Tag Archives: SaaS

The first 5 steps to building your own SaaS application

This post is for non developer founders who want to build a SaaS application.

Software as a Service (SaaS) is a relatively small market – at $19 Billion in total revenues, it seems large, but compared to $250 Billion of the overall software market it seems minuscule. It has grown from nothing to this large number in the last 10 years. Similar to the eCommerce market, which seems large but is less than 15% of overall retail, the opportunities will start to be in the niches is my prediction.

The big question is when and how will it grow and where are the opportunities. While there are many specialist firms focusing on SaaS alone, the incumbent software companies (the largest of who are Microsoft, SAP, Oracle, etc.) are also making their own investments to move their businesses from selling licensed software to services.

One of the key opportunities I see is that ability for smaller, niche markets to be targeted using SaaS. Since the deployment model, time to value and cost are so much lower now than 10 years ago,  it is easy to build a niche product that can gain rapid fan following among the target customers and *if that customer base* does grow and end up having more budget it can be a lucrative market.

I do get the question often about the steps to build a SaaS business. Even if you dont intend to build a Venture funded business, the economics of SaaS are determined by cost of customer acquisition (CAC) and cost of servicing the customer (developing, operating and maintaining the software).

What I am increasingly starting to see is that most prototypes are either built by a developer founder, or outsourced (by a non technical founder) to “prove that the market exists“.

1. The first step I’d recommend before you start development, is to sign up 15-20 beta customers. Target people you know well who will stick through your crappy alpha, beta and version 1, so you can convince them that the value does exist when you iterate quickly.

For early beta customers, there are many techniques you can use including: a) setting up a launch page and promoting that launch page on social media b) setting up a launch page and buying Google adwords to drive signups and following up with signups via email c) blogging about the topic to share what you know about that market d) interviewing influential users before you launch or e) setup an email newsletter of great content for that industry and have many potential users subscribe to that newsletter.

2. The next step is to create an activity model and user flows.

User flow Diagram
User flow Diagram

This step is to ensure that you can know exactly what are the top 3 features you need to implement first which will make your product “must have” to solve the problem for your users.

In fact if you can identify the top feature (just one) that people will come back and use everyday, you should be good to go to the next step. Validate the top feature with your beta customer list, so you are building what they will use.

3. The next step is to create a mockup using wireframes. These are typically good to show the screens your user will go through and the experience as well. I would get a lot of feedback on the list of steps and screens before I build the prototype.

Iphone Wireframe
Iphone Wireframe

Typically in your first pass stick to under 7 screens would be my suggestion. That’s enough for a 45 second to 1 min “demo” and should give your users a feel for what the app will do. If they ask you for “one” feature that matters more to them than the ones you have, dont mock it up yet, but put it on your list until you have enough users interested.

4. Design your database schema. A database schema is good to share with your developers entities that exist in your application and what their relationship are. I tend to use DB Schema or just Freemind to show to fields without the datatypes.

DB Schema
DB Schema

5. Understand and select your “stack”. Even if you want to outsource your application development I’d recommend you talk to a few developer friends who can educate you on the stacks they use – what the front end languages and libraries would be, what the back end language would be and the database options. You will be more confident when you talk to your outsourcing company and also be able to help make tradeoffs when you need them.

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The 5 most important questions to ask before you price your SaaS product

Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action. The names of your pricing plan also has a significant signalling effect on your customer’s perception of your product. I believe the future of SaaS pricing will move from pay-per-usage to pay-for-outcomes.

The most frequent question I get asked about SaaS companies is how to think about pricing for the product. Here are some constructs to think about and 7 questions to ask before you come up with a pricing model or a price for your product.

1. Understanding your customers current solution and options and their “cost per unit of activity” is the most important thing you should do first. For e.g. if you sell a Sales force automation solution, the customer might be using an Excel spreadsheet to track their sales because they dont have too many opportunities. So in their minds the “cost per unit” is zero, since they have already “paid” for Excel.

2. SaaS pricing is a marketing function not finance or operations. If the team that determines the value of your offering to the customer is another them, then it is their responsibility. The reason for this is that value of your product determines how much you can charge, not what customers are willing to pay. Value cannot be determined as a absolute, only relative. Which is why you have to compare it to their current solution.

3. At the early stages (less than 50-100 customers) optimize for more customers and quicker sales cycles not for profit. To get data and buying patterns you need enough data and a meaningful sample size. When you go beyond the early customers, it is time to optimize for LTV and CAC.

Here are the top 7 questions to ask before you come up with a pricing model for your SaaS product.

1. What are the current options for your customer?

Find out how are they solving the problem your product addresses currently and how much does it cost them to do that.

2. What are the different segments of your customers?

Find out if there are different problems your product can solve and the value associated with those problems. That would be the best indicator of

3. What is your goal from your pricing?

It is not always obvious to say that your goal is to get the “most money” or to be the most expensive product. Some companies want to be the 80% functionality at 20% of the cost option. Determine your pricing goal – profitability (after customer acquisition costs), value creation, marketshare, etc.

4. What is your cost of customer acquisition?

For most parts, your cost of development tends to be fixed (if you hire 3 people, you have to pay their salaries regardless of how many features the ship), but the cost of customer acquisition tends to be a variable. So if your costs dont take CAC into account, you will have a model that wont be profitable.

5. What is your sales model?

Linking Sales and Pricing for SaaS
Linking Sales and Pricing for SaaS

I usually use the price and complexity of sales / marketing on two axes to understand the sales strategy for a SaaS company.

If you are a company with a lower price point and low complexity of sales, you will have to rely on customers to try and buy (freemium) the product on their own and work on obtaining customers at a low cost.

If you are a very complex product or have a complex sales process and your product costs a lot, you will have to hire a field sales team to help you sell.

If however, your product is priced high and your complexity is low then you will build an inside (phone) sales team.

If you have a high complexity product and sales model and low price, your company will die.

Use this model to determine where you want to be and price the product appropriately.

What I learned from looking at 89 SaaS companies on how to convert freemium customers to paid

The most frequent question I get asked about a SaaS busines is pricing and sales growth. With pricing the biggest question is how to covert more free customers to paying customers.

While there is no average, I have seen companies focusing on consumers having as low as 1% conversion to a max of 10%. Companies focused on pro-sumers (professional consumers like freelancers, etc) have a slightly higher rate of conversion at 2% minimum and those that focus on SMB (Small medium business) have some of the highest at close to 5%. Finally 10% converted customers is not unheard of for companies selling to enterprises.

The time taken to convert when a customer is free to paid also varies from days to months or never.

What determines when a customer moves from premium or your paid version?

I look at 89 companies in the Microsoft Ventures accelerator programs from the 370+ alumni to understand the techniques used by companies to convince customers to pay. While not comprehensive, here are the 10 most frequently used levers that companies have used to encourage their customers to a paid version.

1. Advertising: In this version, the paid version has no ads. (e.g. WordPress hosted has am option for non ad based and advertising supported blogs).

2. Time: These companies allow for a free version for a period of time (e.g. HighRise, or Trigger.IO) – a week, 15 days, 30 days, etc. This is the most frequently used model.

3. Features: The most widely used model has basic features for free (e.g. Buffer, LaunchRock) and some premium features locked unless you pay. This is the third most used model to convert.

4.Collaboration: Individual usage is free in this version (e.g. Slack) and you will pay if you wish to collaborate with others in your team. Obviously the team usage gets your more benefit.

5. Control and Security: In this version, if the IT administrator (e.g. Yammer) wants to control the usage and wants security features (e.g. Yammer, GitHub), then you will pay for it.

6. User or seat (Fresh desk): In this type of pricing, (e.g. Freshdesk) the company provides a certain number of users free (3 agents or 2 users) and charges if you have more users.

7. Analytics and Insight: The usage of the app is free, but if you wish to obtain analytics (e.g. Feedly) or insights into your usage and data, you will have to pay.

8. Integration: In this version, if you wish to integrate the SaaS app into other enterprise apps in your company (e.g. CircleCi) or internal apps you will have to pay for that.

9. Data access: In this version, you can use the app for free, but if you wish to get your data (e.g. Capricity) out of the SaaS system you will have to pay for it.

10. Usage: In this version the more you use of the product (e.g. Dropbox, MixPanel) you will pay more. You will get a free version for 2GB, but for more than that you will pay per month. This is the second most popular conversion technique.

There are many more models that you can use, but the most frequent are a) Time bound, b) Usage based and c) Feature based.

A #contrarian view on how the customer validation phase should fine tune your #startup business model

The trend from users (businesses and consumers) wanting to buy services – software enabled services, instead of software is accelerating more than ever in my observation. Previously things that most folks would sell as software is now being packaged and sold as a service that solves a problem and is a solution than a packaged piece of software.

In the 90’s and 00’s the solution to a business problem was to develop, deliver and sell software, which was either sold as a license or an annuity. SaaS then came about to provide a change in both the pricing model and the deployment model.

The trend is more pronounced in the consumer portion of the business. Let me give you a few examples and then go into detail of one case study that I discussed with some entrepreneurs Utah.

Take the case of Uber. A decade or two ago, the prevailing model would have been for Uber founders to build the software and then try to sell it to taxi companies and help them service their customers more efficiently. They instead chose to be a “full stack” company and own the consumer experience and recruit drivers to their program.

Another example is Zillow. Instead of providing software to real estate brokerages or individual brokers, they turned the model on its head to go direct to consumers and be a lead generation engine for brokers.

Finally on the enterprise side, HackerRank is a product as an example that a decade ago, would have sold software to companies that helps them manage, deliver and attract software developers with challenges. They prefer to directly attract software developers to their platform and then engage with potential recruiters to help match the top puzzle solvers with companies that are looking to hire them.

Note that in all these cases, the companies are purely software companies, but their business model is predicated not on selling packaged software, but a set of services to end consumers.

I speak to entrepreneurs worldwide, who have heard the phrase “software is eating the world” and then immediately assume that the only way to deliver software and build their business is to sell either a subscription business to the hosted solution or to sell packaged software (yes, there are still folks that think this is the way to go). That is no longer the case and you will find in most instances, investors will prefer full stack companies to software business models in the next decade.

Only hosting your product and providing a SaaS solution does not make your business model different.

That begs the question, how does one go about creating and building a service business instead of a purely software business?

I think the most important phase of your startup journey to figure this out, is when you do your customer development and validation.

During the customer validation phase you will find many potential customers not willing to buy what you sell them (software). That’s usually because they don’t have the problem you articulated.

There are two types of problem articulation strategies. One set of folks articulate the problem they think customers have and another set share examples of the questions potential prospects have.

Let me give you an example of a company I met yesterday.

They are folks that run a theme park who had built software to better manage their park and generate better profits and returns. They were keen to sell software that helps manage a theme park to other owners of theme parks.

When they spoke to potential customers and said they had ERP software to help with theme park management, most potential customers did not care. Their customers did not have a problem that required software.  When we got talking, and drilling down to the real problem, it turns out that 20% of a theme parks budget annually was spent on renewing customers.

So, most park owners had a marketing and a renewal problem not a software problem. When they went to the customers with an end to end solution to help streamline renewals and still had software at the back-end to manage the renewals their message seemed more appealing to theme park owners. Suddenly the problem was not software for automating the theme park but a solution to help remove a key headache and a solution to one of their key problems – Renewals.

The startup still wanted to only be a software company so they were not too keen to take on all the hassles of renewal processes, so I suggested they outsource the other aspects of the renewal process to other companies.

Having control of the end to end renewal process, now gives the company the data and analytics to build another stream of revenue to help end customers get discounts on other services they would like and give the theme park owner a cut of that revenue.

That’s the future. Software enabled services will be the primary business model for the next decade or so. Instead of selling it as a software product (either SaaS or otherwise), I encourage entrepreneurs to look at business models in more depth during their customer validation phase.

A comparison of business software review sites: Credii, ITCentral, G2Crowd, BestVendor and GetApp

There are an estimated 5K to 10K SaaS and enterprise software companies that provide solutions for small, mid-sized and enterprise companies.

The large IT analyst companies such as Gartner, Forrester, IDC, EMR and Burton Group have made a $billion business out of evaluating and ranking these vendors on a magic quadrant or waves.

Over the last few years a host of companies have tried to disrupt the evaluation, comparison, review and ranking portion of the business.

The companies, G2Crowd, Credii, ITCentralStation, BestVendor and GetApp all pretty much offer a similar service with a few twists. The ability for business users to review, evaluate and filter the software solution for the based on their custom need.

Given the explosion of startups (thanks to the lower cost of starting a company), there are tons of choices for any buyer of software and many deployment models as well – mobile app, mobile web, SaaS, etc.

I had a chance to look at all these companies, and the intent was to review them from the point of view of a buyer of technology. I was initially looking for the best Early stage private company database, and stumbled upon one of these websites and went to research and see if there were others as well providing Yelp-type reviews for startups in a “crowd sourced” way.

There are 3 different approaches taken by these companies. While G2Crowd, ITCentral station and Best Vendor are more crowdsourced platforms, where any user can write a review and rate the vendors, Credii is more like a “Analyst on Demand” or ” Analyst as a Service” solution. GetApp is a pure marketplace and seems to want to follow the App store model with some reviews, but more a listings website.

There were 3 things I was looking for when searching for a database of startups – first a good comprehensive listing of vendors, followed by analysis of their features and pricing, and finally reviews and recommendations by users like me.

Of the 5 solutions (none of who are comprehensive) I found Getapp to have the most listings – for other solutions than the one I was looking for. G2Crowd was a close second. The rest were pretty poor in the comprehensive nature of their coverage of a domain or the products within a domain.

In terms of analysis of features and pricing, company information, I found g2Crowd the best, but Credii very comprehensive. The limited nature of editorial reviews in the other sites, make them hard to take seriously.

Finally in terms of user reviews, getApp was the best by far with the most reviews. followed by G2Crowd. ItCentralStation was poor but definitely better than the other two.

If you are an SMB vendor with an interest in reviewing products and learning more about products before you start to shop, I’d be hard pressed to say an of them will truly meet your needs. They might be a starting point, but if you are expecting an Amazon like listing, with great reviews, multiple feature comparisons, you will be sadly disappointed.

P.S. I have been also informed (see the comments) about Capterra. Worth a look as well.