SaaS 101: 7 Simple Lessons From Inside HubSpot

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SaaS 101: 7 Simple Lessons From Inside HubSpot

 

It’s been a little over 4 years since I officially launched my internet marketing software company, HubSpot.  (The “official” date is June 9th, 2006 — for those that are curious about such things).  So, I’ve had about 4 years on the “inside” of a fast-growing, venture-backed B2B SaaS startup.  Quick stats:  ~2,900 customers, ~170 employees and $33 million in capital raised.  But, this is not an article about HubSpot, it’s an article about things I’ve learned in the process of being a part of one of the fastest growing SaaS startups ever.   (I looked at data for a bunch of publicly traded SaaS companies, and the only one that grew revenues faster than HubSpot was Salesforce.com). onstartups saas blackboard

In any case, let’s jump right in.

7 Non-Obvious SaaS Startup Lessons From HubSpot

1.  You are financing your customers.  Most SaaS businesses are subscription-based (there’s usually no big upfront payment when you signup a customer).  As a result, sales and marketing costs are front-loaded, but revenue comes in over time.  This can create cash-flow issues.  The higher your sales growth, the larger the gap in cash-flows.  This is why SaaS companies often raise large amounts of capital.

Quick Example:  Lets say it costs you about $1,000 to acquire a customer (this covers marketing programs, marketing staff, sales staff, etc.).  If customers pay you $100/month for your product and stay (on average) for 30 months, you make $3,000 per customer over their lifetime.  That’s a 3:1 ratio of life-time-value to acquisition cost.  Not bad.  But, here’s the problem.  If you sign up 100 customers this month, you will have incurred $100,000 in acquisition costs ($1,000 x 100).  You’re going to make $300,000 over the next 30 months on those customers by way of subscriptions.  The problem is that you pay the $100,000 today whereas the $300,000 payback will come over time.  So, from a cash perspective, you’re down $100,000.  If you have the cash to support it, not a big deal.  If you don’t, it’s a VERY BIG DEAL.  Take that same example, and say you grew your new sales by 100% in 6 months (woo hoo!).  Now, you’re depleting your cash at $200,000/month.  Basically, in a subscription business, the faster you are growing, the more cash you’re going to need

2 Retaining customers is critical. In the old enterprise software days, a common model was to have some sort of upfront license fee — and then some ongoing maintenance revenue (15–20%) which covered things like support and upgrades.  Sure, the recurring revenue was important (because it added up) but much of the mojo was in those big upfront fees.  The holy grail as an enterprise software startup was when you could get these recurring maintenance fees to exceed your operating costs (which meant that in theory, you didn’t have to make a single sale to still keep the lights on).    In the SaaS world, everything is usually some sort of recurring revenue.  This, in the long-term is a mostly good thing.  But, in the short-term, it means you really need to keep those customers that you sell or things are going to get really painful, very quickly.  Looking at our example from #1, if you spent $1,000 to acquire a customer, and they quit in 6 months, you lost $400.  Also, in the installed-software world, your customers were somewhat likely to have invested in getting your product up and running and customizing it to their needs.  As such, switching costs were reasonably high.  In SaaS, things are simple by design — and contracts are shorter.  The net result is that it is easier for customers to leave. 

Quick math:  Figure out your total acquisition cost (lets say it’s $1,000) and your monthly subscription revenue (let’s say again say it’s $100).  This means that you need a customer to stay at least 10 months in order to “recover” your acquisition cost — otherwise, you’re losing money.

It’s Software — But There Are Hard Costs.  In the enterprise-installed software business, you shipped disks/CDs/DVDs (or made the software available to download).  There were very few infrastructure costs.  To deliver software as a service, you need to invest in infrastructure — including people to keep things running.  Services like Amazon’s EC2 help a lot (in terms of having flexible scalability and very low up-front costs), but it still doesn’t obviate the need to have people that will manage the infrastructure.  And, people still cost money.  Oh, and by that way, Amazon’s EC2 is great in terms of low capital expense (i.e. you’re not out of pocket lots of money to buy servers and stuff), but it’s not free.  By the time you get a couple of production instances, a QA instance, some S3 storage, perhaps some software load-balancing, and maybe 50% of someone’s time to manage it all (because any one of those things will degrade/fail), you’re talking about real money.  Too many non-technical founders hand-wave the infrastructure costs because they think “hey we have cloud computing now, we can scale as we need it.”  That’s true, you can scale as you need it, but there are some real dollars just getting the basics up and running. 

Quick exercise:  Talk to other SaaS companies in your peer group (at your stage), that are willing to share data.  Try and figure out what monthly hosting costs you can expect as you grow (and what percentage that is of revenue). 

It Pays To Know Your Funnel.  One of the central drivers in the business will be understanding the shape of your marketing/sales funnel.  What channels are driving prospects into your funnel?  What’s the conversion rate of a random web visitor to trial?  Trial to purchase?  Purchase to delighted customer?  The better you know your funnel the better decisions you will make as to where to invest your limited resources.  If you have a “top of the funnel” problem (i.e. your website is only getting 10 visitors a week), then creating the world’s best landing page and trying to optimize your conversions is unlikely to move the dial much.  On the other hand, if only 1 in 10,000 people that visit your website ultimately convert to a lead (or user), growing your web traffic to 100,000 visitors is not going to move the dial either.  Understand your funnel, so you can optimize it.  The bottleneck (and opportunity for improvement) is always somewhere.  Find it, and optimize it — until the bottleneck moves somewhere else.  It’s a lot like optimzing your software product.  Grab the low-hanging fruit first.

Quick tip:  Make sure you have a way to generate the data for your funnel as early in your startup’s history as possible.  At a minimum, you need numbers on web visitors, leads/trials generated and customer sign-ups (so you know the percentage conversion at each step). 

You Need Knobs and Dials In The Business.  One of the great things about the SaaS business is you have lots of aspects of the business you can tweak (examples include pricing, packaging/features and trial duration).  It’s often tempting to tweak and optimize the business too early.  In the early days, the key is to install the knobs and dials and build gauges to measure as much as you can (without driving yourself crazy).  Get really good at efficient experimentation (i.e. I can turn this knob and see it have this effect).  But, be careful that you don’t make too many changes too quickly (because often, there’s a lag-time before the impact of a change shows up).  Also, try not to make several big changes at once — otherwise you won’t know which of the changes actually had the impact.  As you grow, you should be spending a fair amount of your time understanding the metrics in your business and how those metrics are moving over time. 

Quick advice:  If you do experiment with pricing, try hard to take care of your early customers with some sort of “grandparenting” clause.  It’s good karma.

Visibility and Brakes Let You Go Faster.  One of the big benefits of SaaS businesses is that they often operate on a shorter cycle.  You’re dealing in days/weeks/months not in quarters/years.  What this means is that when bad things start to happen (as many experienced during the start of the economic downturn), you’ll notice it sooner.  This is a very good thing.  It’s like driving a fast car.  Good brakes allow you to go faster (because you can slow down if conditions require).  But, great visibility helps too — you can better see what’s happening around you, and what’s coming.  The net result is that the risk of going faster is mitigated.

Quick question:  If something really big happened in your industry, do you have internal “alarms” that would go off in your business?  How long would it take for you to find out?

7 User Interface and Experience Counts:  If you’re used to selling client-server enterprise software that was installed on premises, there’s a chance that you didn’t think that much about UI and UX. You were focused on other things (like customization, rules engines and remote troubleshooting).  That was mostly OK, because on average, the UI/UX of most of the other applications that were running on user desktops at the enterprise sucked too.  So, when you got compared against the other Windows client-server apps, you didn’t fare too badly.  In the SaaS world, everything is running in a browser.  Now, the applications you are getting compared to are ones where someone likely spent some time thinking about UI/UX.  Including those slick consumer apps.  You’re going to need to step it up.  In this world, design matters much more.  Further, as noted in #2 above, success in SaaS is not just about selling customers, it’s also about retaining them.  If your user experience makes people want to pull their hair out and run out of the room screaming, there’s a decent chance that your cancellation rate is going to be higher than you want.  High cancellation rates kill SaaS startups.

Quick tip:  Start recruiting great design and user experience talent now.  They’re in-demand and hard to find, so it might take a while.

—-

So, what do you think?  Are you running a SaaS startup now?  What have you learned?  Would love to hear about your experiences in the comments.

Posted by Dharmesh Shah on Mon, Jul 19, 2010

COMMENTS

That was a great gist any SaaS aspirant to keep in mind. I believe SaaS is the new way of telling your TG Hey there I have value and I am backing it up. Lower switching costs, lower sales cycles, later revenues and still a goal of monetizing big. I believe it all revolves around how much value to give back to the ones who opened up their wallets

posted on Monday, July 19, 2010 at 12:40 PM by Himanshu Chanda


Good stuff, thanks for sharing. We work with a few SaaS providers, and a key metric we look is the customer acquisition to churn ratio. Once your marketing rhythm is established we then seek ways to reduce the cost per acquisition metric. Throughout this process it's incumbent upon the provider to continuously add value to their solution set to offset decreasing service costs.

posted on Monday, July 19, 2010 at 1:02 PM by Mark Reino


Very short but sweet article. I built and sunk an SaaS company a few years back. This is good informations for newbies...

posted on Monday, July 19, 2010 at 1:02 PM by DefunktOne


Please continue to add to this list and share with us... as you learn more things. May be we can benefit from your experience. 
 
Thanks for sharing.

posted on Monday, July 19, 2010 at 1:03 PM by Mihir


Point 7 is so true. I like to make great UI just for fun, and I wasnt sure if the time I spent on it will pay off. But it did, big time.

posted on Monday, July 19, 2010 at 1:06 PM by Adil


To your point #3 about hosting infastrutuce this is something start-ups should consider ASAP. We waited too long and outgrew our 1&1 hosting package. It cost us nearly $30k to switch to Amazon Cloud. It is not the setting up instances, DBs, etc. It is all the little settings, applets, and data that must be transferred to Amazon. As far as price, we pay around $2,100 per month to Amazon for around 400 active users in our app.

posted on Monday, July 19, 2010 at 1:07 PM by john rice


Great little article Dharmesh, thanks for sharing, although finely focused on SaaS the rules and lessons can be applied on a much broader scale and I will keep them in mind when working on my business model - particularly the tips on GUI and more importantly the front loading of acquisition costs - I can see how that could be crippling if a business does not have the finances in place to ensure continuity in marketing and keep the leads and sales rolling in.

posted on Monday, July 19, 2010 at 1:07 PM by Saif Bonar


Excellent Post! Loved the numbers and data points. Really brought the issues facing SaaS vendors into focus. However, I glanced through a few of your case studies and made this observation. If I were charged with evaluating your service the metric that would really turn me on would be total cost-of-service (for whatever period of time) compared to the verified incremental value it caused during the same period (more revenue, market share, lower cost, etc). Ideally this would be a ratio. Example: “in my industry, and for my business size, existing customers have found that for every dollar paid to HubSpot they generated $10 in incremental dollars in sales and saved X dollars from the marketing budget,” or something like that. I would want to be able to say to my superiors, “if we spend $5000 a year with HubSpot we can generate $50K in extra revenue and save $2000 from our current budget” (meaning it really cost only $3K to generate $50K). Now that’s tasty ROI.

posted on Monday, July 19, 2010 at 1:10 PM by Rod


Hi Darmesh, 
 
 
 
Nice post, I wrote two similar articles a while back to show both perspectives form the consumer side and producer side. 
 
 
 
You can check them out here and here
 
 
 
I'd love to hear your feedback on them. 
 
 
 
Cheers, 
 
Abe

posted on Monday, July 19, 2010 at 1:16 PM by Abraham Sultan


Dealing with all the issues you have mentioned above our Saas startup, especially the issue of choosing the right hosting provider. We are now on a cloud platform and that gives us a lot of flexibility compared with staying on dedicated servers. Also, the issue of seeing things early on, I can totaly understand that. 
 
 
 
Dan 
 
http://www.takeitnational.com

posted on Monday, July 19, 2010 at 1:18 PM by Daniel Gudema


Helloo 
 
Nice article.. But, I have suggestion with running a SaaS company for past 8 months.. 
 
when u calculate $1000 * 100 no, its not..  
 
Its actually doesn't work that way in SaaS.. U'll advertise and in SaaS it is sold as product(Actually we call it as service) but, thats a product if u understand the basic of SaaS..  
 
so u wont spend $1000 * 100 where as u'll spend ($400 * 100) + $700..  
 
Thats what you'll do in SaaS and thats how it'll make a business profitable.. 
 
Correct me if am wrong! 
 
Thanks 

posted on Monday, July 19, 2010 at 1:18 PM by Vishnu


Great post! Appreciated the 7 points. All very valid. Treat your first customers best...they took a risk on you and deserve the recognition. 
 

posted on Monday, July 19, 2010 at 1:19 PM by Josh Gooch


8. Put a feedback link right in your app. Yes, it's that simple. And damn crucial to the ongoing development of your app.  
 
You'll know where to head to meet your customer's needs. And, you can iterate on a daily or weekly basis. So grab this opportunity of web apps and play installable software against the wall! You won't have to think in shipping cycles, so don't do it. If a customer sends you a suggestion, think about it. Is it a small update that you're (really really) convinced of as well? Implement it right away. You'll have one hell of a fan, instantly. Plus, the flow of feedback will make sure you prioritize correctly, and it'll keep (or push) you on a reasonable path. 
 
9. Choose your payment provider wisely.  
 
A bad decision can cost you weeks, or month in development costs. Talk to other SaaS providers, they might be able to suggest a good one. Plus, consider you might be stuck with your provider for a long time. If you don't save credit card data for yourself (in Germany, you have to get a special certificate to do that, so most don't), there are severe switching costs: users would have to re-enter their data. So choose 'em wisely, and don't go for the solution that's least expensive. 
 
10. Are you in beta, not charging yet? 
 
Then tell your users up front what'll happen when you finally decide to charge for it. Everything's fine, but you have to make it clear. Otherwise, some people interested might decide not to try it, fearing they'll have to pay a huge price one day – or, worse, they'll get crazy as soon as you charge for it. And damage your reputation.  
 
We established a so-called »fair price policy« for our beta users: once we charged for our time tracking app, beta users could decide for themselves how much they wanted to pay for it. Yes, it could be $0,- as well. This went great: ca. 20% paid voluntarily, ca. 80% of the regular price. But, far more important: this policy led to a whole lot of positive word of mouth. Users were greateful, and talked about it, and recommended our app. 
 
11. No fear! You can do it ;-)

posted on Monday, July 19, 2010 at 1:31 PM by Julia


@Julia -- Thanks for sharing your tips. Those are dead-on. Will plan to weave them into the next "version" of the article.

posted on Monday, July 19, 2010 at 1:33 PM by Dharmesh Shah


Web Services (SaaS) whether they are B2B or B2C require tons of forethought. The architecture, the design, the attention to insight from customers and engineering...they are all important. I definitely agree that customers who willingly refer other customers is the best health indicator of a web service.

posted on Monday, July 19, 2010 at 1:38 PM by Evan B


Seriously, I'm looking at the 170 employees you're supporting plus the cost of marketing/acquisition and the estimated # of customers and I'm wondering how you expect to turn a profit. Then, there's the $33MM invested and I'm wondering how your investors expect to make a successful exit. 
 
It's all good advice you've offered, but I'd like to better understand your company's fundamentals.

posted on Monday, July 19, 2010 at 1:40 PM by Lydia Sugarman


Nice article on Saas Start ups. Short and to the point.

posted on Monday, July 19, 2010 at 1:51 PM by William Lennon


Nice article on Saas Start ups. Short and to the point.

posted on Monday, July 19, 2010 at 1:52 PM by William Lennon


We are a SaaS provider and basically a start up company. All the points you have brought up are very true, and very painful upon reflection. We like a lot of you had to learn the hard way and I wish the information you provided here was available then, but, we are Entrepreneurs, right? Keep the ideas and articles coming.

posted on Monday, July 19, 2010 at 1:54 PM by Steve Edwards


I've been selling a SaaS business suite for more than 9 years. It's a privately held company. Everything developed internally by the technical partner and, then, less than a handful of programmers. Built out via feedback, suggestions, requests from customers. There's now a total of 12 employees, all working remotely. No advertising, no marketing. We have nearly 10,000 customers.

posted on Monday, July 19, 2010 at 2:03 PM by Lydia Sugarman


Interesting and a good article! I find that many of us have been running SaaS Solutions without even knowing it. The use of browser-based thin-client application development has been in the Enterprise for some time now. After all, if properly implemented, it greatly reduces the "per-user-license-fee". The folks in Accounting love that one. 
 
If one is looking to take his/her talents out of a single enterprise and start to offer them through the "cloud" for a fee, keep a few lessons from this article in mind. The topmost of which is the UI/UX portion (all of the 7 items are important, of course). 
 
If one had lack-luster acceptance of their great idea in the Enterprise they were working for, chances are extremely good that it was because the Users saw little value in the product OR it was difficult to work with. In short, one must know how to market and how to build a product that everyone wants. 
 
Aspiring SaaS developers, hone your people skills.

posted on Monday, July 19, 2010 at 2:10 PM by Fred Oberkamp


#7 (and by implication #2). 
 
Too true. Much of the suggestions I have made to Hubspot have been to improve the UI, in particular for non-US users of Hubspot. 
 
I would be nice to see these suggestions (that your staff like) actually happen. 
 
For those that think I'm a control freak: If I didn't like Hubspot I wouldn't have become a customer or suggested improvements. Its a great product. But it can be improved.

posted on Monday, July 19, 2010 at 2:10 PM by Stephen Kellett


Assuming a large part of the customer acquisition cost is sales commission, you can mitigate the first two problems by paying commissions over time in the form of a residual. This also ensures that the salesforce takes an interest in ensuring customers stick around for a while.

posted on Monday, July 19, 2010 at 2:20 PM by Akira Hirai


Hi Dharmesh, 
 
Really amazing article. Very precise and to the point. I'm running a SAAS company and all these points that you mentioned makes so much sense for running a successful SAAS company.  
 
An understanding of how much you need to make to breakeven, how much on an average each customer should pay, what is the average life of a customer, attrition rate etc. One thing that really interests me is how to lower the acquisition cost and what role can social media marketing play if at all. I would like to calculate how much social marketing has impacted the cost of acquisition.  
 
I would be glad if in your forthcoming blogs, you can suggest the marketing 1on1 for SAAS companies.  
 
Thanks 
 
Kriti Jaising

posted on Monday, July 19, 2010 at 3:06 PM by Kriti Jaising


"It Pays To Know Your Funnel" should be a new whitepaper from HubSpot! It will generate a ton of leads.  
 
p.s. If you want a co-author then let me know :)

posted on Monday, July 19, 2010 at 3:16 PM by Zorian Rotenberg


Really insightful, as usual, Dharmesh! I've been tossing around an idea for a SaaS solution to basic marketing issues like brand positioning, pricing, messaging, etc. This article gives me much to consider. 
 
As for HubSpot, I'm loving the program and working to become a certified partner. Thanks for putting it together!

posted on Monday, July 19, 2010 at 3:52 PM by Alexa Ronngren


Hi Dharmesh - Great Article. I loved your analogy with knobs & Dials. Thanks for putting it out there. 
 
 
 

posted on Monday, July 19, 2010 at 4:01 PM by Vaidy


Very valid points. I would like to add that while the service is online/SaaS-based, the sales process to enterprises is still reliant on "feet on the street" in many cases. I have seen a few enterprise SaaS plays that have believed that their service can sell itself online - and have been proven wrong. This leads to a lack of sales traction and a need for a hard relook at the viability of the business plan since hiring sales people is obviously a much more expensive proposition.

posted on Monday, July 19, 2010 at 4:20 PM by Satya Krishnaswamy


#5 "Quick advice: If you do experiment with pricing, try hard to take care of your early customers with some sort of “grandparenting” clause. It’s good karma." 
 
Dharmesh is being a bit modest with this. 
 
Early customers paid $250/month. 
 
They were all grandparented pricing. Its now $750/month.

posted on Monday, July 19, 2010 at 4:29 PM by Stephen Kellett


I really love your insights and your company. Thank you for being an incredible thought leader. I founded a company that helps financial advisors and financial services firms compete in a wired world through a turn-key blogging and social media platform.  
Wired Advisor<a/> I have spent quite a bit of time thinking through these issues as they relate to my industry and your article brings to light some great points to ponder.  
 
In the financial services industry, we evolved into more of a "pay as you go" model and moved away from a "transactional" model beginning in the late 90's. Not all firms and financial advisors jumped on board, but the majority did. In our industry we call this "annuitizing your business". The idea was, if you could acquire AND retain assets by waiving any transaction costs associated with your time, or your recommendations, you would essentially be on the same side of the table as your client. The client is more likely to "sign up" if there are no strings attached, and no upfront obligations or long-term contracts. The financial advisor then hopes to realize the ROI on this relationship through retention efforts over time...BIG PROBLEM. 
 
1)On a per-relationship basis, the financial advisor invests significant hours upfront in understanding the client situation, planning and implementing, and on 1st year service. This is a tremendous risk from a revenue perspective...to not be compensated for this time, especially given clients turnover rates, which brings me to my 2nd point. 
 
2)Client turnover is inevitable and high. People die, spend their assets down, become disgruntled with their advisors, meet a family friend in the business, etc. The financial advisor is typically going backwards faster than they are moving forward, and the sales cycle is extremely long which makes it difficult for this to be a break-even or surplus revenue model if no upfront revenues are ever received based upon time invested  
 
3)The focus becomes more about taking on as many clients as possible where the financial advisor can "annuitize" more assets and have greater recurring revenues over time. This leads to capacity constraints. The more clients an advisor takes on, the less capable he/she is of servicing those relationships without hiring additional help and incurring additional costs. The advisor ultimately ends up focusing on the top 20% of clients who generate 80% of the revenue. So you have 80% of clients who are under-serviced and at risk of leaving...and do leave. Client retention becomes a major issue. In fact, it was astonishing to me as a manager for a major wirehouse firm how many clients are going out the back door.  
 
The model is really broken, in my opinion. 
 
The solution? 
I have thought about this problem for years as it relates to my industry. I do think that some sort of "upfront" charge is important. Psychologically, I think the client becomes more "committed" to the relationship. In the case of a financial advisor who acquires a $1M account and earns an average of 1% per year, perhaps they charge 10%-15% of that revenue stream upfront for a comprehensive financial plan that will lay out the investment strategy and relationship terms. I do believe there is value in a well thought out roadmap for the client. 
 
Secondly, I think it is okay to require a one year commitment and charge for that upfront. This gives the financial advisor enough time to showcase his/her service model and cement the relationship, regardless of market conditions. In order to retain clients you must buy enough time to be able to show and prove your value Inevitably in the financial services business, you will acquire the client at exactly the wrong time (when the market goes down). You really need a year to solidify the relationship! The same could be said for producing results for a client who is subscribing to your SaaS package. It takes time to get results! 
 
Lastly, new media tools such as blogging and social media can dramatically increase capacity, if they are leveraged properly.  
 
The model that I have decided to employ at my own firm is to charge something upfront to solidify client commitment (and simply break-even on time and money invested in acquisition), and ask for a one-year commitment paid in advance. No contracts or locked in commitments. The client is free to leave at any time but regardless, they are going to have to pay that 1st year upfront. 
 
Will it work? Time will tell for me, but I have seen it work in other cases. What it means is, you must be incredibly targeted in your marketing efforts in order to position your value. You can't be all things to all people. You must find those clients who "understand" and "realize" the value of what they receive in working with you and your company, which takes a little time in most cases. Most will not be willing to make the upfront commitment, but enough will, as long as you've defined and focused on your ideal client.

posted on Monday, July 19, 2010 at 8:59 PM by Stephanie Sammons


We have a great 4 page article on considerations for choosing a SaaS Help Desk solution. Check out the complimentary Insight article from BMC. (PDF) <http://bit.ly/9y1wwu> http://bit.ly/9y1wwu

posted on Monday, July 19, 2010 at 9:45 PM by Shannonatbmc


You mention the credentials of your business as: ~2,900 customers, ~170 employees and $33 million in capital raised but I don't see any mention of revenue or profit. I think revenue or profit is much more indicative of the success of a business rather than these other indicators. Do you agree?

posted on Monday, July 19, 2010 at 10:44 PM by Mike H


Good article Damresh. Nicely covered the risks.

posted on Monday, July 19, 2010 at 10:45 PM by rahul


Thanks everyone for all of your comments. 
 
A quick note to a couple of you that asked about HubSpot financials. We're privately held, so we don't share revenue numbers. But, our product ranges from $250-$750 month and we have about 3,000 customers. So, if you did the quick math, you'd get really close to guessing our revenue number.

posted on Monday, July 19, 2010 at 10:52 PM by Dharmesh Shah


Nice article.It has lot of nice points to consider before looking for SaaS Startup. Recently I happened to see a very good website. I wanted to send few comments but unfortunately I did not find "Feedback" link. I am glad that Julia pointed out in her post. Thanks a great article Dharmesh.

posted on Tuesday, July 20, 2010 at 12:07 AM by Arumugam


Dharmesh 
 
Thanks for this insight - so great to have someone share their learnings this openly. Our SaaS startup will begin accepting first customers in fall this year and we hope to build from there. We are keeping a diary of the whole process online to chart our successes, failures and fears so that others can experience it alongside us. I will keep you posted on how we are doing and tweet you a link to the app when the first iteration is live. We'll be taking a lot of your advice on costs and customer aquisition to heart over the next couple of months as we finalise our model. A huge thank you once again. 
 

posted on Tuesday, July 20, 2010 at 2:11 AM by The_Partner


Very good article! Our issue with our online DMS is marketing budget. We need to spend a lot to get paying customer, but as you said, money is coming in slowly from them. We are at the point where we must decide: shall we go slowly up and bring new customers slowly or to raise venture money and start the r'n'r?

posted on Tuesday, July 20, 2010 at 3:39 AM by Ivan Mojsilovic


I'd agree totally with the 7 mentioned insights, particularly the UI and UX point. For me this can be the difference between success and failure for a SaaS start-up

posted on Tuesday, July 20, 2010 at 3:41 AM by Peter


Thanks for sharing, its clear that providing great service in order to retain existing customers is vital, SaaS businesses should not get complacent in this area. Thanks again.

posted on Tuesday, July 20, 2010 at 4:06 AM by Joanne Whitehead


Most points are valid - but they are valid for any industry. 
 
Take the cashflow issue, for example. It is not nearly as dire as you suggest. Your assumption is that the entrepreneur will have to manufacture x widgets that need to be supplied over the next 30 months on day one, which is clearly not true. Most SaaS based businesses are high margin and recurring profits fund some of the cashflow on an ongoing basis. 
 
But then, every entrepreneur expanding too fast will face cashflow issues, regardless of the industry or product type. Isn't that the reason why invoice factoring has been established for years? 
 
I may be a bit cynical but article seems to be an attempt to dissuade people from starting SaaS type businesses. 
 
Overall, a good, informative article. Good food for thought, as usual. Please keep it up. 
 
Regards 
Peter 

posted on Tuesday, July 20, 2010 at 4:30 AM by Peter


no.7 is essential 
 
bad UI generally leads to software being badly used

posted on Tuesday, July 20, 2010 at 5:11 AM by BF_Matt


Thanks a lot for insightful information. We do not have products but we do services. Customers don't pay per month instead it is like bid and get the project and complete the project. Probably we need to convert those customers to go for maintenance plan..

posted on Tuesday, July 20, 2010 at 5:56 AM by Krish


I was never a believer of SaaS. its great for clients and very tough for the owners. hope this would evolve for much better protection for the owners. Nice write up.

posted on Tuesday, July 20, 2010 at 6:52 AM by Sriram


Great post. Would love the customers to read this and get an insiders perspective - specially point number 1...

posted on Tuesday, July 20, 2010 at 8:16 AM by


Excellent post. Thanks so much. 
 
May I offer that if your SaaS is B2B, like ours, you can consider annual subscriptions paid up front. That's how ours works and it helps wonders with balancing the cash flow. In addition, we find that most renewing customers are willing to renew for multiple years and pay up front (gives them price protection). As long as you factor in support costs for future years and can handle it, a great model.

posted on Tuesday, July 20, 2010 at 1:47 PM by Sherri


Great distillation of the SaaS reality. Been there and done it and doing it again. Of course the degree to which your application can "land and expand" makes a huge impact on number 1. For instance the customer that buys 20 $55/month seats in month 1 and is up to 100+ seats by month 3 makes a huge difference. 
 
Also, with regard to item 4 we signed up for Hubspot about a month and a half ago. I was never satisfied with our SEO activity and web presence. I was also not a blogger. I am amazed at how much progress it helped us make and how quickly. Plus, from the CEO perspective I get some great reports to share with my team and advisors, etc. Can't wait to release our upcoming site update which leverages everything we are learning. :)  
 

posted on Tuesday, July 20, 2010 at 2:06 PM by Michael Ryan


Excellent post Dharmesh. If keeping the customers long is key for success to cover COA why not offer a yearly subscription at a discount and lock them in for 12 months? How about for 2 years...that is what the telecom carriers do and you will get a penalty if you break the contract...

posted on Tuesday, July 20, 2010 at 4:51 PM by Antonio Faillace


Great post. Thanks a lot. It would be interesting with more experiences on how to deal with competition coming from both SaaS and traditional providers.

posted on Tuesday, July 20, 2010 at 11:08 PM by Ole Ronberg


Great summary of extremely useful experience sharing!  
As SaaS is a fairly new concept, and myself is preparing for this, the financial pre-cautions worth a lot. It is great that similar experiences are shared all over the globe.  
Thank you for this 

posted on Tuesday, July 20, 2010 at 11:44 PM by George Papastamatiou


SaaS business should focus on lowering the cost of customer acquisition and increasing the customer life time value. This is absolutely true, however, SaaS companies should find innovative(alternate) ways to generate revenue from existing customer base. This is nicely done by 37Signals.com

posted on Friday, July 23, 2010 at 1:37 AM by Chirag


This post (which is nice indeed and I have a separate comment on point #4) proves again and again that Blog is good for rapid publishing but not good for discussions. All the people thanking author could use Vote button or Thank you button to leave Comments for people to contribute to subject. For our own product blog we want to 'marry' blog and forum with transparent login. Each blog post will have a related topic in forum with voting plugin (similar to forum 'poll' concept). You click comment below post and you end up in a forum which is 'sharpened' to be moderated better and have much more tools for contributors to participate - attach images, videos, reach text editing. 
 
"Inventive thinking frequently involves combining concepts or elements from different realms that would not normally be put together" sort of.  
 
We may bring comments back from forum to show them below blog post - but I am not sure if it will be necessary (less is more).

posted on Sunday, July 25, 2010 at 8:39 PM by Igor Kryltsov


Talking about #4 Funnel 
 
1. How do you feel about Stack Exchange changing concept/watermark/prices? Do you have enough visitors to stay? I mean http://inbound.org/. 
 
2. Looks like HubSpot blog is custom built and part of a web site - no problem to track who is coming to registration page from blog or web etc. What about http://inbound.org/ or let's say you have internet forum which is external system and you still want to track people coming to web site from forum or stack exchange or uservoice or whatever it could be. 
 
Any suggestions on a product for funnel tracking being able to do this? 
 
Thanks a lot

posted on Monday, July 26, 2010 at 3:46 AM by Igor Kryltsov


"I've been selling a SaaS business suite for more than 9 years. It's a privately held company. Everything developed internally by the technical partner and, then, less than a handful of programmers. Built out via feedback, suggestions, requests from customers. There's now a total of 12 employees, all working remotely. No advertising, no marketing. We have nearly 10,000 customers. 
 
posted on Monday, July 19, 2010 at 2:03 PM by Lydia Sugarman " 
 
If this is your page - http://www.linkedin.com/in/lydiasugarman and this is your product - http://www.privatelabelmail.com/? 
 
It really looks like you said. Ultimately it does not matter how many employees you have. Your profit and customer satisfaction is important. http://www.privatelabelmail.com/ honestly does not look like site anyhow related to internet marketing but if you really have profit and customer satisfaction I am glad for you. I did not get a unstoppable wish to register simply because I have to register BEFORE I will find what it does and how. 
These guys also have around 12 people and do similar things - http://www.campaignmonitor.com/  
 
Can you see the difference? 
 
:)

posted on Monday, July 26, 2010 at 7:49 PM by Igor Kryltsov


Great distillation of the SaaS reality. Been there and done it and doing it again. Of course the degree to which your application can "land and expand" makes a huge impact on number 1. For instance the customer that buys 20 $55/month seats in month 1 and is up to 100+ seats by month 3 makes a huge difference.

posted on Saturday, July 31, 2010 at 5:26 AM by notebook tamiri


Hi all, 
 
I started off with a SAAS product venture and need to take a hosting decision [1st timer] 
 
 
 
Almost thought of taking up a virtual dedicated server from RACKSPACE or the likes. 
 
 
 
Will Amazon be a better choice? Have not researched much on their offerings.  
 
 
 
I would be adding more products [1 in every 6 months hopefully]. Would be hosting in-house someday dreaming things go near sky! 
 
 
 
Any advice from your experience would rescue me. Any good article on choosing the right infra. provider for SAAS comps. 
 
 
 
What are the challenges down the line while migration to own data center? Any article? 
 
 
 
Product type [not actual] : HRM like EmpXtrack, ERP for car rental, Time track, Project Mgt, Property Mgt etc. 
 
 
 
Thanks a lot. 
 
 
 

posted on Tuesday, August 03, 2010 at 6:10 PM by Deb


Good question Deb! Can someone share some thoughts about this subject please?

posted on Wednesday, August 04, 2010 at 5:38 AM by Ivan Mojsilovic


Deb, Its important to know the technology platform of you SaaS application. If your platform is on 'Ruby on Rails' then I would highly recommend you either EngineYard or Rakespace. Both are excellent hosting providers with great support for Ruby on Rails Application. Initially, when you do not have many users signed up with your SaaS application, its okay to go for less expensive options such as Heroku or RimuHosting. Personally, I have great experience working with RimHosting guys, they are good at support. You can go for Amazon S3 hosting for image storage. Cheers, Chirag

posted on Wednesday, August 04, 2010 at 5:51 AM by Chirag


Enjoyable article - thanks.  
 
Would love to hear more robust discussion from Dharmesh and other SaaS vendors around specific client churn minimization strategies and tactics - especially for SaaS providers that have rolling annual payment terms (as opposed to a monthly pay-as-you-go by direct debit plans). 

posted on Wednesday, August 04, 2010 at 6:24 PM by Paul @ PeoplePulse


Hi Chirag, 
Thank you and appreciate for the reply!  
The app/platform is built with Java/J2EE and designed to support mutiple apps e.g. single entry for different apps etc.  
I took up a virtual dedicated server [4GB RAM, Dual, 64 bit] from NAVISITE couple of months back; was a trial decision which can be taken further if we don't see any flaws in the decision.  
My concerns currently are: 
Should i consider a cloud option even before i start off with selling? Did i make a wrong choice by opting for a dedicated option [pay around 350$/month] ?  
Will scaling up or meeting cap. be an issue by not being in a cloud plan? [the demand is fairly predictable though, so probably can add up more servers before time] 
Will it be far better off to move to a cloud plan with the same amount i pay in a dedicated plan, thinking that we will add more apps down the line [its more of a app market place or a platform of apps than 1 single app] 
In next 1 year, i am looking at 300 small businesses using our apps [3 dft. at least] 24/7 [or 600 business users]  
 
What if the business vision is like a SALEFORCE for small businesses or a SALESFORCE like entity in a local market segment lets say only catering Indian Small Businesses having an array of apps [40].  
 
What would be a good starting point for such a plan from the hosting standpoint. Definitely doing it in-house at present is not feasible financially.  
I hope you can make out where i am going in or coming from. Any advice would be tremendously helpful. 
Thanks & regards 
Deb 
 
 
 
 
 
 

posted on Wednesday, August 04, 2010 at 6:44 PM by Deb


Would love to hear more robust discussion from Dharmesh and other SaaS vendors around specific client churn minimization strategies and tactics - especially for SaaS providers that have rolling annual payment terms (as opposed to a monthly pay-as-you-go by direct debit plans).

posted on Sunday, August 22, 2010 at 10:43 PM by hikaye


You sent me the link to this page by twitter. It was really useful and interesting. Thanks.

posted on Monday, September 13, 2010 at 5:55 PM by Diana


Fantastic article, very interesting lessons that I will find useful.

posted on Wednesday, September 15, 2010 at 10:55 AM by How To INcrease Sales


nice article, thanks for tweeting me the link.

posted on Wednesday, September 15, 2010 at 10:57 AM by Adwords Secrets


Thanks for the article, I like #7

posted on Wednesday, September 15, 2010 at 11:00 AM by Perth Sheds


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