The Secret of Making Money with SAAS

On December 31st 2012 we (Ballistiq) launched our first ever SAAS product called Downtown. We started with Downtown because wanted a nice and small product to learn from. We knew that Downtown was tackling a very small niche market with competitors so we wouldn’t make that much money. For us, the purpose of doing Downtown was to help one of our clients who had a need to sell digital downloads, hopefully build something that others found useful as well, cover costs and learn as much from it as possible.

Downtown is a high end digital downloader for Shopify. It offers features such as PDF and ePub stamping, file storage that can be shared across multiple products, serial number provisioning and a download at checkout feature that works hand in glove with Shopify. The process of buying a product from Shopify and downloading from Downtown is seamless.

The secret of making money in Software as a Service (SAAS)

In all the books I’ve read and events that I went to, nobody mentioned this. That’s why I’ve dedicated this post to this topic.

My theory is this:

In SAAS, you are building a digital vending machine.

That’s your business model.

Think about how vending machines work. You set up and stock up a vending machine. You place it in a high traffic area where people can see it and buy from it. People come, pay money, get whatever they paid for and leave without ever contacting you. It just ticks away and makes money.

Your ideal scenario is that many customers come across your product, try it, pay for it and never contact you.

As soon as a customer writes to support, you’re screwed. At Ballistiq we do consulting and we are paid by the hour. When a consulting client contacts us, we bill everything to the client including reading their emails. In SAAS, when a customer contacts you with a problem, the time it takes to read an email and investigate the issue wipes out all revenue that they paid you and more. There is also the overhead toll of context shifting as you move from one task to another. And stress too.

With Downtown, we offer a very low cost service where customers are generally paying $5-10/month. As soon as a customer writes to us, we’ve lost money. There is an opportunity cost involved as we can compare objectively with consulting work where if that time was billable we could have been profitable.

Observation of this theory

Take a look at 37Signals Support. Go to Basecamp.com and try to find where to contact support. Notice that it is in fact quite difficult to find where to actually write to support. It is at the bottom of support pages after all the FAQ’s. 37Signals wants you to investigate the problem yourself first and hopefully never contact them.

When you do contact them, they offer great support. But the nature of the game is build a digital vending machine where customers can solve their own problems and never ever write to you.

We got burned by this. With Downtown, it’s too easy to contact support. We use Uservoice and there’s a widget that floats on the right side of the screen so people can write to us when they can’t figure something out – even though it’s in the Help section.

This doesn’t mean that you don’t speak to customers and listen to their issues. When you are building a product, it’s important to listen to customer needs and have support available so that you can iterate and build a better product. However, you need to be realistic and set boundaries. Aim to build a quality digital vending machine and lower support requests as much as possible.

Say “no” to new features by default

37Signals always gives the advice to say “no” to new features by default. This is an observation of the Digital Vending Machine business model as they are setting clear boundaries and not raising customer expectations. If a customer is only paying a nominal fee like most SAAS products are ($5-50/month), you shouldn’t bend over backwards and spend too much time on building a feature just to win that customer. You have to weigh the opportunity cost. For example if you’re consulting at $75/hour and a customer request will take 20 hours, you could have made $1500 by billing by the hour. If 10 customers all ask for the same thing, then you can weigh to cost of building the feature and the potential revenue that it could make from having many people buying the product for that feature.

At Ballistiq, because of our hybrid consulting/product model, we track time spent on tasks and it became clear that support and feature requests were in fact wiping out all profits on Downtown. Once we understood that the goal is to build a Digital Vending Machine, we focused on building a quality product where we can reduce the support enquiries significantly.

People respect you when you explain you’re a small provider

Because we are software consultants, it’s very hard for us to say “no”. In the first few months of Downtown, we were just adding features to win customers. Once we figured out the Digital Vending Machine business model, we began to say “no” to new feature requests by just explaining to customers that we provide a low-cost, flat rate service and we’re a small provider, so we can’t cater to all feature requests. We found that people really understood this and respected it. People move on. It’s not a big deal.

It’s still hard!

In addition to Downtown, we also recently helped another customer (ReviewStudio) launch an awesome digital reviewing service. This client is doing well. The one thing we both shared is that it still takes a lot of effort, blood, sweat and tears to build a viable business on SAAS with repeatable, sustainable results. So don’t go into it thinking that you can build a Digital Vending Machine and that money will just roll in automatically. There’s a lot involved!

I’d be interested to hear what others think of this.

Leo


Image by Vincent Lock used under Creative Commons License.

  • victor

    cool one dude

  • **Excellent** post, Leo. I’ve been looking for a way of thinking about and talking about SAAS, and you thought of a great one: digital vending machine. While I’ve yet to find a way to do away with support, the digital vending machine is the dream.

    • Paulo Pinto

      I was saying Leo the same… once it’s independent we could work this out from home! Wouldn’t it?

  • Awesome job of explaining a complex problem in simple terms. Thank you!