Continuing with yesterday’s post on SaaS and Barriers to Entry, if it seems like Software-as-a-Service (SaaS) products are easy to reproduce from a functionality perspective, why are there so few successful ones? Software development and delivery costs have dropped 10x over the past 15 years due to the rise of open source software and cloud computing. Technically, it’s easy to take one product and make a barebones reproduction of the most basic functionality. Only, there’s so much more than that.
Here are a few reasons why it’s so difficult to get a SaaS startup off the ground:
- Initial minimum respectable SaaS products still require years of continuous development to reach maturity and broad applicability (while it might cost a few hundred grand to get a decent product to market, it’ll take several million over a few years to get a robust product to market)
- SaaS products are often billed monthly, with the occasional annual pre-pay, meaning SaaS companies are really in the financing business as it takes years before a customer is profitable (compare this to enterprise software companies that get paid upfront for the license fees and are immediately profitable, but become much more difficult to maintain growth)
- Most SaaS products have retail prices in the sub $1,000/month price range, requiring thousands of paying customers to build a meaningful business (at $1,000/year per customer, 5,000 customers are required to build a $5 million/year business, which is a huge amount of effort)
- Repeatable customer acquisition at a reasonable cost is always the limiting factor (best practices are that the cost of customer acquisition should be equal to or less than the first year’s revenue e.g. spend $1,000 or less to acquire a customer that pays $1,000 per year — see Why Lead Velocity Rate is the Most Important Metric in SaaS)
SaaS companies are extremely difficult to get off the ground. Once up-and-running with some modest scale (>$2 million in revenue) and modest burn rate, they are a thing of beauty and typically grow fast for several years.
What else? What are some other thoughts on the difficulties of getting a SaaS company off the ground?