I sought some input from the people who do SaaS business valuations for a living and found some excellent information at Bessmer Venture Partners amongst others. This article by Ben Yoskowitz was also particularly useful.

The points I’d like to highlight are as follows.

Focus on building an application/business model that generates the right patterns of usage

• CMRR – Committed Monthly Recurring Revenue. How committed are your clients? How much are they paying you how often?
• Cash – Has your cost and revenue line crossed yet? How long until it does?
• Churn – How much monthly recurring revenue do you lose? How many customers do you lose? Why?
• CAC – Customer Acquisition Cost. What does it cost to acquire a customer? How long does it take to pay CAC back (should be 1 year or less).
• CLTV – Custom LifeTime Value. What is the average a customer worth to your business from the start to the end of their engagement with you? How can you increase your CLTV?

Some guidelines:

• Repayment of CAC: If this is greater than 3 years, thats very bad! If less than 1 year, thats good. Half a year is the median for successful SaaS businesses (with exception of course)
• Churn: Aim for less than 12% of your user base. Aim for your upsell revenue to your user base to exceed the loss in revenue from Churn.
• CLTV: Make sure that you make more off a customer over the lifetime of their engagement with you than your CAC.

These are the things that will matter most when you start trading and adding clients. Your business plan must be focussed on getting the best results according to these important metrics. Adjust your General & Administrative (G&A) and your R&D (research and development) costs accordingly. Only build the features that (ultimately) improve these figures. Nothing else. Ever.

To see more detail on these matters, go through this slideshow:

Last time I said that I was going to post about great SaaS business examples. Well I’ve been researching this topic and it is “1 million miles wide and 1 mile deep.” I decided to use less real company examples and talk more on a “principles” basis.
My favourite examples of great SaaS business are the usual suspects: Sales Force, 37 Signals and FreshBooks. These three examples cover most of what is great about the SaaS model and how good solid businesses are built using the model.

If you’d like to read up some more, here is a recent article on the top 8 performing US SaaS stocks in 2008.

Some guiding principles:

1. Great SaaS businesses charge for their service

So as not to reinvent the wheel, read this from 37 signals. In summary, sentiments like “the future is free,” “we’ll all from ads,” “VC money will get us there,” “acquisition is nirvana” are short sighted and frankly, lazy.

Online advertising is getting completely saturated. Google is very difficult to compete with. AdSense as your only revenue stream is BadSense. VC doesn’t want to hear about advertising as a sole revenue stream anymore.

If a service is valuable, clients will pay for it. If it can’t be charged, it probably isn’t valuable.

Think about that. Think long. Think hard. Don’t invest frugally.

2. Great SaaS businesses foster and maintain trust

It is a pretty scary proposition for a client to entrust your business with their valuable and confidential information. It is equally scary that the more information they entrust you with, the more locked in they become.

This is a big subject, but getting prospective and current clients to trust the service (and maintaining that trust) is a core competency of the great SaaS businesses.

3. Great SaaS businesses evangelize their value

I spoke about offering value above. Great SaaS businesses let everybody know, in every possible way, that they offer bottom-line value.

4. Great SaaS businesses segment and understand their market

A SaaS application in use will have numerous stakeholders/users. A great SaaS business understands the needs of all service stakeholders and ensures they are addressed appropriately.

5. Great SaaS businesses understand buying behavior and the current status of SaaS

See the slideshow below and jump to slide # 12. In terms of new technology/product adoption theory, the majority of customers are “Pragmatists” and “Conservatives.”

In the current SaaS scenario, SaaS buyers are “Visionaries” or “Early Pragmatists.” The good news is that SaaS is becoming increasingly mainstream, i.e. “Conservatives” will come on board sooner or later.

What this means for great SaaS business is that they understand the buying profile of their target market. For example, if you are about to launch to a target market whose buying profile is predominantly comprised of “Conservatives” or “Skeptics” you are going to have a tough time. You’d be advised to wait a while.

6. Great SaaS businesses understand that they are selling a service, not software

Buyers of SaaS are often fed up with software products. They need a business result. Great SaaS businesses understand this and sell business results as a service. The software product simply enables their ability to offer that service.

7. Great SaaS businesses improve continuously

SaaS enables the ability to make frequent software enhancement releases with minimal end user disruption and cost. Great SaaS businesses fully exploit this reality and thus give their clients a tangible sense of ongoing value.

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Next time teaser:
Next time I will continue with the “Starting Out” series and look at “Who do you start out with?” Friends, Angels? To JV or not to JV?

Full Book Chapter Plan:
The full list is available on the Upcoming Topics page.

Glossary of Terms:
Please comment if I have used any term that you are unfamiliar with or feel should be added to the Glossary page.

SaaS is a volumes business

“Your SaaS business is a volumes business…”

SaaS products are successful when they have lots of clients. Simply said, “it’s a volume’s business.” Ideas that work well on a SaaS model need to meet a fairly generic need (albeit with customizable options) and there should be a high number of potential clients.

So…

1. The need your product fulfills must be compelling

Regardless of how ineffective or inefficient it is, your prospective clients are likely already meeting the system need they currently have in some way – be it through paper, spreadsheets or legacy systems.

It is a serious effort to search for, sign up for, free trial, evaluate and decide to purchase software. The needs driving your prospective clients to go through this process must be compelling. Your product solution has to solve real world problems that already exist new or better ways.

Abstract or not particularly useful but rather nice-to-have products seldom make a big success on the SaaS model.

2. Prospective clients must be able to afford your product (and see value)

Even though typically, paid, on-demand software is charged at a relatively low monthly fee (considering that is a “volume’s business”) it is important to test the affordability of the fees you plan to charge. Even once you are comfortable that the fees you will charge are reasonable and affordable, you must test that the prospective clients will see value when paying those fees.

A helpful simple question is “will the client save or make more money in using this product than they are going to pay me to use it?”

3. Your product/solution must feasibly be “self-supporting” (“self-everything?”)

Knowing that this is going to be a volumes business and a competitive space, it is vital that, as a business, you are able to focus on the core capabilities of maintaining and improving the product.

Your product will thus need to be “self-supporting.” By this, I actually mean “self-everything.” It must be self-marketing, enable client to self-sign-up, self-provision, self-train, and self trial. It must automatically remind the client of the trial end and automatically end the trial or begin the paid agreement. It must automatically invoice, automatically follow up on non-payment and automatically terminate non-paying client agreements. It must self-support through help, FAQ’s and community forums.

If your product idea is too complicated and can’t feasibly do the above, you need to consider how all these business needs are going to be fulfilled and how those costs are going to be built into your pricing model.

If the are too many of these costs, it is quite possible that either your business/product idea must be reviewed or it is wrong for the SaaS model.

4. Your prospective clients must be frequent web users

The client interface of your SaaS product will most likely be through a web browser (or at least use web app conventions as an offline app) and thus many standard web navigation conventions will be immediately implied by that fact. Those of us who use the internet on a daily basis lose touch with the reality of how difficult it is for an infrequent or non-web user make sense of these implied conventions. They can do it, it just takes much longer and much more explanation/training.

Often infrequent-web-users will trial a web based app and comment that it “doesn’t work” but with further probing and training one discovers that the fact of the matter is that they didn’t understand how it works.

Knowing that your SaaS business is a volumes business, you don’t have time to educate all of these people. This means that being a frequent web user will be an entrance requirement to using your SaaS product.

If your prospective/target market are no frequent web users, you need to seriously question the feasibility of using the SaaS model.

Forecasts…

The enterprise wide needs (ERP systems, CRM, Accounts) are already fairly well covered by SaaS brands. I wouldn’t compete in these areas without a BIG appetite to spend both on product development and marketing.

Areas of opportunity as I see it are business to business. Anything that can enable a mobile workforce and centralized reporting remotely accessible is a good play. Systems that can enable franchises to rapidly expand are a good play.

In the current global economic climate, companies are looking for ways to cut costs and increase efficiencies. If your product can reliably achieve that for the client, you are on a winning wicket.

A disproportionate amount of the B2B SaaS products currently being built are for agencies (software and design). This is understandable because these clients are early adopters and frequent users of the web. I however would avoid building a product for this industry/market unless you have something revolutionary.

One last important thought: Before you start, do your research! Who else is doing something similar to you? How far are they? Can you beat them? How?

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Next time teaser:
Next time I will continue with the “Starting Out” series and look at “Examples of great SaaS businesses?” I will look at some of my favourites in a bit of detail..

Full Book Chapter Plan:
The full list is available on the Upcoming Topics page.

Glossary of Terms:
Please comment if I have used any term that you are unfamiliar with or feel should be added to the Glossary page.

For more on that subject, here are some useful links:

• Eight Reasons why companies still say “no” to Saas
• SaaS for enterprises
• What to ask before saying “yes” to SaaS, cloud computing
• The truth about Software as a Service
• Are you running with the big dogs?
• Software as a Service Myths
• The Three Stages of Enterprise SaaS

To look into my subject for today, I’d like to start answering this question by asking “why not SaaS?” from the point of view of a business person developing a software product.

Here are some reasons to avoid SaaS as a business/software developer:

• The development of the architecture is difficult to get right. It requires very careful thought, solid upfront and ongoing planning and an experienced development team throughout the project.
• Fixing cost, scope, schedule and quality upfront is impossible. I’d recommend fixing budget and working of a list of business objectives translated into technology features. For the techies out there – you have to build SaaS using an Agile approach. Don’t even try traditional SDLC.
• Your testing and change control has to be impeccable. Once live, any errors published immediately effect all of your clients.
• Your business model relies on large volumes of clients paying you low (lower?) fees more often. Your offering thus can not be too niche – you won’t get the volumes.
• Your product must be simple enough to be self supported (or community supported) but unique enough to fulfill a real need. This is not easy to get right.
• Because your software will be accessed by the end user through a web browser, you need to support all popular web browsers and all new versions of the browsers that are released. This is far more difficult than it sounds.
• The on-demand concept is still quite foreign to many buyers of software and this may be a barrier to securing new clients. You will need to evangelise both your product and the SaaS model while selling.
• It is still contentious that SaaS is a model that makes business sense for the purchaser, as you see in the debates in the links I provided above. Recent developments lead me to believe that this perception is changing.

If there are so many reasons not to build your software business on a SaaS model, why ever would you? Well that is far easier to answer. Simply put, as a business software owner, the SaaS model, executed propertly, affords you the following opportunities:

• Reliable and growing annuity revenue streams - the goal of any sensible shareholder.
• Income streams that grow far more rapidly than the commensurate/related expenses.
• Minimal end user interactions (which means minimal support head aches).
• A growing Research and Development budget enabling you to be continuously improving your offering and looking for new related business opportunities.
• Happy clients (because they are genuinely getting a great product/service for a reasonable price)

The SaaS model, by its nature, is an absolutely fantastic business model.

It is also a superb model for your clients, when you consider that it offers:

• A minimal upfront investment risk (which translates into a low commitment requirement before deciding to trial).
• An affordable payment structure (low, capped, monthly fees).
• Flexibility to evolve and change with the clients needs (free upgrades and downgrades)
• A model that minimizes the risks for clients associated with software licensing and ownership – man hours and expertise required for support and ongoing costs of maintaining hardware infrastructure.
• A proven software solution with a continuously evolving feature-set.
• Data stored securely offsite and accessible 24/7 from any internet connection in the world.

In many ways SaaS models do for the software industry what franchising has done for other industries.

For the vendor, it allows them to create an easy and replicable model with best practices and simple procedures for 90% of the conceivable client needs (and the other 10% are probably not really “needed”).

For the buyer, it allows them to get what they want and need, more conveniently and for a lower charge and from a proven and trusted source.

All software should (will?) ultimately be on-demand. All software should (will?) ultimately be web-based.

As a last thought, read this: http://www.readwriteweb.com/archives/saas_wolf.php

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Next Week Teaser:
Next week I will continue with the “Starting Out” series and unpack the question “What business ideas suit  SaaS?” I will look at the features of business models that have historically been successful and make some forecasts about what should succeed going forward..

Full Book Chapter Plan:
The full list is available on the Upcoming Topics page.

Glossary of Terms:
Please comment if I have used any term that you are unfamiliar with or feel should be added to the Glossary page.

According to Wikipedia, “SaaS is generally associated with business software and is typically thought of as a low-cost way for businesses to obtain the same benefits of commercially licensed, internally operated software without the associated complexity and high initial cost.”

Some key characteristics of a SaaS product are:

• Available via the web
• Product support, maintenance, enhancement and deployment are managed centrally by the Vendor
• Deployment leverages multi-tenant architecture to achieve significant economies of scale
• Deployment model is one-to-many in terms of feature-sets
• Pricing is kept as simple as possible, with vendors typically packaging infrastructure, support, maintenance, licensing, bandwidth and ongoing feature upgrades into one pay-per-use fee
• Is often designed using Service Orientated Architecture (SOA) enabling mashups and integrations with other “as-a-service” stacks (Platform as a Service (PaaS) and Data as a Service) often through a well defined Application Program Interface (API).
• First-line end user support is often not provided at all, or provided through online community forums, wikis and help documentation. Interfaces are thus developed to be extremely intuitive and self-supporting
• Many SaaS products can be ordered, immediately deployed and paid for online
• Usually a time-restricted free-trials are offered to allow potential buyers to sample the software
• Due to the Vendor requirement to “package” these products and make them “self-supporting,” the offering is forced to be well thought out and simple from an end user’s perspective.

History:

In the early 2000’s, the buzz word for this type of concept was “ASP” (Application Service Provider) and the concept gained some popularity, especially in the United States. Microsoft Exchange Server is one example of a fairly early ASP model that enjoyed a measure of success.

The problem however was that the technology was not quite ready yet. Many early ASP Vendors experimented with models of deployment delivering stand-alone software via Virtual Private Networks (VPN). This proved to be slow and frustrating to end users in many cases. Also, the early ASP models didn’t deliver well on their cost-saving promises as bandwidth and infrastructure costs soared (especially in countries like my country of residence, South Africa, where telecoms monopolization/regulation kept bandwidth costs extremely high).

What Changed?:

Technology caught up with vision, bandwidth improved internationally (in South Africa, as with  other countries, bandwidth provision was deregulated and costs have come down substantially) and the international tech community invented a new buzz word to signal a new start, SaaS!

Internationally, we saw a number of great proprietary SaaS software product successes, most notably, SalesForce.

So where are we now?:

Going back as far as 2003, at White Wall Web we have had a slogan (and a banner) that says “Ultimately, all software will be web-based.” Not too long ago, that was seen as a somewhat fringe comment and an unlikely eventuality. It may still seem quite a way off, but it is certainly more conceivable today.

Personally, I am very bullish about SaaS as a deployment model. I envisage a future where, at very least, the bulk of software is deployed on this model, accessible 24/7 to end users via web and mobile interfaces.

What is SaaS? It is model for software deployment with the most benefits for both the vendor and purchaser of software.
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Next Week Teaser:
Next week I will continue with the “Starting Out” series and unpack the question “Why SaaS?” I will answer the question,, “What are the key benefits?”and provide some real world examples to demonstrate these benefits in practice.

Full Book Chapter Plan:
The full list is available on the Upcoming Topics page.

Glossary of Terms:
Please comment if I have used any term that you are unfamiliar with or feel should be added to the Glossary page.

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