Ask HN: Does the SaaS model really work? Really?

https://news.ycombinator.com/item?id=375417

by tomswiftjr • 18 years ago

51 36 18 years ago

news.ycombinator.com

I'm working on a web startup with a partner and I'm just feeling unsure of whether whole SaaS thing really works. Maybe it's because I'm personally reluctant to pay for stuff online, but I feel like some of my enthusiasm for this thing is waning because I'm doubting whether anyone really pays for anything.

I mean, I've read all the success stories about the YC companies and other web startups, I've read the "Autopsy of a web app" article that the Particletree guys wrote (awesome, btw). But I would love to see more numbers, as well as hear success stories from others, no matter how small.

To be blunt, though, I have a hard time believing that people will really sign up and pay for this in the numbers that we need. Our service isn't that expensive, starting at about $20 / month, and we need about 500 paying users to be "ramen profitable". But once we get to several thousand users, things start to get really interesting. Is that at all realistic?

I know it's heavily dependent on the market, what value we add, etc, but to give you an idea, our target market is primarily small companies, tech startups, bloggers, and others with a strong online presence. Probably a little smaller than the market for something like Basecamp, but similar in nature.

Bottom line: is it unrealistic to think that we can get 5000 users paying $20 / month? I know this is an unrealistic question to ask without more info, but I'm just trying to get an idea of what the upper limit of realistic expectations is. If a company like 37 signals only has 2,000 paying users for Basecamp, then I don't feel great about our chances. But if they have 200,000 paying users, I feel better about it. I just literally have no idea of what's realistic in terms of the size of a paying userbase. I know that others will be reluctant to post their numbers, but perhaps you can post them under a different account name or something? I would absolutely love to know how many paying users you have. Help a fellow entrepreneur out here :-)

yan• 18 years ago

Does the model work? Yes, of course. People pay contractually for things.

I don't understand what you're asking. Whether or not people pay for anything you create? That heavily depends on what you're offering and what value it's adding to your customers. It depends much less on the model; much more on your product.

And I think 37signals have _way_ more than 2,000 paying users.

ryanwaggoner• 18 years ago

According to this, Weebly (YC startup) has over 1 million users and "well over 1%" of those are paying users. That might mean 1.1% or it might mean 5%...but apparently they've got at least 10k paying users. Not sure how much their paid plans are...

http://venturebeat.com/2008/11/03/weebly-scores-1-million-us...

apsurd• 18 years ago

the monthly plan for weebly is $3.99 I believe. They also very smartly push buying domain names, which they surely get a couple of bucks yearly on. 40k per month is quite nice.

nuggien• 18 years ago

salesforce.com?

ivanstojic• 18 years ago

Kudos for pointing out the obvious, and in one URL summarizing what another poster in this tread already explained: target businesses, not consumers.

staunch• 18 years ago

I think you really need to go after businesses. Consumers are just plain cheap. I know I am. As an individual I don't really need anything. Certainly I don't really need any web service. Getting me to buy something that is just a luxury is really hard. I'm also very likely to cancel when buyer's remorse sets in.

Businesses are different. If they need to solve a problem (to make or save a significant amount of money) and the choice is between paying one of their developers $10k+ in salary to build it or paying you $80/mo to have it instantly there's not much of a decision there. You just need to make sure that you're solving a problem that thousands of businesses have and then push it really hard. A simple formula that's really hard work to actually do, but quite likely to succeed.

netcan2• 18 years ago

There is also the question of how SaaS vs Outright affects businesses vs individuals. There are all sorts of aspects to it. You mention buyers remorse. That's a consumers trait. Anecdotally, it seems to me that consumers are less willing to take another regular expense on. I know I am.

It often seems that these regular expenses from magazine subscriptions to car loans are what get people into trouble, so they avoid them. Businesses on the other hand have different issues. Small businesses have cash flow issues & limited credit lines. These are (seem) easier to solve with payment products as services. larger ones have

Larger businesses have different issues. People within them may not want to be responsible for am irreversible mistake. Others may need SaaS to get around some budgeting issue, decision making process or department (bypassing IT seems fashionable).

MicahWedemeyer• 18 years ago

Understand your time frame as well. How long are you willing to wait to get to 5000 paying users? If it's 6 months, quit now. However, if you're willing to wait several years and grow slowly, it's perfectly achievable, assuming your product isn't completely asinine.

zzzmarcus• 18 years ago

Another example: http://www.cobalt.com/

This is a Seattle company that does other stuff, but is at heart mostly a SaaS company and they're doing well. Really well actually, from what I can tell.

csavage• 18 years ago

The SaaS model works, infact it works really well. This is a great time to be selling SaaS because the TCO (total cost of ownership) tends to be much less than that of standard licensed software. (http://www.readwriteweb.com/archives/is_saas_cheaper_than_li...)

The question you need to answer is "how big the opportunity is for your application?" The number of paying customers at other SaaS companies is irrelevant unless you're playing in the same market and you expect to steal their customers. Which by the way should be a valid strategy if you believe that your application is going to be better.

Figure out what you're replacing, guess the % of that market that you can own and decide if it's big enough for you to survive and thrive in.

critke• 18 years ago

That's right - you've got to be patient. It will not happen over night. And you've got to target businesses. But from what I see (http://uploadthingy.com) - once they're in there and paying they pretty much keep paying.

sahaj• 18 years ago

if you have a business and are providing a service that the consumers want, then you will have no problem getting people to pay for that service, given you are staying competitive in the given market space.

if you are selling primarily to online companies, there is no doubt that these people will buy your service, as they are used to doing business online (unlike yourself).

how old are? if you are under 30, and you feel reluctant to pay for stuff online, then you are a minority. most teens and young adults spend their money online, with growing numbers.

right now, the economy is tough, so it's hard to say exactly how your business will fair, given most companies are cutting spending (less trade).

webwright2• 18 years ago

SaaS marketing is expensive. Don't look at 37s or JoelonSoftware as successful models-- they have built in advertising for their exact target market with their blogs/content.

Can you spare $500 to find out? If so, do this:

1. Get an adwords account. 2. Research keywords with their keyword research tool. Are people searching for what you're building? How much advertiser competition is there? This will give you some idea of demand (this part is free-- or $5 for the account setup). 3. Build a landing page that explains your value prop as best you can and your pricing. Have a sign-up button that is BIG at the bottom that goes to a "we're in private beta right now" page with a "give us your email address to get an exclusive invite". 4. measure how many people click on the ad. Then measure what percentage click on the signup button. That's a pretty good indication of demand and pricing sensitivity. The email is a bonus-- if you dash someone's hopes and they still are eager enough that they give you an email addy, then there might be some classic "hair on fire" problems that your purporting to solve.

Oh, and +1 for businesses. I've heard 37s say that the vast majority of their revenue comes from biz accounts.

run4yourlives2• 18 years ago

That's a brilliantly evil way of conducting market research. Well Done!

webwright2• 18 years ago

I'd love to take credit, but it's actually straight from Tim Ferriss. :-)

terpua• 18 years ago

To add to Tony's: http://startuplessonslearned.blogspot.com/2008/11/using-adwo...

markessien• 18 years ago

Frankly, if you need money fast, then don't sell subscriptions. People pay much quicker and faster if it's a one time fee than if it is a subscription - what you then have to do is that once a year, you bring out something so compelling, that the users are willing to purchase another 'chunk' one time.

After trying the subscription model, and noting the pains the users would go through to NOT have to pay a subscription fee, I switched to a fixed one-time fee.

It makes you work harder to have something new each time, so that the users go through the upgrade cycle.

geoffc• 18 years ago

Saas is a great business model as long as you can handle the deferred revenue part of it, essentially you are financing your customers purchase of the software. This can be painful when you are cashflow negative but once you go positive it is terrific as you have a steady and predictable cash flow stream.

I think the biggest benefit of Saas is that it matches the incentives of the vendor and customer far more closely than traditional packaged software. Rather than the sell and run approach of packaged business process software you focus on getting successful deployments and making sure the customer stays happy and around for a long time i.e. low churn rate.

grahamr• 18 years ago

As others have mentioned, the key distinction is whether you're targeting individuals or businesses.

Typically you'll have a tough time convincing individuals to part with $20 per month and typically there's a free alternative.

It's much easier to convince businesses to spend the same amount and, as a bonus, many will be suspicious of free offerings. In fact, others will subscript to a higher premium tier purely to "buy the best for my business."

I always refer people to this StartupSchool talk by DHH of 37signals which outlines their business model, and explains their focus on small businesses: http://www.omnisio.com/startupschool08/david-heinemeier-hans...

callmeed• 18 years ago

Yes, it works. How well it works really depends on a lot of things. It does take patience and you do need to know your market.

I actually think you don't need to be in a huge market to be hugely successful. We serve a niche market (professional photographers) and, by most accounts, are successful with strong growth.

We have 2 main products/services that have a monthly fee. The first isn't a true SaaS (it's more Saas+web hosting), but we have several thousand customers paying monthly.

Our most recent product (nextproof.com) is a true SaaS and is also doing well. We launched in June and should hit the 1,000 account mark early next year.

The thing I like about being in a smaller/niche market is that it's easier to find and present to your target market. If you're product is good, it will sell–you just need to make them aware.

Here's some things I would suggest based on experience:

* Find some "connectors" in your market and partner with them. Give them free accounts and VIP treatment in exchange for referrals * If you need some cash up front, consider selling a limited amount of "lifetime" accounts. They pay $500 (or whatever) and get an account for life. We've done this and people jumped all over it. * Explore the possibility of tweaking your app for even a smaller niche market.

I've got lots more ideas ... but that's where I'd start. But, yes, I'm a firm believer that it can work.

mixmax• 18 years ago

SAAS works very well for a lot of companies, besides it's bound to get a lot bigger in the years ahead.

I wrote a bit about SAAS and the design decisions you should take into account here: http://www.maximise.dk/blog/2007/01/moving-applications-to-w...

blender• 18 years ago

I think there is always a market for business apps that deliver value. We're a startup ourselves and pay for Basecamp and Highrise - sure there are free alternatives but BC and HR are intuitive and easy to setup and when you have non-techies included in your business those things are important.

Someone mentioned Salesforce - also check out Netsuite.

You should determine if you're 100% pay (with maybe a 30-day free trial) and primarily directed towards SMBs or freemium model directed to users and businesses. If freemium you can expect a 1-5% uptake on the paid services.

Cheers

netcan2• 18 years ago

context

It may help to think of SaaS as a part of a larger context. Over the past 20 years or so, many 'product companies' have become 'service companies.' Aircraft tyres is a popular business school case study. In many countries where company owned cars are the norm, leasing companies are the primary providers of cars (+ petrol + insurance + washing + servicing + all other issues). Office hardware is another good example.

If it helps, those are all X as a Service business models & I believe they do quite well compared to their industries. But note that most of them targeted mature customers.

There are quite a few software segments where SaaS is or is becoming the norm: Live chat customer support, Web Analytics, CRM.

jedc• 18 years ago

If it helps, I tried modelling 37signals' revenue a while back. Based on some of their posts and a few guesses I think they've got about 10k paying Basecamp customers, and across all their products will have about $8million in turnover this year.

My original blog post is here: http://blog.jedchristiansen.com/2008/02/25/37signals-is-one-...

You can play around with the spreadsheet I created, though I hope to update it soon.

I think it's absolutely easy to see that you can get 5000 users paying $20/month if you provide $20/month of value to your customers! Are you saving them that much per month in other costs, or generating new revenue through your software?

auston• 18 years ago

QUICK STATS

HUBSPOT has over 700, my guess is close to 800 and they charge like $200 per month (~$140-160k per month)

LEADS360 was doing like $400k in rev per month in late 2007.

37SIGNALS obviously, is doing well, I'm guesstimating $10 mill, at least.

ZOHO is doing like $40 million a year.

CONSTANTCONTACT is doing $50+mill a year.

Then of course, there is SALESFORCE.

edb• 18 years ago

Anybody know if schools are a good target?

bgtony• 18 years ago

mylunchmoney.com is definitely working

brezina• 18 years ago

Taleo.com - fantastic recruiting SAAS business, something like 300k paying users. Bought by individuals and corporations

mattmaroon• 18 years ago

What alternative is there really? Ad supported won't work well for most apps. It really depends on what you're doing, but it's clear that it may work, and it's often clear that it's your only reasonable business model, often with some sort of freemium twist.

known• 18 years ago

SaaS + Govt Regulation = Successful Business

santacruz• 18 years ago

World of Warcraft - 14 million subscribers - $15 monthly. Can you do the math?

trevelyan• 18 years ago

Not to skirt the question, but ten thousand dollars a month is not really ramen profitable. Your hard costs are server space and bandwidth, and whatever amount of food and shelter is necessary to keep both of you working.

A lot of subscription businesses are slow growth and high churn. Your market expands slowly as the people who will pay for your services find you and you get better at marketing to them. Unless you have a really killer service, large advertising budget or the media at your beck and call, I think it will be tough to grow to that subscriber level overnight.

utnick• 18 years ago

Saas costs can be pretty low because you only need a couple hundred users to get to that 10K a month. A couple hundred users on most apps can probably be run totally fine off of a <100$ vps.

azsromej• 18 years ago

I have a small service and about 3% of the user base opts to pay for advanced features. That figure has been consistent for me for some time, even when the user base as a whole was smaller.

Ask HN: Does the SaaS model really work? Really?

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