SaaS as a business model has existed long enough and there are compelling value propositions for Organizations to adopt this model as can be seen with the large increase in SaaS products over the last few years. This theme is not specific to any vertical but is something that can be seen across the IT landscape, although the speed of adoption across different industries have been different. No wonder, there is more and more money being pumped into these SaaS companies. Coupa, a SaaS company that I track on a daily basis for eg is trading at an all-time high valuation of $5.5 Billion and a Fwd P/E of 446. That’s incredible.
The SaaS business looks attractive but if you were to build one, what are the key components of an effective and valuable SaaS business?
- Product should be fundamental to how the business runs: A great SaaS product is something that is fundamental to how the organization functions and is relied on a daily basis. Eg: Coupa for procurement, Concur for expense management or Freshdesk for customer support. There are incremental/ value add systems that you can build, but they are always going to be a hard sell if it’s not business critical. Net result, these incremental products would never turn into a multi-billion dollar businesses.
- Easy to understand/ visible value proposition: Cost reduction, increased efficiency, productivity, sales or whatever is the core value proposition of your product is something that is easy to understand and is experienced instantly. Intangible benefits are often a hard-sell.
- Moat: How easy or difficult is it for the client to replicate the value proposition you are delivering? If it’s cheaper for them to build it at their end, then you probably don’t have a market. Or if your technology is easy to replicate, then soon enough you are going to have a very commoditized market that in turn drastically reduces your profitability.
- Shorter time to Market: You probably start with the SMB segment where the compliance, security and the complex integration requirements are much lesser and with more customers, you end up getting more feedbacks during the initial days. This is critical as early feedback helps you course-correct with minimal investments.
- Revenue model: I had previously written about how startups by tweaking their subscription revenue model can have significant cash flows, interest free cash that can drive product development and growth during the early stages. Upfront revenue collection and if it’s done annually is a great way for SaaS companies to work with negative working capital.
- Customer Breakeven Period: Can you have a customer breakeven period of less than a year. This includes all cost associated with customer acquisition and management. If you are able to charge the customer upfront annually then, you are nullifying any loss you can have with customer churn before breakeven. The longer you are able to retain your customer, the better the ROI.
- Market Share: What’s the relative market share you have in whatever market you have defined for yourself and how big is that market? The lower you are in the list, the higher your CAC gets. Momentum, customer references and WOM helps you drive down CAC as well as increase your top and bottom lines.
If you are planning to build a SaaS product or already have one, ensure you tick most of these criteria listed above. If you aren’t ticking a good number of these criteria, maybe it’s time to rethink your SaaS strategy.
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