Mark Suster says your SaaS startup should be low margin: snapstorm summary

Had to do a quick summary here because this is so applicable to the enterprise / institutional SaaS companies I work with in fintech.

Mark often has great snapstorms where he shares nuggets of SaaS startup wisdom. Today he answered a question our companies wrestle with a lot: “how much should we be focused on consulting / professional services vs recurring revenue / subscriptions?”

Here is what Mark says:

Btw Professional Services or “pro serv” essentially means consulting companies on your SaaS product. Things like training and implementation services.

1. VCs will typically say to stay away from professional services because it is a low margin business. (not to mention hard to scale)
2. They are wrong. Salesforce did a lot of this early on and stopped bc public market forced them to get out of that business. But they were big enough and important enough to stimulate a market to do pro serv them.
3. Pro serv is critical early on.
4. Why? Reference-able clients are one of the most important things for startups early on. You have to work with them to deliver success, software wont implement itself.
5. First year you should have 50% of your revenue come from pro serv. Sounds like a lot but year 2 will serve itself anyway.
6. It’s valuable revenue that you need to survive. And those clients have to buy your software anyway (recurring rev). It’s win win.
7. Priced it at 20–30% margin not 60%. Margin is margin is margin when you’re early.
8. The 🔑 is don’t get addicted to that revenue.
9. A 3rd party can’t do it for you early on. You don’t have a market.
10. After you’re successful, reduce margins to 15–20% of rev over time and eventually to 0%. Even at 0% it does something important: guarantees customer success.

That’s it. Now go follow Mark Suster’s snapchat.