Treat SaaS As A Business Model!
By Sergiy Golubyev (Сергей Голубев) on ALTCOIN MAGAZINE
Andreessen Horowitz: ‘’Software Is Eating the World’’
Recently, due to the growing interest in blockchain and fundraising by ICO/IEO/STO, many projects are ready to sell services or access to software using the blockchain or attracting crypto assets as an alternative investment tool. Founders and project teams in their WPs are trying to tell the public and investors about the bright future of their revolutionary ideas or what perspectives in the project can provide. For most cases, the bright future of many projects is described using the ‘’ marketing fairy tale’’ instrument, beautifully brought you what you wanted to hear. Inexperienced investors seem to believe this, but investors are experienced, ready to operate with larger amounts than $10, such tricks less and less willing to consume, because the crypto hype is gone, now only business remains. That is just such investors, more and more thoroughly trying to find answers in the fabulous WP related to how the business model will work in the project, in its tokenomics, and whether there is a sense when calculating different business development options, to invest in a project? Unfortunately, not all project teams understand that capitalists began to want from them, and they do not understand those who respect their money. The eyes wide shut of the team of such a project is the first sign that they did not think yet about it or worse, the team did not understand why everyone wants something from such an “innovative” project, there is no person in a team who is ready at least to show investors such model in private. Not just to justify the importance and need for their product in the market, but to prove the importance of the product in the market for the investors firstly, but above all for the team itself.
Indeed, so far, such project teams think that they have already earned by raising the desired amount; However, they do not realize that to earn money — this is when the product of the project, after a period of risky payback, with fixed costs and risk control (at the initial stages, expenses are covered by the collected budget to the project), is already making a profit, which also should not be treated as a win in a casino, but as a fact that your product or digital service is in demand on the market. Be sincere, we are still silent on how to treat such profit and how to distribute it. That is another story. Moreover, we have already talked about the problem of working with the budget itself(https://medium.com/coinmonks/the-budget-of-the-ico-project-or-the-secrets-of-the-madrid-court-dd8ee48bc7d2) But in this article, we are considering the next step — when a part (at least) of the budget is already spent on creating a product/service (just more than MVP), and you need to think about how your innovative product will be sold. To make forecasts for its economic development, including the most pessimistic outcome of development. The goal is to prove to a serious investor, and to yourself — that profit is possible and that you are ready and understand how to structure it. And here, we just stress out everything not to tokenomics — as to the system of the pricing policy of your tokens (although many recognize tokenomics as fantasy), but rather to the second part of it, to my opinion, it’s very important and interrelated with Tokenomics — to a financially sustainable business model. Every company needs a business model that ought to be logical and scalable. You need to predict and know how your company’s revenue cash flows work, and how these revenues can increase/decrease over time. And if you cannot explain all this to investors, they will not pay attention to your project. In my opinion, for the majority of blockchain projects, SaaS can become such a model, both from the practical and economic side.
What Is SaaS In Practice?
The SaaS model (Software as a Service) is a system for selling a software product, where user access is provided via the Internet. That is, instead of buying and installing software on your computer locally, the service is available through the www or, as they say, from the cloud (yes, at least from the darknet). The user of the SaaS system, who gets access to the application, as if rents it, paying a certain amount for a period of time. Due to this, such a solution is cost-effective. Thus, an economic effect is achieved, which is considered one of the main advantages of SaaS. But its main advantage is that the user does not need to deal with the technical side of the issue: installation, support, updating, compatibility, and other issues — that is, one can only use the necessary functionality for their business purposes. SaaS provider cares about the technical health of the application, provides technical support to users, and independently installs updates.
The Main Differences Of SaaS From Standard Software:
· There is no need to purchase a license to use the product: instead, its rent is paid for a certain time. This can be a monthly payment or payment for the amount of data. In this service (support and upgrade the system) is already included in the price.
· Several clients can use one service simultaneously. They can access it from different operating systems and browsers remotely from anywhere in the world where there is an Internet connection.
· If the service is not satisfied with something or the need to use it is gone, you can simply not extend the payment for the service.
Services based on the SaaS model today are quite a lot, and they all have a client. However, alongside with all their benefits, they have certain disadvantages. SaaS benefits:
· There is no need to install software on each computer — this is the main advantage of the model, as mentioned above.
· Reducing the financial costs of purchasing a software product and its subsequent support.
· From the side of the developer, such a model allows you to deal with the problem of piracy — the distribution of unlicensed copies of a software product since the final program does not fall into the hands of the user in finished form.
· Such systems, as a rule, are cross-platform and cross-browser, that is, they do not require a technically specific operating system or browser to work with the application.
· Using SaaS allows the employee not to become attached to a workplace or computer: access to the application can be carried out from anywhere in the world
Disadvantages Of SaaS:
· Your commercial data using the SaaS system will be transferred to a third-party provider, which is not always safe.
· Low system speed, which depends on the speed of the Internet
· Due to interruptions in Internet access, there is downtime at work, which is very unreliable from an employer’s point of view.
· However, all these problems are already fading away, since modern technologies allow for stable and fast access to the Internet, and data encryption technologies allow for reliable exchange of commercial information via the Internet. That is why SaaS systems are becoming more common.
The main part of SaaS users is a small and medium enterprise, for which the purchase of a ready-made software and its subsequent support are quite expensive, therefore its rent is more profitable. In addition, such a system will be beneficial for companies with a wide network of offices or branches, between which there should be a constant data exchange, so even large companies may be interested in SaaS technology. Here are a couple of examples of SaaS that you could already use or, for sure, have known for a long time:
· Corporate mail on Gmail, Yandex or other clients is perhaps the most massive and simple example of SaaS technology.
· CRM and ERP — systems for project and resource management.
· Online document management systems (same google docs), organizers, calendars are all also examples of SaaS, although many are free.
· Website hosting services are also a prime example of SaaS.
· It can also include online games as services built on the same model, although they are not usually classified as SaaS.
· You can also add marketplaces that have recently gained widespread popularity due to the development of blockchain projects and cryptocurrency fundraising with the help of ICO
In addition, there are numerous industry solutions, even in the development and promotion of sites: site designers, automatic site promotion systems, eternal and rental links exchanges and much more. As is clear from the above, SaaS as a practical side of the business model of a ‘’service — client’’ is not perfect, so some alternative solutions appeared based on its model but have its own modifications, which can also be claimed by the blockchain sphere:
· Cloud platforms. If you do not want to give your commercial data to a third-party provider, then it will be beneficial for you to rent not the application, but the computer capacity on which to install the purchased software.
· Application Hosting. This model differs from SaaS in the server-side architecture, so for the average user, the difference will not be visible. Its essence is that the hosting provider installs a separate copy of the application for each client instead of serving multiple users at the same time. This process is more difficult to administer and perform software updates, so this service is more expensive
· S + S is a model from Microsoft that suggests using a software client for accessing the service, not a browser
Differences SaaS model from the model of practical use of conventional software:
· The application is initially adapted for remote use
· One software is used by multiple clients
· Payment for software is either monthly in the form of a monthly fee or based on data volume
· Software support is already included in the fee
· Software update is transparent to users
· If the need to use the software is temporarily gone, then the client will be able to easily stop its use and payments to the developer or application provider
Like any phenomenon, the SaaS model has both positive and negative sides. Positive factors:
· No need to install software on employees’ workplaces, since it is accessed via the Internet, that is, a regular browser
· Reducing the cash costs of deploying software or a system in a company — these are also the cost of rent per visit, remuneration of employees, and so on
· Reduced maintenance costs and system upgrade costs
· The need to transfer commercial data to a third-party service provider
· Not very high-speed system or applications
· Possible interruptions to the Internet, and, as a result, interruptions in work.
The rapidly evolving IT, the development of encryption technologies, and the consolidating SaaS image dispel these mentioned above fears. In recent years, the SaaS business model has been actively developing in the IT market. In some ways, this scheme can be compared to rent — with the only difference that, within the SaaS model, all the physical servers and components of the program remain on the vendor’s territory (that is, the supplier). What is it for? The fact is that the traditional software purchase scheme has significant drawbacks. First, the company has to withdraw significant financial resources from the company’s turnover. Secondly, the customer most often uses only part of the functionality, and you have to pay immediately for the entire package. Entrepreneurs are accustomed to treating this as an inevitable evil: without modern software, it will still not be possible to fully optimize the company’s work. SaaS can be considered as an alternative to the classic version of the software installation, with its advantages and disadvantages.
Software as a service relates to cloud technologies for business and has modifications: models like PaaS (platform as a service) and IaaS (infrastructure as a service) have much in common with SaaS. SaaS is the simplest cloud model from the user’s point of view. IaaS assumes only access to a virtual server, PaaS — access to a server and basic software (operating systems, database management). In terms of economic structure, there is more in common. However, which model to use will be prompted by the project itself and its goals. The understanding of the SaaS varies even among expert practitioners. In a broad sense, even popular web applications like Skype or mail services from Yandex and Google can be attributed to SaaS technologies. Yet in the classic sense, SaaS is a business-oriented model. Another controversial issue is whether the presence of a subscription fee is an obligatory characteristic of this concept. We will proceed from the narrower definition of SaaS as a subscription business application.
Economic Features Of SaaS As A Business Model
Yet, in the classical sense, SaaS is a business-oriented model that many start-ups in the IT sector can use. This is a cozy model for a SaaS startup at an early stage with a model that sells a SaaS solution through its website, offers a 30-day free trial (or less), gets most of its trial users organically and converts them into paid clients through online marketing. Therefore, the key factors for a SaaS startup are the organic growth rate, the marketing budget and customer acquisition costs, the conversion rate, ARPU and the churn rate. If your SaaS startup has a higher level of interaction, where revenue growth is largely determined by the number of personnel, then the model plan needs to be changed accordingly. Here are some of the economic features of the model:
· All starts with the registrations you add. Consider registrations (subscriptions) that are not monitored and traceable registrations (registrations with AdWords and other paid advertising where you can track the cost of getting registration). You may have to break this further depending on your customer acquisition channels.
· Then we assume that the project converts a certain percentage of subscribers into the category of paying customers (with a delay of one month if you have a 30-day free trial). A model can contain only one conversion rate, regardless of the source of registration. You can change this if your conversion rate varies depending on the source of registration (as a prediction option)
· Next, you need to calculate the possible income by multiplying the (approximate) projected number of customers that you may have in the middle of the month by your average projected income per account. If your project provides a multi-level pricing model, then consider the possibility of modeling it.
· Turning to costs — everything should be clearly written, calculated and justified. Be attentive to the project and its costs. An overlooked thing will surely hit the project on time.
· As for profit and loss, and cash flow, everything is very simple, use the assumption that your EBIT is equal to your operating cash flow. That is, you monthly collect money from your customers, you do not make any additional investments (in terms of accounting) and that are no taxes or interest payments. Simplification of forecasting works well for most SaaS startups, but it, of course, should become more sophisticated as it grows and the configuration of calculations is constantly becoming more complex, adding additional parameters
· Last — when predicting the SaaS business model, do not go for the synthetic decoration of the situation. Financial plans with an EBIT margin of 90% in the short term (up to 3 years) are a utopia and a classic mistake that can occur if you forecast your earnings to grow exponentially but do not provide your project with a real increase in costs. After all, if the load grows in a project, then the number of necessary personnel will grow at least, including the technical components of the project
The SaaS business model should give you the answer to the following questions:
1. What are the key factors affecting the profitability of a project and model?
2. How does the project attract and acquire customers, how is this reflected in costs and revenues?
3. What are the drivers of customer value and the life cycle of your product/service? How are these factors expressed in variables when calculating a model?
4. How do all these variables interact?
To become profitable using the SaaS business model, you should keep in mind the following truth: Lifetime> customer acquisition costs + service provision costs (paid and free). In simple terms, the lifetime value of your paying customers should be more than the costs needed to acquire them, plus the costs of servicing all users (free or paid). There are many different factors that affect profitability, including:
· Cost per acquisition
· Media efficiency (traffic sources, CTR, impressions)
· % Conversion Registration Funnel
· Average number of viral invitations
· Lifetime cost
· retention rates
· revenue structure
Understanding these components, you can customize your model and find out what indicators you need to use to achieve profitability in the SaaS model. At a high management level, here are some things that need to be tracked in the model:
· How do you pay for traffic? (CPM/CPA/CPC)
· What do intermediate metrics look like? (Impressions/CTR/etc.)
· How does your registration/subscription funnel work?
· How much do you spend on users you register?
Here are some factors to think about in terms of planning to increase or decrease the purchase price (CPA — cost per acquisition):
· Traffic source
· Cost model
· User requirements
· Audience and subject
· Funnel design
· Viral marketing
· A/B testing process
About the funnel in SaaS. As soon as you register your users on the site, the question arises how to convert them all into paying customers and whether there are any viral effects. In reality, the following happens:
· Every certain period of time comes to a group of newly registered users (both acquired through advertising and through viral marketing)
· Some % of these users turn into paid users
· Some % of these users then send out virus invitations
· Revenue is generated by creating a database of only paying users
· But costs are added up due to the base of both active and passive users
The point is to create the right combination of functions for segmenting people who are willing to pay but without alienating the users who make up your free audience. Do it right, and your conversion rate can reach 20%. Do it wrong, and your LTV will be very close to zero. That is why these functions should be built into the core of the SaaS business. You need to find a balance between free and “pay for”! Just remember that during the time it takes you to figure out your funnel, the viral cycle and everything else, all the free users you create more costs in your system!
About saving users in SaaS. Of course, it’s not enough just to get paid users, you need to save them. If you have a very high churn rate, then at best you will be stuck on a treadmill (you do a lot of work, you barely cover the cost, but you should forget about the profit). In the worst case, losing a lot of money is easy if the CPA exceeds the LTV. How sensitive are hold/save parameters to LTV? Here is a small example: the lifetime value (LTV) is the amount of revenue that a user generates from the first period to the abandonment of your service. Think of it as an infinite amount that looks like:
LTV = rev + rev * R + rev * R ^ 2 + rev * R3 + …
Where rev is the income generated by the user for a certain period of time, and R is the retention rate of the user between certain periods. So, LTV = 1 / (1-R) * rev
Let’s decide for clarity that for a certain period of time you have earned $1, and you have, say, 1000 paying subscribers/users. For example, compare the difference between 50% retention and 75%:
At 50%: LTV = 1 / (1–0.5) * $ 1 * 1000 = $ 2000
At 75%: LTV = 1 / (1–0.75) * $ 1 * 1000 = $ 4000
This means that in this case, by increasing the retention rate by half (relatively speaking), you will actually double your income. And even more when you reach the status of “application killer” and reach a retention level of about 90%. So we get:
LTV = 1 / (1–0.90) * $ 1 * 1000 = $ 10,000
You need to know that retention rates, as a rule, are not fixed numbers — they, as a rule, become well, the longer the group of users stays with you! Thus, the main factors influencing this coefficient are reduced to:
• Product Design
• Notifications (optimize them)
• If successful, the effects of saturation
On cash flow in SaaS. In the paid user model, it takes time to get a break — even point. You pay for the user in advance, but then the revenue cash flow decreases over several periods of time. As a result, you are prone to negative cash flow for a certain number of periods of time, which then becomes positive. This effect is exacerbated if your model specifically depends on virus capture because you will not get significant users in the virus version until your user base becomes large. As for the average revenue per paying customer, then, as a rule, you find that your customer base consists of several segments. You can rate them differently through different subscription levels (Free vs Pro vs Business) or pay-after or with many other models. Ultimately, you can put all of this into one parameter, which is called revenue from each paying customer. You can also divide income by the number of users (paying or not) to get the average revenue per user (ARPU). As for the cost of service, your predictions will vary. The main thing is to try not to do anything too expensive for free users! In the end, given that typical conversion rates are <10%, and subscription services are usually <$ 20 per month
Lifetime value in SaaS. Essentially, you calculate the number of payments that the paying users will generate during the entire time, called “user periods” in the model. The revenue per payer to get the total amount then multiplies this. For the paid acquisition model, it is more important to calculate LTV not for paying users, but for all registered users (paid or free). This way, you can find out if you can manage your traffic profitably by buying ads. Then you compare this LTV with the effective LTV that you get from the user's purchase, and then consider their viral effects. There is no doubt that there are inaccuracies in the SaaS business model. There is something to think about and what to improve. Here one cannot agree with the majority of experts who propose to improve the following in SaaS:
· Benchmarks of real data for comparison
· More detail for choosing from attracting users for affiliate or advertising or other options
· The degree of saturation in the viral model
· The best model for retention rates, except for one fixed indicator
· More complex cost accounting per user (infrastructure/employees/etc.)
· Simulation with multiple sources of income, including transaction fees
· Calculation of costs for the purchase of advertising, with an increase in profits/while reducing profits. And so on
As you could understand, you have already come across SaaS technology many times, and the number of such services continues to grow due to their relevance and ease of use. At the same time, SaaS, as a business model, in my opinion, lags behind the technology itself. Few projects and startups work with it and the majority, unfortunately, are paying less attention. However, progress does not stop there, offering more and more perfect and interesting ideas, taking into account the needs of each case. Accordingly, technological progress will require its model to substantiate, then SaaS and its variants and modifications are gradually being introduced into the digital economy and even into the crypto sphere step by step.
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Sergiy Golubyev (Сергей Голубев)
EU structural funds, ICO/STO/IEO projects, NGO & investment projects, project management, comprehensive support for business