Acceptable margin for starting SaaS Business


3

We're just trying to startup a SaaS business, where the model is based around a subscription radio station. We've done the hard numbers and the licencing costs of just providing the music is 50% of our revenue. As most of the licecsing is in Percentage figures this isnt going to change much.

We are going to be selling to small business. We are looking to sell at about $99 (AUD if it matters) a month

Based on this (I know its patchy) information, what do people think of the viability. Would you enter into a SaaS business if you had to scale to 1000's of customers to make it worth your while? or would you say the margins aren't big enough?

Any thoughts would be great!

Cheers

Mark

Saas Viability

asked Apr 13 '11 at 12:24
Blank
Mark Underwood
116 points

2 Answers


5

One thing I see missing from your analysis is the cost of customer acquisition and the lifetime value of the customer. Those are hard to project until you're really well underway, but they are far more important than just the question of the margin. If the cost of acquisition is substantially lower than the lifetime value of the customer and you can prove it, you should be able to easily find investors who are happy to put up the capital to get you to 1000 users and break-even. If the cost of acquisition is higher than the lifetime value of the customer, well, no amount of investment is going to make the business work.

answered Apr 14 '11 at 11:48
Blank
Joel Spolsky
13,472 points
  • The cost of customer aquisition is a hard one. But I think the lifetime value is pretty good. I imagine that as long as our clients dont go out of business that we should have them for quite a while. at least a year, most probably 2. But its all guessing at the moment, which is the hard part. – Mark Underwood 8 years ago

3

you should really project your cost structure and account for increased (or decreased) overhead. Sometimes you will see that adding 10 customers won't cost you much, but adding an 11th one might actually cost you a lot. This will determine your viability in accordance to your margins.

One thing I don't understand well in your model is that you are saying your cost (licensing) are a % of something. That's fine, but you should have a bunch of other costs that can be fixed and that is the beauty of the SaaS model. One you buy your servers, you can go form X to Y with the same cost (I'm simplifying), so your margin would also grow on a "per customer" basis. Your variable cost of licensing is only a piece of your total cost.

Also, I would try to consider what kind of upsale or premium service you could offer that would have higher margin or could add to your revenue without impacting your cost too much.

The question is not "Can I survive if I need 1000 customers", but:

  • How much does it cost me to aquire those 1000 customers?
  • Can I upsale part of them to have them pay me more than $99?
  • How long will it take to get to a 1000 customers?
  • Do I offer a competitive pricing (or do I offer much more value than the competition)? which will determine if you are priced correctly.

Of course, you cannot lay out your entire Business plan and financial forecast here, but if you feel confident that you can survive long enough to get to 1000, and that your costs have been incorporated, and that after a 1000 customers you pump money in, then I say your margins are good enough.

Good luck.

answered Apr 14 '11 at 10:18
Blank
Antony P.
714 points
  • The licencing costs for us are the most significant. The majority of it are changed on a percentage of our revenue. Which means no matter what we charge, or how many customers we have we still loose close to 50% of our revenue straight to licences. All other server costs etc, are pretty minor compared to that. So thats what we are worried about. And there isnt really anything we can do about that 50%. – Mark Underwood 8 years ago

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Saas Viability