David Cummings on Startups

Category: SaaS

  • Where’s the SaaS App Market Headed?

    After spending a day at Dreamforce it is clear that the SaaS app market, as well as associated salesforce.com AppExchange eco-system, is growing like gang busters. The top sponsorship slot for Dreamforce this year was Platinum for a whopping $250,000. Next year they’ll have two even more expensive slots: Diamond and Titantium. Imagine what those will go for.

    Here are a few SaaS app trends I see:

    • More connectors and off-the-shelf integration between SaaS products (who’s going to win the generic app marketplace e.g. a marketplace that isn’t the Google Apps Marketplace and isn’t the salesforce.com AppExchange marketplace?)
    • Integration and migration of legacy data continues to be a big challenge (garbage in, garbage out, regardless of industry)
    • Ease of use continues to be a major focus (design for the novice, customize for the pro)
    • Pricing and complexity of contracts is starting to decrease, making things better for the customer

    All in all, the SaaS market continues to grow fast and I’m very bullish about it. We’re only scratching the surface of SaaS apps changing how businesses operate.

  • Pricing a SaaS App

    Saas im Prättigau
    Image via Wikipedia

    Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.

    Here are a few things to keep in mind when pricing a SaaS app:

    • Under $10/month is generally a consumer app that is fully self-service
    • $20-$100/month is more small business and self-service or limited service to get going
    • $100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
    • $500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
    • $1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs

    Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.

    What else? What are some other considerations when pricing a SaaS app?

     

  • Usage is Like Oxygen for Ideas (in Products)

    The founding developer of WordPress, Matt Mullenweg, has a great essay titled 1.0 is the Loneliest Number where he recounts similar story to my post mortem on a failed product in which he spent entirely too long adding more and more features to a release before putting it out in wild to get feedback on it. His choice quote, which is echoed by the guys at 37signals, is as follows:

    Usage is like oxygen for ideas. You can never fully anticipate how an audience is going to react to something you’ve created until it’s out there. That means every moment you’re working on something without it being in the public it’s actually dying, deprived of the oxygen of the real world.

    My recommendation is to read Matt’s essay and to create a culture of minimum viable functionality for new features so that customers can provide feedback right away. Too often, the engineering mentality is that of a perfectionist leading to more and more functionality piled onto a feature to get it just right. Only, just right for one engineer isn’t the same as just right for 80% of a product’s user base. Don’t let your product ideas suffocate.

  • SaaS Products with the Same Name as the Company

    One of the many exciting decisions to make when starting a company is the name of your first product. For many software-as-a-service (SaaS) companies, the product is synonymous with the company and is referred to as the same name as the company. Depending on if you’re taking a multiple product approach vs a single product approach, it is important to think through the product naming convention.

    Some companies like GE name every division using the company name followed by a word specific to what they do e.g. GE Energy, GE Capital, etc. Other companies like P&G have different brands for their products and don’t co-brand them with the P&G label e.g. Tide, Bounty, Duracell, etc.

    My recommendation for SaaS companies is to call your main product the same name as the company and keep it simple, or add a generic term after it like “App”, “Suite”, or “Platform.” Once you are successful your customers and users will identify with the company and not the individual product.

  • The Healthy Department Symbiosis in SaaS Companies

    With Software-as-a-Service (SaaS) products, the operative word is service, not software. The service element, when done well, fosters a healthy symbiotic relationship between the company departments. Let’s look at the common departments:

    • Sales – Sets expectations with prospects and turns them into customers
    • Services – Gets clients successfully up-and-running
    • Support – Answers questions and continually helps clients
    • Engineering – Continually improves the product and fixed bugs

    By excelling in these departments, clients will renew their service and likely purchase additional services over time. Successful SaaS companies need to develop a service-oriented culture and exceed client expectations.

  • Thoughts on the Freemium Model

    The freemium model is a business approach where an account, typically with limited functionality, is offered for free with the hope that the person eventually upgrades to a paid premium account. I must admit that we don’t do a freemium model for any of our products (we do have a free product, Visitor ID, but that is more of a generic freebie). With that said, I have a few thoughts on the model:

    • Many entrepreneurs think it is the holy grail of business models only to learn that many companies won’t even use a product for free
    • At its core, freemium is simply a lead generation mechanism, much like open source
    • It is incredibly difficult to get someone to upgrade from a free version to paid version
    • Offering a free version of a product often times attracts a different crowd compared to a free trial
    • Many labor intensive items like support, on-boarding, and policing (e.g. if email marketing is involved) are expensive and difficult to scale with lots of non-paying customers

    My goal is to one day have a successful freemium product, but to date the feedback I’ve received from entrepreneurs that have one is that it is much more difficult than they expected.

    What else? What are some more thoughts on the freemium model?

  • The Three Critial Numbers for SaaS

    Software-as-a-service (SaaS) is a great business model that provides recurring revenue for vendors, continual upgrades for users, and fewer hassles for customers. When looking at a SaaS business, there are three critical numbers to watch:

    • Churn — the percentage of customers that leave monthly/annually (the equivalent is looking at the renwal rate of customers)
    • Current customer revenue growth — the growth of revenue from up-selling existing customers
    • New customer sales — the number of new customers signed up and the corresponding revenue

    These are the three most important metrics to monitor for a SaaS business.

  • SaaS SMB Web Testing and Monitoring Software

    So, we’re starting to evaluate upgrading our in-house web testing and monitoring software to a commercial solution (we use several free and open source products now). Here’s what we’re interested in from a single provider:

    • Pinging a variety of ports and servers from different locations in the world
    • Browser emulation with pre-defined scripts and paths
    • Checking of SSL certs, domain names, etc
    • Web services (REST) testing
    • Web services API for us to inferface with
    • Priced under $1,000/mo

    We’re looking for recommendations and best practices. What do you recommend?

  • Ways to Grow a SaaS Business Faster

    Earlier today we were talking about ways to grow a SaaS business faster. SaaS, with almost all recurring revenue, is a great business model once the machine is humming. SaaS is so desirable because it provides consistent cash flow and makes it easy to budget during growth. Thinking about the ways to grow faster, at the most basic level, here’s what we came up with:

    • Sign up customers faster
    • Sign up customers at the same rate but at a higher revenue amount
    • Up-sell existing customers
    • Reduce customer churn

    Now that we have the most basic ideas, it is time to work on different strategies for each category.

    What else? What are some other ways to grow a SaaS business faster?

  • Cohort Analysis for SaaS

    One of the SaaS measurements tools that I don’t think is mentioned enough is that of running a cohort analysis (Wikipedia) on customer data. The idea behind a cohort analysis is to track a group of data over time as an independent unit. With SaaS, the major areas to do cohort analysis are for churn and up sells. A common example would be as follows:

    • Analyze customers as a group based on the month they sign (each customer signing month would a new row in the spreadsheet with the left most row being the name of the month and year)
    • Look at the renewal rate and annual recurring revenue for that group for each subsequent month (each month after signing would be a new column to the right of the signing month in the spreadsheet with the column names being the number of months as a customer)
    • Look for trends in over time (e.g. renewal rates significantly increase after the sixth month)

    For more information, please see Fred Wilson’s post on cohort analysis.