 100 customers.
Good example – and its nice to see a simple breakdown of SaaS in these terms – because it’s rapidly becoming one of the most misinterpreted terms in the business arena!
@duncan – SFdC runs its own data centers. It’s got 3 of them. And yes – I know exactly why it costs them a lot – but it isn’t remotely the number you’re quoting or as simple as how you’ve got it presented. As for Amazon – be careful…low rate throughput is fine but there are data complications as you scale plus spiking remains an issue that can lose you data. The economics are not so clear cut as you might imagine.
So while it is very easy to get started, anything running at scale is not the same, either in cost or engineering.
I should add – there is a reason why WinWeb spent £7 million
That’s the theory in a nutshell – and we’re all here to prove whether it works or not!
Duane,
Nice outline of the model. We hear a lot about the reasons it makes sense for the business (KashFLow in this example) but what is the small biz customers take on Saas? Do they give a crap? are most small biz saas users early adopters? how do they differ from the big biz Saas user?
love to hear your thoughts
Ian
billFLO.com
Although Duane oversimplified the whole thing (i assume on purpose) the message gets through quite clearly. We have the same model at Paymo.biz and i personally am very confident in SaaS, however the path to success won’t be that easy. I see two major issues that look like drawbacks to small business desktop software users:
- cost of running SaaS over time. Many small business owners don’t realize that SaaS is actually cheaper than owning a piece of software (there are many reasons)
- privacy. Again, many customers see the privacy risks of using SaaS. I think companies need to be very careful with this aspect because a couple of negative examples could turn off a lot of “traditional” software customers. Although i’m a firm believer than a team of security experts/admins that work for a SaaS company usually do a much better job than in-house staff, i’ve ran into this issue with several customers in the past.
@dennis a bit bold making claims like that about Amazon without any justifying the claim isn’t it? Perhaps you would like to elaborate on these “data complications” and “spikes causing data loss” issues? As it happens, Amazon hosting is one of the most resilient solutions you can get, with data replicated to multiple physical locations in real time. As you can see here, Amazon has never lost data from their storage service: http://developer.amazonwebservices.com/connect/message.jspa?messageID=84153. It is possible for individual servers to go down on occasion as with any hosting solution, but our architecture is designed for failure so that when a server does go down other servers take over and there is no possibility of data loss.
I wasn’t talking about data loss but as it happens there have been reported EC2 losses: http://www.datacenterknowledge.com/archives/2007/10/02/amazon-ec2-outage-wipes-out-data/
I wouldn’t expect S3 losses.
I was talking about scaling resilience and the cost equation when you suddenly need to run things hard. That was one of Twitter’s problems and I know a good amount about that scenario for various reasons.
We’ve done some scale tests on ESME and while it sounds impressive to say we can run 50K users on a single souped up Linux box, of itself that’s meaningless. It’s when you have capacity problems that thing get hairy.
Then there’s the data control issue.
Amazon is fine for relatively small setups but I’ve yet to see solid evidence of a situation where I’d want to run a good sized saas solution on it.
That could easily change over time as costs fall and resilience improves.
But…that is only one part of the equation.
…and just to add a little spice into the mix, Paul Murphy chimed in on ZDN with this: “Basically, my bottom line on cloud risk is that I’ll put serious user data on the cloud right about the same day someone proves Dante’s hell a physical reality, shows that it’s frozen over, and proves that it’s run entirely by squads of flying pigs.”
http://blogs.zdnet.com/Murphy/?p=1564
We’re quality bloggers on ZDNet you know (heh)
@Dennis, thanks for clarifying that you didn’t mean data loss.
Regarding scaling resilience, Twitter is a messaging system so has very different scaling challenges compared with a CRM app. I would guess you’ve seen:
http://www.readwriteweb.com/archives/making_twitter_scale.php
With a tenanted CRM system it’s relatively easy to run servers independently of each other assuming you architect the application appropriately. Add another server and you increase capacity. Amazon supports this nicely.
Paul Murphy is entitled to his view about where his data is safest. The cloud is a rather loose term and Paul’s vague concerns would appear to apply to any service where his data resides on the internet. Is this your view also?
In my previous role I was responsible for architecture of client & investment management systems in some of the biggest UK financial companies. I’m comfortable Amazon lets me create a deployment architecture that rivals the resilience of the IT systems in most of those companies. In fact I think most startups would have more success creating a robust solution on Amazon than with Rackspace say. Amazon gives you more useful tools out of the box.
Would be good to talk some time.
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