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The Business of SaaS (stripe.com)
845 points by geordilaforge 5 months ago | hide | past | web | favorite | 248 comments



  > Businesses and investors love SaaS because the economics 
  > of SaaS are impossibly attractive relative to selling 
  > software licenses.
I would be careful and not over-generalize. The statement above is opposite of what many late stage investors think of SaaS companies. Their gross margins tend to be horrible. Some are basically in the business of being an intermediary mailbox for transferring money from their customers to AWS.

Sure, if you can charge, say $1 for processing one Kb of data, you'll love being in the business of selling SaaS subscriptions. But it's not always the case: for many SaaS companies selling more and more subscriptions means constantly re-writing (AKA "scaling") their codebase, maintaining a large and expensive ops team and dealing with ever-growing AWS bill. Some SaaS companies only have ~10% of their R&D allocated to evolving the product, the rest are struggling keeping it running and it's not cheap.

Compare that to selling a recurring subscription to a downloadable license file. Stripe is a great fit for SaaS, but TWLO will have to face a much tougher reality than MSFT had.

SaaS can be awesome, or can be hell, take it from a co-founder of Mailgun.com

Stock market seems to agree: the 1st wave of software explosion produced lots of highly valued tech giants: MSFT, ORCL, etc. The current crop of public SaaS companies pale in comparison, the new giants don't sell SaaS, they sell ads.

P.S. The billing model is very loosely related to how a software is delivered. Look at Adobe who're happily selling monthly billing plans for good old photoshop.


True which is why one of the more mature (timeline) SaaS companies, Dropbox, decided to in-house their infrastructure to bring costs down. While this was a massive undertaking that took many years, they were able to achieve it and are reporting various levels of profitability (free cash flow). Also if you dig in further to most SaaS companies P&L you'll see that infrastructure by and large isn't the biggest driver of losses, but sales & marketing is.

Personally I think companies still continue to overspend in sales in marketing and with SaaS they use a blended average of CAC which includes their organically acquired customers so that the blended CAC looks extremely low. But the reality is you are paying 10x more for "paid" customers than organic and adding an only incremental amount of growth (5-10%). I think that's where the real profitability of SaaS companies lies.


I've worked in finance for several SaaS companies and you're 100% right. Infrastructure is never the biggest cost, it's sales and marketing and most of that spend is a mystery in terms of attribution, so blended CAC is not terribly useful.


The more customers you get, the more customers you get from "organic" sources. Blended CAC makes sense from this perspective.


The amount of cash Snapchat is throwing at GCloud/AWS according to their recent IPO filings is just insane.


They are the exception for sure, but their platform also supports a tremendous amount of video and that's the real killer for them. This is the same problem that youtube had, video just consumes many times more bandwidth than doing a similar service in text (twitter), or images (instagram). So that's not surprising.

But one exception doesn't make a rule.


How would you avoid blending the cost to acquire paying, non-paying, etc.?


It’s not easy to get an exact figure but you can fairly easily split out customers who arrived via an ad vs those that didn’t. Likewise it’s easy to split out those customers who arrived via cold selling


For starters I would separate them out.

Paid I would consider traditional forms of advertising and marketing such as TV, FB, Google, ads, etc.

Organic or community driven advertising has it's costs as well but I would separate that out to a different section. This would include budgets like meetups, some conferences (though many I would actually lump into traditional ad spend), t-shirts, stickers, credits to customers, community expenses and so forth.

Then for non-tracked customers I would assume that percentages work well. Meaning if 25% of my customers come from community, then 25% of my non-tracked organic customers are from community. If 5% are from paid, I would say 5% of my organic non tracked are paid.

If you do the break out this way you will see that old-gaurd paid advertising is 80% of the cost of the entire sales and marketing function, but brings in an overall 5-10% of net new sales.

Now if you are profitable, or near profitability go for it, but if you are losing a sizable portion of yearly revenue, say 50% or more due to sales and marketing and you see it broken out this way you will immediately realize how false this spend is.

Just because something is done a certain way and accepted, doesn't mean that it's correct.


Most of the public SaaS companies around today spend a significant part of their S&M expenses on sales reps, and their associated selling commissions, not advertising and marketing. There are exceptions like Atlassian however, where they have managed to make the economics work at scale without a sales rep or any implementation assistance.


> maintaining a large and expensive ops team and dealing with ever-growing AWS bill

Set it up on real hardware with 2-3 good admins and you'll save 6x per year. AWS has its place, but it's unlikely that place is anywhere near 100% of everything. This truth has practically become a heresy, which means you can make good money by having the gumption to take advantage of it.

> Some are basically in the business of being an intermediary mailbox for transferring money from their customers to AWS.

Does this mean that you can win just by hiring one of the few people who can accomplish the terrifying task of, GULP, setting up a server without dragging around little blocks in a web GUI? :P


I don't disagree on a lot of this but I'm willing to give businesses like Workday, Twilio and Salesforce more time to develop their business before saying the market has decided.

I had to look it up, but Twilio gross margins are healthy -- 55%. AWS expenses are not really a problem for a company like Twilio, their well publicized arrangement of relying on other large tech companies is a bigger threat.


Sure, the gross margins are healthy for many SaaS companies. Take a look at the other expenses. They eat that margin, and then some, quarter after quarter, year after year.

Where does it end? Will these companies ever be profitable? I'm invested in several public SaaS companies, just following the trend...


I think that's because too many SaaS CEOs think something else mentioned in the article: "Margins, to a first approximation, don’t matter...If they’re quickly growing, the company can ignore every expense that doesn’t scale directly with the number of customers"

It makes sense in theory, but businesses don't grow to infinite size so fixed costs do matter. Ignorance of this fact drives the lower than anticipated gross margins of many SaaS businesses.


> Ignorance of this fact drives the lower than anticipated gross margins of many SaaS businesses.

It's intentional. Great margins don't matter if you don't have customers, and no VC is going to get excited about a few extra margin points on OpEx when should be focusing on growing.


Selling recurring subscriptions for software requires continual updates, and lots of customers are still put off by that model. Yes, there are a few megaliths with untouchably huge products that are sold as regular software; but how many of them is there room for in this world?


As someone building a company with the model you speak of: do you think communicating to potential purchasers via website copy that others in my industry have essentially abandoned their platforms because of lack of incentive to continue updating post-purchase would perhaps soothe some of that?


We also use this model (software subscription). One thing that is very important is that never, under no circumstance be tempted to sell perpetual licenses even if there is demand for them. If you do subscriptions you should do only subscriptions.


Thanks, that's advice you're probably giving for a good reason you've experienced, I'm assuming!

Any other insight into your experiences/troubles? How you decided on pricing, whether it had any impact on sales/sales efforts, what you had to do to support such a model?

Thanks very much for your time!


We transitioned from freeware to subscription (it's B2B), a subscription model shares a lot with freeware logistics, for example most users are in the last version. Another advantage has been to be able to add features any time it was fit, no need to save them for the big upgrade. We decided a price at the beginning (EUR 99/year) that we thought would allow us to expand our offering under the same subscription umbrella. We run several promotions to experiment with pricing (in particular a Dutch action which was very successful at EUR 29/year, that brought a big revenue spike and also many new paying customers). But even after experimenting with good results we always stuck with our EUR 99/year price point. Due to the rather low price pint, we chose not do any type of customer segmentation (all customers pay the same per user, regardless of quantity of users). We do not do promotions anymore to avoid confusing users with pricing (since it is a subscription, we want to avoid that users wait for the next promotion to renew). Curiously very few potential customers ever asked for a permanent license. We have a extremely generous trial 30 days of actual use, not calendar days. Conversion at the end of trial is high, about 30%, probably because by the end of trial, users probably found a few use cases that somehow justify the price.


No, they just won't care.

I was on a non-software forum last week where a dev was gathering pain-point information because he intended to produce software for that niche. The main feedback I remember was "just let me buy it. No f'ing subscriptions."


Any chance you can share what niche this was?


Machined-object Contract Manufacturing. e.g., https://www.milacron.com/services/contract-manufacturing/


What does the software for that industry track?


Is this really a problem?

A SAAS client of mine's operational costs are like 1% of our revenue. Ok, they're at Series A/B funding sort of size. they've started to go international and we could also quite easily do an instance per country if we wanted, though I don't know what sort of pain that might cause.

Running ASP.Net/C#/Azure. Azure's a bit of a nightmare, would be running much better/cheaper on a dedicated server in my professional opinion (shock, horror, yes, I said it, cloud is a bit of a con).

I've spent 2-3 weeks per year "scaling" the code, which was written by other people who in some ways didn't know what they were doing and were trying to make it too much like a SPA which resulted in lots of ridiculous, excessive dupe calls for data and over-complicated code. After my last round of optimisation I doubt they'll need to scale up for a couple of years now, the CPU was basically sitting less than 20% and DB was about 40% even in the crazy Xmas rush, and we were on standard tiers (compared to the year I started where they had to turn up to premium a couple of times with 10x less users).


Isn't this more a problem of billing than of SaaS in general?

But yes, I recently read that games make more money in general than even movies, books and music and most of them don't have subscriptions but one time payments.


It has nothing to do with billing. I was just pointing out that the second 'S' in 'SaaS' means "service" and once you get into services your margins often go down, that's why I (and other folks I know who've done SaaS at scale) disagree with Patrick on "economics of SaaS are impossibly attractive". I am willing to bet that Splunk's margins are way better than Loggly's.

Moreover, if you're smart & lucky and you manage to find a large niche with good margins running SaaS on AWS, Amazon will launch it as a service. Mr. Bezos is around & watching you :)

[EDIT] Besos -> Bezos :)


Not to be a jerk by pointing at a innocuous typo... but "Mr. Besos" put a huge smile on my face. Especially since "besos" means "kisses" in Spanish.

Mr. Kisses sounds even more ominous!


Let's just go with Besos from now on.


All AAA games have either micro-transactions, additional purchasable content, or both


I seem to recall seeing a report recently that Activision-Blizzard made more money from micro transactions than non-MTX revenue last year.


The payment model used in Starcraft 2 - a ancient game at this point - is sophisticated. A good illustration of the old game-economics model fused with the new. Oldest single player content is free; multiplayer is free; newer content and cosmetics are purchased in-game a la cart.

Instead of paying $45 one time, you might spend $120 over the course of a few years.


I suspect that will include game time tokens for WoW that can be then sold for ingame currency or used for gametime.

They also basically converted a big chunk of their subscribers to pure mtx players with that move further muddying the signal.


They also own... King was it? One of the big mobile companies, and I think over $1 billion in MTX revenue was just their products.


I think those are great points in where the underlying business model could have underlying cracks. My take is that SaaS has desirable features in the current age of agile product development and data-driven business decisions. Selling an Oracle database is a bit like going door-to-door to sell vacuums. Ultimately, it is hard to gauge product adoption, CAC, etc. with a licensing model at first since you aren't selling a $5/month per user solution. The Oracle database could actually scale better as a business model as once the customer is set up they can move to the next sale versus always battling how much it costs the company to maintain the service. However, in this current day and age, it takes a little faith to run this model versus one that has daily performance metrics from the onset.


Yikes, that was the best article on SaaS that I've read all year. So much great information.

A few things jumped out to me as off:

> Conversion rates of low-touch SaaS trials with credit card not required:

> 2%+: extremely good

Really? 2% seems awful. If a company signs up for your trial, they must have a problem they're trying to solve. If you don't solve 98% of peoples' problems, it seems like you have a problem getting people engaged with your product.

Our (bootstrapped low-touch B2B SaaS's) trial -> paid conversion is closer to 8%. This doesn't feel "extremely good". I think we can do much better.

> Virtually no low-touch SaaS business achieves net negative churn; their churn rates are too high to outrun.

What about Intercom and Front? Are they just outliers?

I would guess that this is actually true, but only because most low-touch SaaS business don't have scaling pricing - they have fixed plans. If you have pricing that scales with usage/value, you'll make much more each month from expansion revenue.

Overall I loved the article, and wish I could have read it a year ago before we launched our SaaS company. Thanks patio11 and Stripe.


The article doesn't mention this but if there is a freemium component to the product, a 2% conversion rate is actually not bad. Not great, but not bad either. From what I've seen, a 3-7% conversion rate would be quite good for such a product.


> Really? 2% seems awful. If a company signs up for your trial, they must have a problem they're trying to solve. If you don't solve 98% of peoples' problems, it seems like you have a problem getting people engaged with your product.

Also think about how many of those signups are for "products" that never get delivered. Some side project that is thinking about charging and the dev never bothers implementing, some startup is thinking of switching from per-client contracts to a self-service model and either doesn't make the switch or dies/gets acquired before they manage it. None of those situations are Stripe not meeting someone's needs, and a single developer can create an arbitrary number of those trials throughout a year.


The article isn't talking about super-early-stage SaaS, it's about SaaS in general. While 2% might be good for a just-implemented product, it comes off as poor for a mature one.


There's a big gap between someone at a company signing up for a trial and them getting enough convincing leverage to get the company to consider that seriously.

All too often someone at the company is getting their problem solved (possibly by the free/trial plan), but they aren't at a position where they are able to drive any purchases whatsoever for that company.


Well, I've had my little SaaS up and running for about 6 weeks.

- The landing page gets about 30-70 hits per day (excepting the occasional spike) -- how many of those are bots and crawlers, I wonder?

- I've had a grand total of FIVE (5) trial sign ups.

- No buyers yet

- My linode bill is currently about ~$120/month.

- Still within the free tier on S3 and Mailgun.

- You know, when I'm the only one using the app, I don't place much stress on the infrastructure.

Now, I can't really say one way or another if I'm getting to that 2% because I'm just not getting enough trial sign-ups :)

EDIT: Oh, yea, link for the curious: https://www.contabulo.com

Bah, I've posted it here before.


I can help you increase your visit-to-signup conversion rate for free, if you're interested. Just soft launched my own service (www.leadnexus.co), where I will split test your signup forms to find more effective options. Your volume might make it a little tougher to optimize, but I bet I can improve on that ~0.3% conversion rate for you.

(That goes for anyone reading this -- happy to see if I can help, to test out my own idea. Not ready for a bigger announcement, but ping me via the site or travis@leadnexus.co if you want to give it a shot.)

Link - https://www.leadnexus.co


Nice site :)

Might want to fix this passage:

> We use an emphasis on optionality, machine learning, and a dedicate to results to get you more users and leads. We don't want you to pay us for unless we improve your results.


Good catch, thank you! I've got to update the copy tomorrow, will make a pass through this as well.


Why is your linode bill so high with so few users? I see a 32GB plan is $120/month. Do you really need that?


1. App Server (all my Clojure services... and the one transient service written in golang)

2. Postgres (Master)

3. Postgres (Standby)

4. Elasticsearch server (yea, only one right now, you know, few users)

5. One linode running RabbitMQ

6. The linode running NGINX that sits in front of the app server and does all of the reverse proxying

Also,

7. The linode running the marketing site (wordpress).

I know, I know, I'm a nerd and just couldn't help myself with the architecture. Hey, at least it should be fairly scalable.


Don't need the standby server, just use automated backups.

You also don't need the linode running nginx, with so few users put it on one server.

Finally wordpress should be $5/month or less.

Right there you could drop at least $15 / month.


$15 / month.

Kind of not even worth thinking about when you're a developer and should be internally billing yourself for $100/hour+.


Fair, what I decribed should reduce overhead as well (less nodes = less complexity typically).

Also when you're starting something you can't bill yourself anything mentally. Else you'd go out and be billing someone else, you'd likely make more money. In part cutting costs is important because it's actual savings, i.e. imagning billing yourself doesn't produce real money.


Hey, my day job doesn't pay nearly that much :)


Consolidate that all down to a single server and save your configurations in case you ever do get customers. There’s no need to be wasting $120/month when you literally have no customers at this point.


I'd disagree. Optimizing infrastructure costs is the last thing you should be worried about at the start. Your time is far, far more valuable. If it works, leave it alone and spend your time on product/sales/marketing.


- Infrastructure size correlates with labor required to keep everything running. It's not a perfect correlation, but keeping things small at the beginning usually saves a lot of time.

- Maintenance costs will be a limitation on how many different experiments you can keep running at the same time. If you consolidate everything on the same machine, and still has 98% of the machine for the next experiment, you will keep your first one running even if it has low profitability. If you need $120/month just to keep it running, you will be tempted to close it down after any new idea appear.

- You are assuming that the OP lives in a developed country and has a well paying job there. You are also assuming he has no risk of being unemployed for a couple of months.

- All that is probably dwarfed by taking a couple of hours a day for reading HN. So I should go back to my project and stop thinking about unasked advice :)


I use this app myself. Worst case, if it fails as a business I open source it and continue to use it myself (after consolidating onto a single host just for myself).

And I'm in the US and not going to run out of money assuming I can keep my day job :)


He has 5 trial signups after 6 weeks. Let’s be realistic here. His time is literally valueless because he hasn’t made a single sale.

Better to save money and expand if and when a paying customer shows up.


$120/month is a drop in the bucket. You need to look at the opportunity cost. His time is worth over $100/hour and better spent on other things (features, marketing, whatever..)

If he gets a ton of customers, he'll need to expand anyway and will waste even more time setting things back up.


Well, you know, I'd like to think my problem is sales/marketing and not product.


Maybe you know it, but reading your comments it looks like you are treating sales/marketing as an afterthought.

For running a successful business, I think you should try to always have the others in mind when you work on one, because that’s how you can find product/market fit (otherwise it’s mostly luck, and/or you had perfect hindsight of your market).


The value of his time is that he can use it to figure out what customers will actually pay for.


You could containerize all of these services and run them on the same machine.


I'd advise against single machine container deployment. You'll hit big problems the day you need to horizontally scale.

If you're going to dockerize, at least spread things over a two node swarm so you find these issues early.


A quick glance at your site, and I left with the impression that you're a more corporate version of Trello. Right now Trello serves our needs perfectly for free, so what's the value add in signing up?


Gah, I get that. It serves a different purpose and I wouldn't think it's really in competition with Trello.

Perhaps a screencast/animation showing the product in action could demonstrate its not-a-Trello-clone-ness better than still screenshots.


Are you more in-line with Confluence, as a place to build a database of knowledge in the organization?

This is purely my opinion, so please take it with a large grain of salt. I'm not a fan of videos and won't last long enough on a site to sit through them unless I've arrived there from a referral (there is too much software out there that does the same thing, so time is at a premium). I'm more of a fan of descriptive workflow/image showing what the software does and keeps the value prop simple.

As an example, this marketing site impressed me greatly and I actually took the time to read through the different features as it was easy to follow and I didn't feel flustered by each of the feature explanations: https://www.contactually.com/how-it-works

My only gripe, there is no cohesive single blurb explaining how all these features fit together in a complete package. Their tagline at the top is weak, but visually they've nailed it.

Also, having to sign up for a demo kind of sucks and slows down the process of me getting to try out your product to evaluate if it meets my needs. I'd love for our industry to move towards a "here is a sandbox, have fun for a few minutes" model which would be completely painless for folks evaluating the tool. After a couple of minutes it could nudge you to sign up for a full trial account.


I'm not in your market, but your product looks pretty interesting.

The free trial is fairly prominent on your home page. On your pricing page, all of the free trial links are below the fold for me: https://imgur.com/a/4qsaf

You might want to move the free trial buttons higher, maybe right below "How much does Contabulo cost?"

Also, you can put cost in lowercase.


Gotcha, thanks.


I find your pricing page a bit confusing (could well be me though) - I'm used to SaaS pricing being per-user while you are advertising 'packages' that actually look quite high but aren't really when you calculate the per-user price.

e.g. Maybe replace $29.99 for 10 users with $2.99 per user (with a minimum sign up of 10 users)?


Hmm... you might be right there. I thought packages would be simpler (and I know basecamp charges a flat $99 - I'd be afraid of large enterprises coming along and placing more than $99 worth of infrastructure costs on me).

I know Jira, for example, has a low rate package for the first 10 users (basically like a paid trial), and then the pricing switches to per-user and it ramps up quickly.


Maybe A/B test it or something - I guess I take a very simplistic approach where I see the numbers on the page, assume they are per user and the run away before reading the small print.

Good luck with the service!


> assume they are per user and the run away before reading the small print.

LOL, that could be a problem. I could at least draw attention to the fact that these are packages and NOT per user pricing in a more obvious way.


My two cents: make it easier for people to see know what it is.

I'm not entirely sure from a brief scan - is it team wiki software? Is it sorta like trello cards but for archival/searchable org information?

As someone who is actually looking at team wiki software for a couple startups and nonprofits I'm helping I can tell you that my threshhold for signing up for a trial (even no CC required) is pretty high so don't let that discourage you.


> is it team wiki software? Is it sorta like trello cards but for archival/searchable org information?

That's basically it. The idea came to me after I had become frustrated with enterprise wiki/KM software. At the time I was being forced to use Liferay, though I've also had to use Confluence, MediaWiki, and Sharepoint (the worst thing in the universe) in a corporate setting, none of which I particularly liked.


I’m currently looking for a team wiki solution (team of 3), but I wasn’t sold by your landing page.

Here are some things that went through my head:

- I don’t like the graphic design

- evaluating if this is good will take us more than a month

- I’m worried about lock-in. If, after a few months I discover this isn’t for us, do I need to keep paying not to lose my data?


> - I don’t like the graphic design

Of the landing page or the product itself? The landing page is an easier fix :)

> - evaluating if this is good will take us more than a month

That's quite possibly true. Wikis take time to populate and only become useful if people commit to doing so. The problem is how to balance:

- Giving users time to evaluate the product

- Revenue

> - I’m worried about lock-in. If, after a few months I discover this isn’t for us, do I need to keep paying not to lose my data?

Valid point. I do plan to add a data export feature at some point. I'm wondering what the most useful format for such a thing might be. CSV? XML? JSON? SQL?

Conversely, I still haven't thought of a sane way to allow for a mass data import... but I'd like to.


I was talking about the graphic design of the product screenshots.

I'm personally not a fan of time limited trials -- I think feature or usage limits are better, especially when you don't have any users yet, and you need people to use the app and give feedback...


Currently the trial is limited to 5 users and something like 100MB of file storage. I was actually more worried offering a free-tier would result in people abusing the service (i.e., using it to store/share illegal stuff).

However, just between you, me, and the internet, I actually haven't enabled the logic to lock trial accounts out at 30 days. Because I'm still unsure about it.


"Stop losing your mind" is clever but hard to grok.

Maybe "Stop employee brain drain"? That would at least be relatable to people who have heard the phrase brain drain before.


This product has a subset of features from Drop-box, Trello and Instagram?


I don't know about Instagram (haven't used that much), but I'm shooting for (long-term) a card-based, simplified replacement for tools like Confluence, which I find overwrought and difficult to use.

It uses cards, so I suppose it superficially resembles Trello and similar agile board-esque tools, but it definitely has a different feel to it.

I actually got the idea for the basic layout from Pintrest (I originally had a masonry-like layout to the cards, but switched to CSS grid -- makes sorting/searching/scanning for something specific easier, IMO).


How are you marketing the product?


So far:

- Get listed in any/every saas (esp b2b) directory I can find (haven't done producthunt yet, though).

- Send out cold emails (not a lot so far). I'd start making cold phone calls if I wasn't sitting at a day job during business hours every weekday. I could try postcards..?

- Post to online formus - kind of like I'm doing here :)

I'm really trying to avoid resorting to PPC ads, but it might be time to do that.

I'm also thinking of making it free for academic use, just to get some folks using the product and talking about it.

Also, the thought to find a partner who knows bizdev/marketing/sales has occurred to me.


Thanks! I think 30-70 visits per day without paying for them is quite a lot after six weeks. I'm in a similar situation, working a day job while trying to get something off the ground. Right now I'm just experimenting with ideas and trying to learn as much as possible.

I think paid ads is a pretty good approach to validate the product and copy, even if it's not a viable strategy in the long run.

Making it free for academic use makes sense in more than that sense. If you're lucky you might get a .edu backlink from it, which is valuable for seo.


Site is down btw


I think y'all managed to crash my wordpress site. Rebooted :)


Yeah, that's the one part of the article that seemed off to me. For my low-touch, no-credit-card-up-front SaaS product we get about 25% trial-to-paid conversion rate. I think it's possible we're above average, but we're not doing 10x better than "extremely good" peers.

Maybe there's just so much variance that it's impossible to give a good benchmark, but even still, 2% seems low.

I also suspect that marketing has a lot to do with it. A company that's much better at marketing than product will be better at getting someone to sign up for a trial and worse at converting them, so maybe their numbers would be down in the 2% range. I feel like I'm the opposite (bad at marketing, but pretty good at product)


Your numbers are great, and congratulations. That said, I will guess that you are leaving money on the table by not having a wider target audience for your marketing.

Also, the idea that a company is “better at marketing than at converting” isn’t really the correct way to look at it. Basically the math says that you want to keep increasing the width of the net you cast as long as it is profitable. In some cases, you will find a profitable group to market to, but the reasonable conversion rate for that market (i.e., people who end up loving or product) is just naturally lower than your high-conversion group.

As a simple example, someone may have a very technical finance newsletter that they sell to finance professionals, and they covert that group at a high rate (and a high price). This newsletter can probably also target HNW individual investors profitably, but they will not likely have the same conversion rate.


I think the 2% metric refers to all users from top of the funnel to paying customer. I've always found the metrics in this deck helpful: https://www.slideshare.net/totango/2012-saa-s-conversions-be....


That would make more sense. But then it's weird that for credit-card-required the conversion rate is 40-60%. That's definitely trial -> paid, not visitor -> paid.


> Conversion rates of low-touch SaaS trials with credit card not required:

> 2%+: extremely good

I think that is the percentage of website visitors who eventually become paying subscribers. Eg. 10% of visitors sign up for a trial and 20% of those trial users pay for a subscription at the end of their trial period.

Patrick - can you confirm this?


Then how come for credit-card-required he says 40-60%? That must be trial to paid.


I do not have lot of experience in SaaS. I do have experience dealing with conversion rate in ecommerce. I believe you usually cannot compare conversion rate across different businesses in different markets. Comparing SaaS businesses in different markets is like comparing apple and oranges.


> If you don't solve 98% of peoples' problems, it seems like you have a problem

Nah, great products are about focus. You definitely don't want to scope your focus as "98% of peoples' problems."


Not 98% of people... 98% of people who had a problem that they felt signing up for your trial would solve. It's not like trial signups are coming from random people across the globe.


I've been following patio11's blog posts since way back in the Bingo Card Creator days, and he's part of what inspired me to start my own SaaS. I hope his gig at Stripe is good for him, because I think he's supremely well suited to the role of 'teacher' and I think posts like these are great (even if they are part of a content marketing strategy for Stripe)


100%. Stripe Atlas and Increment are some of the best examples of content marketing I know of.


Do your know if Atlas supports LLCs yet? I think when they launched they only did C-Corp.


We don't support LLCs yet.

We ship first and then announce dates because down the other path lies disaster, but LLCs are a great way to incorporate many tech businesses, and Atlas aims to incorporate most tech businesses.


Atlas is starting to create a really vibrant community. Matt Richman joined the team recently and is spearheading events, a Slack channel, Q&As, a weekly newsletter highlighting the community, and more.


What's `Increment` ?


It's a publication by Stripe on engineering: https://increment.com/


Can you give some info on your SaaS? Any tips/hints/tricks? I'm always looking to hear stories from people who have shipped a product. Keen to make this year the year I create something small.


Try to take "The Build a SaaS app with Flask" course on Udemy:

https://www.udemy.com/the-build-a-saas-app-with-flask-course...

I found it very well made and you might ship a simple SaaS within a week, including Stripe subscription. You'd also learn about Docker deployment there. Themeable using Twitter's Bootstrap as well.

Now just get an idea for a profitable offering and you are golden! ;-)


Hi,

Course author here. Thanks a lot for posting this (and for signing up).

But, it's worth noting that if you buy the course on my platform at https://buildasaasappwithflask.com/ there are additional perks you won't get on Udemy.

For example I'm in the process of adding a new bonus section to the course that goes over building RESTful APIs with Flask. I've already released the source code and 1 video for it on my own platform but this will never make its way over to Udemy.

I'm going to be adding some front-end related bonuses too (only on my platform). Plus you get better support and I'm even thinking about doing things like recorded office hours.

If you don't want the bonuses / updates and only care about the cheapest price possible, please use my Udemy link[0] below for $10.99 because otherwise Udemy takes 50%. I don't want to sound like a complainer, but yeah, it took me 4 months of real life time and years of experience to create this course. I can't afford to keep making courses on Udemy when I see $3-5 per sale.

It's also worth mentioning those Udemy "discount tricks" are out of my control. I can set the price to anything within reason, but ultimately Udemy pushes courses out for $11 all the time. It's partly why I'm looking to remove all of my content from there in the future, but building my own audience is a long process. :)

In either case, any support is much appreciated. Thank you in advance for anyone who signs up.

[0]: https://www.udemy.com/the-build-a-saas-app-with-flask-course...


Found the course very interesting and it's something I intend to build upon. However, I've done similar stuff with rails since it has more batteries included and found it easier of course.

However, this comes to mind: https://elsyms.com/the-art-of-over-engineering-your-side-pro...

This was followed by a discussion on HN which a lot of people enjoy over-engineering side projects because they use it as a sandbox to learn or test different things, and I relate, so I was looking for as much material on including as many buzzwords as possible on a saas app/business/tool set(microservices, kubernetes, docker, UI frameworks, mobile app, graphQL, whatever else is out there), I'm pretty sure I could get each piece from different sources, but is there someone who covers overblowing everything? Or maybe one could build a curriculum out of several different online courses?


Thanks a lot for signing up.

In your case, I think you're best off learning each of those things from separate courses / learning material. Mobile app development and Kubernetes are simply not related at all.

This Flask course focuses on building a classic web app using server side templates. It happens to use Postgres and Redis while also performing background jobs with Celery.

To me that's the bare minimum for building a web app with Ruby or Python. Web app + DB + background worker + sprinkles of JS on the front-end. We use Docker Compose to get it all running because the alternative is rolling your own Python environment from scratch which is IMO more time consuming than using Docker.

That's also a good article you linked and I agree with pretty much everything they wrote.

I think it's more important to ship your app than try to incorporate every buzz word for the sake of doing it. I'll admit, sometimes learning new things is highly motivating but at the end of the day, the tech wins REALLY need to be there for it to make sense.

For example I choose not to use Kubernetes in production because 1 server deploys with Docker Compose is very easy to reason about and it works well, even for decently high traffic. I treat ops like I do code refactoring. It's important to get something working, and if you ever get to the point where it becomes a problem, then refactor.

The interesting thing there with ops is, if you have a SAAS app running with 800 customers and 50 of them are on concurrently, do you really need a self healing auto scaling Kubernetes cluster on multiple regions?

Probably not. Those 800 customers might be generating you $49 / month each or $39,200 per month in revenue and something like that could be running on a single $40-80 / month server with a Flask set up (or even Rails for that matter).

In my mind, I'd rather spend my time figuring out how to grow from 800 customers to 8,000 and even then you could probably vertically scale your server, but at this point you're rolling in so much cash that it's all irrelevant. You could just pay someone $100,000 to fix your scaling problems over the course of a few months (without outages) and continue growing your business.

Basically, front load your time in making your product really cool and successful, then invest the time (or money) into scaling when you need it.


"...front load your time in making your product really cool and successful, then invest the time (or money) into scaling when you need it."

I agree 100%. ~premature optimization is the root of all evil~


I understand your points and somewhat agree with them, and it's great advice for people who want to build a product on the side.

However what I meant is, what if building and iterating is the goal, not the means to the product? When you're building a SaaS app you have to worry about market fit, sales(as the article talks a lot about), if you're not concerned about finding users and growing, a side project app can be a great way to learn and show knowledge.

Perhaps the classic web app with server-side templates is the quickest way to launch an MVP, but what I want is a way to build something integrating as many different things as possible, a lot of companies will want to see your GitHub, if you can present a largely-complex yet well-designed application where you can showcase front-end development, backend APIs, containers and what not you're one step ahead.

I want a sort of sandbox to play with, not an actual product, would be interesting as a multi-part series course(start with simple web app, keep iterating, separate web app from server code, remove bootstrap or other UI kits in favor of self created styles, incorporate mobile, watch app, whatever you can think of. This could be a good exercise in writing maintainable applications.


Yeah, I've read your blog post recently why you are quitting Udemy and am sorry about it as I enjoyed your course very much! I guess Udemy's only way to stay afloat is to push the price as low as possible to attract more paying customers all around the world (given they have competition). It's tricky to figure out a good business model for both platform and course providers; probably you could consider keeping simpler parts of your course on Udemy and then suggest getting advanced courses on your own platform? You leave the most problematic users on Udemy and get only the dedicated ones. I think in the future it will always be some version of freemium; free to get your course known and premium to make some money.


Yep, my long term goal is to not use Udemy, but in the short term, something like you mentioned is how I plan to move forward.

It's going to be tricky to find a good balance (the bare-bones Udemy version still needs to have high value), but it's doable.

I have a lot of ideas this year for new content and I'm going to experiment with paid courses, free courses and even not putting some courses on Udemy just to see what happens.


Thank you very much for taking the time to reply and also in giving that link - very much appreciated. I'll look at your site and the Udemy one and weigh up what's best for me at the moment.

Also interesting to hear a creators side of Udemy. I've used Pluralsight before where you have a set fee for everything. I wonder if something like that might work better for you as someone authoring these courses?


It's worth noting that the course description page on my platform doesn't mention the new bonus RESTful API section yet. I was going to update that once all of the videos are recorded. That's on my short term radar and it's what I'm working on for a few hours a day as we speak.

Pluralsight is ok but they are only interested in very short courses in a tech space that isn't already crowded with content. That makes sense because they are a membership site where the perceived value of individual sales isn't that important. Where as on Udemy, longer courses are considered "better" because each course is an individual transaction and a course with more content is perceived as more valuable (even though I don't technically agree with that, that's what their data shows).

This Flask course is about 10 hours of video for reference. Some of my other courses are in the 3-5 hour range.


Interesting, I think PS have at least a few long courses. I'm sure I've seen a few in the 10 hour region. It's been a while since I browsed about looking for something interesting though.

I'm thinking I could do 10 hours as an hour or two a day over a few weeks. I need to decide if it's the tooling holding me back or the MVP. Easy to focus on technology, pitting this against that when really, anything up and working is key!


I'm not too close with PS but the last time I talked to their content director they mentioned wanting to focus on shorter courses and much preferred a bunch of short courses that are loosely coupled but still related vs. 1 longer course.

Maybe that's something they are pushing for moving forward.

For something like this Flask course, I've had people tell me they cranked through it in 1 day at 1.5x speed, and others have taken it multiple times over the course of a few months and still reference it a year later.

I think it really depends on your level of experience. I'm a big fan of "doing" and while the course does have a lot of watching, there are self guided homework assignments to make modifications to the code base (they are presented as real life feature requests).

If you did all of the assignments, there's probably 40 hours worth of content to go through, but those assignments are really your chance to get your hands dirty and start practicing what you learn.

A lot of people also build up their own app side by side while watching, which is a great way to follow along if you already have an idea. It takes longer, but IMO the goal here is to become a solid developer, not rush through it and do the minimum.


Just used your link to get the course. It can't hurt to get exposure to alternatives and broaden my horizon.

Thanks again for your comments and you discount link!


Cool. Good luck with the course and if you have any questions, feel free to email me or post an issue (details are in the course).


Given that it was only $11.99 (from $99) today - I just bought the course for the heck of it. Great suggestion - thanks!


Keep in mind, most Udemy courses are just like that. They "cost" around $100-$200 dollars, but are all basically permanently priced somewhere between $10 - $15. The price usually changes every couple weeks or so too.


There must be laws against this sort of practice, right?

Maybe there are clear loop-holes.


The author of the SaaS course I mentioned ran away from Udemy because of this.


Indeed. Btw, would you mind updating your Udemy link to use the one I linked in my previous reply?

I'd really appreciate it.

Edit: I see you updated it. Thanks!


It's always $10. It's a trick udemy uses (always on sale)


Thanks for the link to that course. I'm a seasoned .Net developer and would like to explore .Net core more, but this would add another skill set and a different approach to solutioneering.


Oh wow the timing of this info.

Purchasing this for a saas idea of mine.

Funny i was meaning to learn flask the right way


Can I ask what you are looking for in terms of stories? Sector?

I'm a B2B guy - so I never build anything until I have ~1M~2M/year in soft commitments. Then as I build it, I try to get the soft commitments to sign-off on early purchases (at a discount).

Usually - where it gets hard - is customer support if the "B"s you are selling into have a lot of employees that need a lot of handholding. That is a 24x7 hell that you don't want to deal with (but that I don't know how to avoid).


At the moment I'm leaving myself open to any good oportuity that comes along. I have a feeling B2B would be easier however this is only based on my assumptions.

I'll not be in the position of getting anywhere near those figures you shoot for and considering this will be my first, I'm keeping my feet firmly on the ground. I've just spent all my career to date (15 years +) building products for other people that I feel I know enough to do my own. Again, it all comes down to finding that need. This is where physical networking and schmoozing pay off, sadly not my forte!


I hear you. I had a pretty amazing job at Motorola (remember them? :-) ) when I moved back to the US from Japan. They wanted me to run around the world (on their credit card) to figure out what business they needed to be next.

I found one. They didn't get it. I ended up quitting: "Fine - I will do it myself".

I remember the first meetings I had a 6.30am or 7.00am at breakfast places with VCs... They would listen and then (essentially) pat me on my head and say: "You're a nice boy. Go back to being an engineering cube-monkey".

It was so frustrating. I did not know what I was doing. I was a fairly competent engineer - but I did not know the code-words for the VC-world or the business-world (and there is definitely a tribal language).

Finally - mostly by luck - I found a guy to partner with. We ended up raising $100M, before we got caught in the back-wash of the dot-com implosion (we weren't a dot-com, but it didn't matter).

Now - I know how to speak their language to them. But I will say: It's hard. The only way to learn is to get into it. Go try to sell. Fail. Get dirty. You'll figure it out.

I believe in you! :-)

EDIT: I do remember this. This was the 90s, but I remember that I pitched customer-types and investor-types about 2000 times in about 350 days (a year). I am an engineer, not a sales-type, so this was uncomfortable. But I updated my/our pitch deck after every meeting. You do get better with practice. It sounds cold, but I would say: "Hit The Road".


Can you provide any links or books that'd provide guidance on speaking "their language"? Seems like a wonderful opportunity to educate. I'd love to learn more as someone that tried to raise money, albeit from a smaller sample (~50 engagements), and failed miserably.


That's a great question. Let me go through my collection and see if I can find any that might provide guidance.

I found that it was like a fraternity, though. I only learned it by hanging out with them. Kind of like how doctors call bruises 'hematoma's. They all know what it means, but it wouldn't occur to us normies to call it that.

If that book doesn't exist, maybe somebody should write it!


Assuming you believe you aren't able to secure commitments >$1M in publisher cash for that book, then?


Does that exist for tech books?


Unless you're a best-seller, swinging a deal like that's hard - in any genre =]


Thanks for your posts, very encouraging and all good advice. I'm going to booststrap for the first one. As you say, try > fail, try again > fail, try yet again > modicum of interest.

Really is good to hear your words of encouragement.


Seriously - good luck.

IF I knew then, what I know now - I would be too afraid to start. But all progress is made by people who are not too afraid to start. I wish you all the luck and fortune in the world.


Not the op, but any chance I could ping you for some advice on this soft commitments stage and your approach?

edit: My details are also in my bio if you want to shoot me an email.


Ditto - be interested in this side too. If you don't want to post to all my details are in my bio. Fascinating to hear how this area is conducted.


I would be interested to learn more about this, though I suspect that this approach is actually harder. From my experience companies will not even bother to try your product unless you're already selling to consumers or other companies. You really need some deep connections in order to get anything started with a company before you have a product.


Connections certainly help but aren't required. You need grit and a solution (or an idea of a solution) that's solving a pain point worth paying to alleviate. Ideally 10x better and cheaper than what's currently in the market. At first, you will be the salesperson and you have to realize that comes with a lot of rejection.


I'm taking 30x500 from Amy Hoy and Alex Hillman. They are in patio11's orbit. It's an expensive class and would only be worth it if you are really willing to commit. They have some other less expensive products (Year of Hustle, Just F$&*% Ship) that you can use to dip your toe into their methodology. Look up their blog "Stacking the Bricks". Not affiliated in any way, just a fan and appreciative customer.


As someone who has looked at the course also, I'd be really interested in hearing your thoughts on the class. I'm quite sure it's all good stuff, but like all things only really hear about the success stories. A genuine appraisal of the coaching, course materials and time involvement would be really, really interesting.


I’m keeping a journal as I go thru the class that I plan to publish at some point. I’ve just gotten to some meaty parts and I can say I’m impressed, but you’re right, I’m not a success story (yet). We will see!


I'd be very eager to read whatever you post. My contact details are in my bio if I can be cheeky enough to be remembered when you do publish!


Just made a reminder note to do so! As it turns out, you’re squarely in my target audience, as “a software person with hardware ambitions.” :D Will keep you posted.


Hey Hey! intriguing...

Feel free to get in touch if you want a sounding board. As I get older I'm more concerned with being useful, so I'd be happy to be a sounding board/alpha tester.


Here's a great community for just that: https://www.indiehackers.com/

Coincidentally, Indie Hackers was acquired by Stripe via patio11.


I work with Courtland and Channing at Stripe, and am privileged to do so since we share substantial confluence of interests, but I don't believe I deserve any credit for that acquisition.


> I've been following patio11's blog posts since way back in the Bingo Card Creator days

Great blog, but part of me finds it sad that such an intelligent person spends a huge chunk of his life working on creating Bingo Cards.


While running Heysan (YC W-07) we were having a hard time hiring; startups were a hard sell back then, and given we were building a product aimed at feature phones it was harder still to convince folks to join. We faced a meaningful decision: whether to buy a subscription to a product or build it ourselves. The notion of SaaS clearly existed back then, but it had not yet developed into what it is now; it was more akin to buying software licenses per CPU than the sort of products and pricing that we have now. Also, pertinently, I was a young and inexperienced CTO who had no real framework for how to approach this problem, so I took it to the board, the answer was resounding: pay for it.

In 2011, while deeply ingrained in converting justin.tv -> twitch.tv, the same sort of decision came up: should we build our analytics or should we buy it (mixpanel in this case). This time it was obvious: buy it.

In the time from that first decision and the later decision at Twitch I was able to fully appreciate why you buy, and Patrick nails it in the first few sentences:

> Unfortunately, many entrepreneurs discover this body of practice the hard way, by making mistakes that have been made before, rather than by spending their mistake budget on newer, better mistakes.

also:

> Customers love SaaS because it “just works.” There is typically nothing to install to access it. Hardware failures and operational errors, which are extraordinarily common among machines which are not maintained by professionals, do not result in meaningful data loss.

I've often retaught these points to folks: "Our job is to deliver a product to our users, they don't care about the ancillary product we use to deliver them our primary product. Buying Saas is like hiring pro's to do a job at the fraction of the cost of hiring pro's to do that job".

Or as Matt Brezina (Xobni & Sincerely) likes to say: Hire via API ( http://www.mattbrezina.com/blog/2011/08/hiring-via-api/ )


Fantastic article. I wish I had access to that sort of knowledge before I started my own SaaS [1].

I'd like to underline two points, in case anyone reading this is thinking about starting their own bootstrapped SaaS (I guess many HN readers are):

* The long slow SaaS ramp of death is true. SaaS businesses, especially bootstrapped (and cash-starved) ones do not grow quickly. It takes years, as in more than one, and possibly several years.

* Apart from product-market fit, the biggest problem is marketing. Contrary to what one might expect, it is extremely difficult to get one's product in front of customers.

So, set your expectations accordingly.

[1] https://partsbox.io/


Technical details, for those so inclined: the software is written in ClojureScript (compiled to highly optimized JavaScript) on the client side, using React.js for user interface updates, and Clojure on the server side, running in a JVM (Java Virtual Machine). It uses the RethinkDB distributed database for data storage. Interesting choice of Tech stack. Care to explain why you went with Clojure backend and ClojureScript for react on the Front end instead of much more traditional choices?


Those are very pragmatic choices. I don't think I could a) tackle the complexity and b) achieve the performance I wanted without Clojure and ClojureScript.

RethinkDB is used for two reasons:

1. It's the only database that provides changefeeds that I need to implement real-time updates for users. Complete changefeeds, as in: get an initial state and then updates.

2. I wanted to easily solve replication, fault-tolerance and scalability, RethinkDB gets all of them right, at least for the levels of scalability that I require.


As someone involved in re-licensing RethinkDB and finding a new home for it at the Linux Foundation, I'm thrilled to hear your use case.

https://www.cncf.io/blog/2017/02/06/cncf-purchases-rethinkdb...


Thank you for your work! I think RethinkDB is underappreciated and undervalued, mostly because people tend to act based on hype and seasonal fads. RethinkDB brings down the cost of developing apps with real-time push updates to manageable levels. Similarly, there is no other distributed database out there that can be deployed so easily.


Great answers!. Thanks to You I learnt a new tech-stack today and cant wait to try it out. I also am an EE Btw, and I wish my Purchasing person had tools like these available to them to do better production planning back in the days which was like 5 years ago !


Very cool - thanks for posting a link to Partsbox. Will be looking at it more deeply as soon as I get to my machine. I just launched a quasi-near service myself (https://www.agentotto.com) and am also finding that the marketing is tough. Ours is more service than SaaS with a high price point and sales based on preexisting industry relationships, but it's still hard to get people to stroke the checkbook for a service that has clear utility and value (as yours does as well)


So, this quote is my key takeaway:

"There are, broadly speaking, two ways to sell SaaS. The selling model dictates almost everything else about the SaaS company and the product, to a degree which is shocking to first-time entrepreneurs. One of the classic mistakes in SaaS, which can take years to correct, is a mismatch between a product or market and the selected model to sell it on."

From helping build a SaaS company for the last couple of years, I can tell you that knowing which kind of "touch" your product is very very important. Really important.

There are a lot of SaaS markets where the customer needs high touch but can only pay low touch prices. That's not a fun place to live, though it can be a good place to start and then move upmarket. I remember seeing that grid of high/low touch and high/low ACV outlined somewhere, but I don't remember where.


> There are a lot of SaaS markets where the customer needs high touch but can only pay low touch prices. That's not a fun place to live, though it can be a good place to start and then move upmarket.

This just seems like a really bad place to start. Do you have an example where it worked?



Hmmm. Maybe mind body? QuickBooks? Any saas product that is a crucial part of a business will necessarily be high touch.

The reason why it might be a good place to start is because you can find enthusiastic customers that are ill served.


There is a LOT of experiential knowledge out there around QuickBooks so even if the SaaS version needs extra hand holding it is rarely the case of the user being completely lost.

ONE example that I think applies and is Interesting: domain name registration. The entire business model at GoDaddy around domains is the hope that they would be registered and left unused. At such a low price point ($1/month billed annually) the cost of cancelling was often not worth it. But if even a fraction of those domain registers decided to need a website or email...Jenny bar the door. The support required to walk clients through DNS updates and MX records would flip the business on its head. GD has invested a ton to making these processes more seamless but it wasn't long ago that if you didn't know how to use FTP or cPanel (as example) you had to get help from an actual person.


Actually, my examples are probably bad, I was thinking about them in the early days, but those are low touch businesses now.


patio11 refers to subscription based software as a "financialization" of it, but I'd argue it runs deeper: it turns software from a single, large "opt-in" transaction, to a small "opt-in" transaction followed by a series of "opt-out" decision points for customers, putting more of the burden on the customer to disengage vs the business to sell the customer on the latest version every couple of months.

This runs into some tricky ground. Consider the fact that many customers who do not churn may also have not used the product, at all, in a given month. Given the difference between "existential risk" and "profitable enterprise" is a 5% change in churn rate, these customers may make all the difference!

How does a company balance reducing churn with ensuring that customers who (perhaps temporarily) have dis-engaged can easily turn off the software? For example, how long of a period of inactivity should a company wait before asking a customer if they would like to unsubscribe? Do any companies actually do this? Should we expect them to do this given that doing so may kill their entire business?


In my experience it's best to focus on new user on-boarding and the needs of the most engaged "in love" users. Reasons for focusing on smooth on-board are obvious. Reasons for focusing on your engaged users:

- It's easier to get direct and indirect (metrics) feedback that you need to actually improve their experience.

- These are the users who push your product in areas you possibly hadn't considered or prioritized and can often have sub-optimal experiences.

- Large teams using your product is one of the few viral channels available to B2B saas. People change jobs and say "you know, at my last place we used..."

- You can probably grow their ARPU.

You should definitely track people who deactivate or never log-in, but it's a hard thing to optimize.


Slack does this via their Fair Billing Policy [0] and it’s completely automatic. You only pay for active users, so those who go inactive are free.

[0] https://get.slack.help/hc/en-us/articles/218915077-Fair-Bill...


I love this about Slack. It puts me into a different mindset. I'm less defensive and therefore more creative, productive, and happy. Most other services put me on a constant lookout. How are they going to "get me"?


The people that don't show up to the gym are what make the business profitable.


I've heard this before and intuitively it seems right, but only for certain gym cultures.

In the US almost everything is membership-based, so a paying member who doesn't show up is free money until they cancel.

But there are other places where it's more flexible, for example my gym has monthly passes, dailies, and 10x or 20x passes. The 20x is the best deal if you miss a few days a month due to travel.

None of this has any recurring billing.

I'm sure even that gym has a bump in monthlies in January and May/June but with their setup it seems much more in their interest to have everyone actually coming to work out, else they might just not bother to buy that next monthly.


There are different types of gyms. 24 hour fitness, for example, will happily keep charging you if you don't come in, and if you try to cancel over the phone often tries to force you to come in and do that in person (I'm not sure how much of this part is corporate strategy or poorly incentivized branch behavior).


I'm guessing corporate strategy, and not just for the cheaper gyms.

Good luck trying to get a one-week pass to Equinox without pretending to be a local who's interested in joining.

OTOH I know an awesome gym in LA that is perfectly happy to sell you a week pass if you're visiting. (Maybe that's a film-industry thing.)


As a customer of a few B2C SaaS products I would say to not try to keep users on board too hard. From my personal experience, unsubscribing from a service I am not using may only be temporary, but the surest way for a company to make it permanent is to be clingy and make it hard for me to get out. The nicest exits are the ones where I leave on a high note, like how amazon prime refunded my last month because I hadn’t been using the service that month; makes me way more likely to sign up again.


> Given the difference between "existential risk" and "profitable enterprise" is a 5% change in churn rate, these customers may make all the difference!

That's exactly how it works.

> How does a company balance reducing churn with ensuring that customers who (perhaps temporarily) have dis-engaged can easily turn off the software?

The ideal model in my opinion (but that one is obviously not going to maximize profits/revenues) is to stop billing if the customer has not used the product in 30 days.

That way there is a balance between payment and performance, maybe at some point we'll see laws to enforce such a setup.


I can imagine this driving providers to work around that, structuring their service such that they can argue the user is still engaging with the service passively. For example, having data stored on their servers is use (as I may later want to use it, and incurs them a cost to store it). Or, perhaps being emailed updates about my credit score could be regarded as engagement as they can't necessarily tell whether I am reading their emails.


For some SaaS businesses although, such as dropbox & google drive, their most of their business is storage. It would be hard to blame those kinds of services to keep on billing you even if you don't look at the data most of the time.


Pretty much all SaaS businesses have storage as significant factor. Office 365 has documents; DocuSign has contracts; Salesforce has customer information. Even if it's not a significant amount of data in commodity storage terms, the storage and handling of that data is central to the service.


That's different. Storage is 'in use' when you're using it, period. But when you have a dropbox subscription and you don't use your storage then that should not be charged imo.


I think it's much more subtle.

It might be better to separate the two use cases as: "data at rest" and "data in use" like Amazon does with S3 where they charge separately for storage and transfer costs. If you do not access your data stored on S3 throughout a billing period, your invoice will only reflect those costs -- your usage costs will be stated as $0 for that month.


> I can imagine this driving providers to work around that

And those providers will be punished by consumers for it.

One angry customer can cause all sorts of damage.


> Should we expect them to do this given that doing so may kill their entire business?

Absolutely.

Don't forget that these customers may just file a chargeback through their bank. I did this with a service called Classpass which misleadingly kept you signed up without any notice. I and my partner both filed chargebacks and overturned 6 months of subscriptions.

That sort of thing can really harm a SaaS on a number of fronts and so IMHO they should ask the customer after one billing cycle and no activity.


How is it not absolutely obvious on the Classpass pricing page that it's a monthly subscription?

Chargebacks are a real dick move, and should be used as a last resort if the company gives you any trouble when cancelling. Otherwise you're literally stealing from the service, for example your patronage cost the company 15*6=$90 in just chargeback fees (Stripe) because you couldn't be bothered to cancel your plan online in a minute. I think most SaaS companies would be happy to not have you as a customer.


Outstanding summary Patrick, was prepared for a piece of dry content marketing but many gold nuggets as usual!

I would add a couple of supplementals unique to 2018 for those of us raising capital in a SAAS or looking to liquidate:

1) The "SAAS Napkin" for 2018, a survey of ~50 Series A / Series B funded companies that have shared with regard to growth / churn / etc. Links here https://www.producthunt.com/posts/saas-funding-napkin-3 and explanation here https://medium.com/point-nine-news/what-does-it-take-to-rais...

2) The fascinating rise of Private Equity companies as a liquidity / funding option outside of larger co Acquisition / VC money as observed by the founder of Pardot (~$100m exit to SalesForce) - https://davidcummings.org/2017/10/03/private-equity-as-the-s...


Well.. after reading those conversion rates - I feel pretty happy with my conversions :D

I've been using Stripe and Stripe Atlas since 2016, and it's helped me grow my business well. Slowly iterating. My particular tactic is to give users a full refund - every month - they give me feedback via a survey:

https://projectpiglet.com/

It's actually been super nice because people are super willing to pay after I build out the system the way they want. They then tell their friends and so on.

Then there are websites I built like:

https://easy-a.net/

Which only has a 3% conversion rate form registered users to paid users. Apparently, that's pretty good as well... People love it and I haven't touched the website in 18 months -_-

It's clear why SaaS is superior in that aspect, because it's 100% automated, makes money, and I don't even touch it. Updates are nearly completely automated on Easy A, and https://projectpiglet.com (being completely in development) requires a bit more, but also completely automated.


>My particular tactic is to give users a full refund - every month - they give me feedback via a survey

Nice, I'm gonna steal this idea!


By all means! It's also nice because often people forget so one month I'll get feedback, the next I'll get $X, then the following I'll get feedback again.

Customers tend to blame themselves for forgetting the feedback and eventually some users are like, "Hell, this is exactly what I wanted" and they'll pay full rate.


If anyone was curious about Inovalon's $70M customer, it appears to be Anthem. It isn't explicitly called out that way, but from page 23 of that report:

  Our largest client, Anthem (formerly known as WellPoint), represented approximately 
  17% of our revenues for the year ended December 31, 2016, while no other clients 
  represented greater than 10% of our revenue.


The free trial section gave me an idea. I have a product (a course) which can be used in 2-4 weeks.

This isn't exactly SAAS, but there's some overlap. Has anyone ever seen (or tried) a full free trial which lasts 2-3 days?

I currently just have some demo videos, but it occurs to me I might increase conversion if I just let people into the full thing, let them have a taste, and then ask them to pay if they want to keep access.

I could limit it by time or percent watched.


Full-featured time/use-limited trials are pretty common. Netflix, Spotify, Audible, all offer the first month, for example. Specific to your area, Coursera and Lynda both have them.


Mmm. Those are traditional, longer trials though, as they tend to be longer services. Do you think it would work on a shorter timescale for short courses?


I do think a percentage limit would make more sense in your case, but you shouldn't take my advise, since I've never built anything like it.


It may be worth trying.

Design+Code is a pretty well-known course for designers that want to build iOS apps. The previous version of this course was a one-time payment of $50. For the newest version he's moved to a subscription with a 7-day free trial. However, you do have to add a credit card for the trial. https://designcode.io/


Thanks! That's one's probably a bit long for my courses, which are 5-24 hours in length.

I could try maybe a week with a credit card option on the longer one. Or test a "percent complete" lock on the shorter one.


Yes this exists, for example Travis-CI Pro has a free trial that includes 100 builds and is not time based.


2-3 days probably means your'e a sales company, and it will continue to be a hostile relationship. I much prefer buying from product companies, trying to show me why I need their software.

It's just downright ridiculous/shady.

Ridiculous since there's no way I'll be able to make an informed decision in 2-3 days, especially since there's no chance I'll dedicate 100% of my time to those 2-3 days. When I'm done looking at the several options available, I'll have a meeting showing my findings and running through a guess which software isn't going to have a live demo.

Shady, because I know I'm not going to get a full picture in 2-3 days, but more importantly, they know I'm not going to get a full picture in 2-3 days. My assumption will always be (and is usually correct) that on the surface things are fine, but if you try to use any of the more advanced features/integration/whatever actual use, you'll run into trouble.

If you actually have a good product, why fear letting people see how good it is? Let them try it out, integrate it into their workflows enough and see enough of an improvement that they don't want to go back.


I suspect you did not actually read the parent. It's an online course. Nobody's going to "integrate it into their workflows".


Please actually read comments before replying.

I sell 5-24 hour long online courses. A two week trial would let someone see everything, and would leave the user with no reason to purchase.

This is why I haven't done full free trial yet. Because 2-3 days seems short. But I'm wondering if it counterintuively might be optimal, by removing friction to trying the course.


There are many merchants who have found that increasing the generosity of their refund policy leads to decreased refund rates.

I.e. a 6 month refund window may have a lower overall refund rate than a 1 month window.

It gives users who are on the fence about the value of a product more time to see how they've gotten value out of it. It also gives people longer to forget to ask for the refund.

The only reason some companies have a "1 year" refund policy instead of "lifetime/anytime" is because of issues like credit card merchant processors being uncomfortable with the credit risk that creates.


My mistake! I misread your second to last sentence.


I've been plugging away at my SaaS app for many years. Have bounced around on the "low-touch" vs "high-touch" spectrum as well as on pricing. I am in agreement with most of the article. If I could do it over again, I'd focus on finding a good niche of "low-touch,high-price". Sure you say "that's obvious", but if so, why are there so many people trying SaaS companies that are not? If you are considering Stripe, you are already off the mark. You should be having Quickbooks send quarterly or annual invoices for at least $10K. Companies will happily pay if you are solving some problem that is costing them $50K per year.

There are still so many opportunities to reduce IT costs through SaaS. I've been in software a LONG time, and I think this is a golden age, with things like AWS and Azure and third-party horizontal services for pretty much everything. Just find your niche of companies that have issues that nobody is addressing. Help them automate tedious and time-consuming things like reporting and dataflow. Help them with regulatory compliance. Think of it as consulting where they also pay for platform services.

I also take issue with "investors love SaaS". The margins just aren't high enough to make it worth the risk. You might find an investor willing to do a deal for cash flow. But I think this is like Stripe - if your thinking VC capital, you're already off the mark. Your customers need a solution and they will be your investors.


I'd expect $10+k/quarter to require high touch sales & account management in most cases.


Hasn't been my experience. Sales cycle can be long, but doesn't demand a lot of cycles.


The article is excellent, but ..

> [SAAS..] spend less than 5~10% of their marginal revenue per customer on delivering

This is really, really not realistic. Just billing through Stripe will cost you 2-3% commission.

I was involved with a financial SaaS and I couldn't believe how many sub-services they needed just to keep the product alive


Product/market fit wasn’t coined by Marc. It was Andy Rachleff: https://a16z.com/2017/02/18/12-things-about-product-market-f...


Great read! The "Churn rates" section was super interesting. Our SaaS has hovered around 4-5% churn rate. Glad to see that's doing pretty OK!

Interestingly enough in December we increased our prices by quite a lot (percentage wise, $2/month to $6/month). That month we saw an 8% churn rate, and January 6%, and this month looking like a bit less. It's going to be really interesting to see what happens in the future.

The jury is not in yet, but it feels that the voluntary churn is a lot less for the customers paying more, compared to the lower price point.


> The jury is not in yet, but it feels that the voluntary churn is a lot less for the customers paying more, compared to the lower price point.

I noticed the same. Our $29.90 plan churn is 3x higher than our more expensive plans.


Since they pay more, they value the service more, so they tend to stick around more :)


Are you talking about monthly churn or yearly?


Monthly churn. We're using Chartmogul for the stats.


What does the app offer? What type of customers do you have?


The app is an RSS feed reader (feeder.co) Our user base is everything from B2B to B2C, as RSS is a tool not a solution, so it's very mixed.


Great article.

Bill Janeway offers a well-written deconstruction of the "impossibly" part of the author's "impossibly attractive" characterization of SaaS here:

https://wtfeconomy.com/enterprise-software-death-and-transfi...

(from 2016)


Do software products like adobe photoshop for $20/month count as SaaS, or merely a subscription based software product?


I'm surprised everybody else is saying it doesn't count.

SaaS stands for Software as a Service, which means begging customers to make a one-time decision to start a predictable subscription in exchange for regular new features and bug fixes.

The alternative is begging customers to make decisions to upgrade to the latest release multiple times, even after they purchased the older software. Customers on older versions spend a lot of time downloading updates to security issues, comparing to competitors, and deciding if this is the right time to upgrade or to wait for a sale.


From a business perspective, I would say Adobe is squarely in the SaaS business.

Creative Cloud is mostly light touch product with an few large companies and agencies requiring high touch.


Interestingly, I often feel like Adobe wants it to be higher-touch.

I've had the $10/mo Photoshop+Lightroom bundle forever. I almost never use them, and when I do it's definitely not for pro-level stuff, but I find it worth the price to have these tools available when I need them.

Adobe, on the other hand, really really wants me to get into Behance, watch this or that instructional video, take a survey, read their blog, etc.

But if I got that engaged with their ecosystem, I'd surely end up with support tickets and so on, but I doubt I'd give them any more money. I get that it's worth it to them on average, it just feels weird sometimes as I'm a dream customer at $10/mo.


I think you may have it backwards. In SaaS high-touch refers to the actions the company takes on an account, not your engagement with the product.

Self-serve items are generally considered low-touch. Knowledge Bases, Documentation, Instructional Videos—these are all things that are created so the company doesn't have to spend time with you. Support is considered a fall-back when none of those options work.

High-touch means a Customer Success Manager is assigned to your account. Generally the CSM will try and setup monthly or quarterly check-ins to:

—Troubleshoot any problems

—Spot and address churn risks before they arise

—Inform the customer about product changes

—Handle renewals (Although this is sometimes a sales function)

If you're paying $10/mo and not sending Adobe any support tickets, it sounds like you're the perfect low-touch customer.


Ah, interesting, thanks for clarifying about the CSM.

Right, I'm the perfect low-touch customer right now, and I get that the self-serve things are also low-touch.

So I guess burning a few hours of customer support time would not move me into the high-touch zone. Got it.


Technically, if its an app which runs in your browser, and in the cloud only, it would be SaaS, regardless of function. But it also qualifies as a software subscription. So, yes.


The lines are blurry. For example there are apps that can run in something like Citrix Connector, VNC, even ssh etc. that are not running in a browser but also are running "in the cloud" (whether private or public).


Well.. photoshop runs on your computer.. but it requires you to be logged in. It used to be a 1-time purchase, but now it is monthly subscription.


Ah, then nope, just a subscription... and lame one at that. Have you seen this? https://www.figma.com/


It's a subscription based software.

For something to be SaaS, the software has to be in the cloud.


I think that we're at a point where customers no longer care, it's just a technicality


Slack kind of found the holy Grail of SaaS sales where they get a foot in the door like a low-touch SaaS product where employees just start using it. But then they convert this into a high-touch business with low churn after the employees convince their boss to start paying.

They basically have outsourced enterprise sales to their customers.


They didn't have an enterprise division until about a year and a bit ago, so I think it's more accurate to say that they found a channel that normally only works for low-touch SaaS, but for a product and business model that can charge SMB rates.

As someone else stated in another thread here, $100k+ deals don't happen because some employees use your product. It requires an enormous amount of sales and marketing infrastructure — and just plain old time — to rally someone else's organization around the change that adoption of your product entails.


Yammer did a great job with this kind of sales long ago as well.


Even though SaaS model has matured, and many SaaS are created by software developers (who are familiar with open source), I have not found a "Bootstrap for SaaS projections/financial modeling", probably in the form of shared Google Spreadsheet.


Fantastic article patio11. I work with a lot of SaaS companies on a daily basis (designing their product with our team [1]) and get to see the thought process of the founders. The part about product market fit is super crucial. I can clearly see that the founders that keep an ongoing feedback loop between customers and product always end up building a more successful business. Will def. share this insightful post. Tnx for the writeup.

[1] http://fairpixels.pro


Coming from somebody who doesn't really know anything about business or how to make SaaS work (despite working as an IC for a SaaS company) this article is very enlightening. In particular I never really grokked how to think about "churn rates" until reading this. It's actually pretty simple when it's explained well!

It's also written very clearly and candidly (although admittedly it's a bit of a self-congratulatory pitch for Stripe).


What are some examples Of high touch SaaS (besides Salesforce)? And any that have successfully deployed both low touch and high touch?


Dropbox and Box employ a bit of a hybrid model.

For SMBs, there's a self service model that's low touch but for enterprises, the sales + customer service is very high touch and requires a lot more customization.

BI tools such as Periscope, Looker, Mode, Tableau, etc are also a bit of a hybrid. Usually starts off with an individual playing around or looking for a tool (pretty self service), but a full company deployment is much more hands on and high touch.

Following the framework that Patrick provides, odds are that any company that has "sales engineering" or "integration engineering" for a SaaS will likely be high touch (unless they're doing it wrong =D)


There are a lot of small companies offering that - a mix of SaaS and custom development.

In a previous company, we built a SaaS platform (based on Odoo, a kind of semi-open-source web version of SAP) which allowed clients to purchase changes to any part of the application. Unlike in a typical SaaS, each client had its isolated copy of the app/database/etc (though all running on our cloud), so they could change anything. Some changed nothing, others have whole new components and business flows.


I would consider NewRelic, AppDynamics and other more expensive APMs high touch.


High touch SaaS sees much... much.... much... less benefit from marketing. So many don't market themselves as often, or market in specialty places. Salesforce isn't even that much of a household name.


The benefit enormously from marketing, but they don't benefit from high-visibility brand marketing.

Trade shows, performance marketing, affiliates, content marketing, retargeting, account-based ads ... those all work well.


Qualys


How do people "flatten" churn to a single number? In my experience churn is very high in the first month, then falls as time goes on.

My current (consumer) startup has a churn of around 25% the first month, then dropping to almost nothing after a few months. Using a single churn number doesn't even come close to approximating real behavior.


This is a sign that there might be something wrong with your positioning/marketing/messaging. The initial high churn means your customers think they will get X but they get Y - so they abandon the product. The ones that "get it" stick around. For now i would just remove the 1st month from the stats and look at it independently and then try to tweak the perception. Talking to the people who drop out will give you a better picture (it's hard but very much worth pursuing).

ps: we sell project management at https://www.paymoapp.com - every time someone cancels or deletes an account we show them a form where we collect data.


Nice article, but the most interesting question remains unanswered: how/where to find SaaS business ideas?


Hang out with people and hear their problems. Usually these are not as clear as "I wish I had a way to access my home PC files from work" but more like "damn, I left by USB card at home!" (hinting at Dropbox)


"Hang out with [regular] people, [preferably those controlling budget at a business]" is how I'd put it :).


Do contracting at rates affordable to small businesses. They'll come to you with problems they're willing to pay to fix and can't find a decent premade solution for.


Didn't flesh this out in time for edit.

- Don't position yourself how you normally would if you were going for a new job and trying to maximise your income. No "senior developer with experience in python, node, etc"

- Do position yourself as just a general "software developer". I said contractor before but I wouldn't (didn't) even make it look like that. More like a small agency. If they're completely outside of the tech industry (what you want) then they're going to be wanting someone to just give money to in exchange for solving their problem, not someone they're going to have to manage. Instead of hiring Dave by the hour, they're hiring "[town name] Premier Development" on a fixed project basis.

- Be selective with who you take on. Again, you should be positioning yourself pretty cheap to the point where if this wasn't basically an exploratory exercise for you then their project wouldn't be worth your time, so you don't want to get stuck doing work that isn't a potential SAAS for you down the line.

- You want them coming to you trying to get something done for $15k that would normally cost $100k+ to build. Then you say "hey, if you're willing to be my test dummy/case study/first customer, I'll build it and give you a licence for $10k"


Hmm, so the client says "I want X", and you say "okay, I'll build X, and sell it to A, B, C, and to you of course". I'm not sure if the client would be too happy with that (it's their idea after all).

Also, why work as a contractor if you already know what SaaS the company wants? And if you don't know what SaaS they want, how do you know you want to work for them to find out?


Depends on what they are. Plenty of brick and mortar stores only compete with other providers within their city/area and don't really care what's going on in other cities. Offer them exclusivity in their region of business if you need to.

Even if that's not the case. If it's genuinely out of their price range to get built custom just for them, which it almost always will be, then they should be willing to collaborate just to get it at all.

Sorry, I guess you don't ever need to do any actual contracting at all if it's just exploratory. I was writing from experience as half of a "software development agency" so we did do custom work, I just noticed that a lot of what we were building could easily be turned in to a product.

I will say though that actually doing some work for them, basically getting carte blanche to poke around their workstations and getting rundowns from their staff on how to achieve their tasks, reveals a lot of opportunities. You come across things like them moving over to a different pc. "Oh we need to use this because it has our X on it, which we use to do Important Task. It's not made any more so we can't get a new version".


Every word on high touch was true about where I work and I hate it.


This is by patio11, in case it wasn't apparent.


How do these numbers relate to bootstrapped SaaS?


Wonderful content marketing strategy :)


[flagged]


His history and relationships with many startups?


Nothing stellar about his history apart from fooling the HN community with his authoritative tone.




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