Jason Cohen Thinks Some SaaS Products Could Be Permanently Unprofitable

Via Hacker News: The Unprofitable SaaS Business Model Trap

Jason Cohen walks through how SaaS operations can get into a trap where they keep growing customer numbers but earning back the acquisition costs doesn’t happen because of cancellations and rapid cost acceleration.

I recommend reading the full piece because he breaks down how this could occur for a firm that doesn’t make it as easy as possible to join (low acquisition costs) as well as keep average contract length high. (retention through an awesome product)

If the payback period for a new customer is 24 months and you have a retention rate of 75% – each year you must acquire 25% of your starting customers from previously untapped sales channels who will be unprofitable for the first 24 months of the customer relationship.

Upselling and earning as much revenue from current customers as possible is a key strategy for shortening that payback period. The economics of SaaS demand constant fine tuning of acquisition strategy, a strong handle on cost growth and aggressive customer retention ideas.

Microsoft Takes A $1 Billion Charge On The Surface Tablet

The latest Microsoft earnings report included a US$900 million dollar charge related to the Surface RT. (H/T NBR Paywall).

Microsoft is trying to focus on enterprise IT because that’s where the money is.

Not every firm, particularly public sector organisations, can embrace the cloud.

It should be noted that in terms of Microsoft’s annual revenue – US$77.85 billion dollars – the charge is quite small.

It should also be noted that they paid a US$733 million dollar fine to the European Commission in the 4th quarter!

It is really easy when you live in a tech blog bubble to forget that most of the world’s IT spend is by large corporates, public sector organisations and other firms for whom it is actually not possible to seamlessly upgrade to each new version at a time.

There are substantial fixed costs that you incur when moving from a long term support version of a product to a new one – how much enterprise IT spend has been deferred because of cost-cutting during the global financial crisis, for example?

In terms of applying economic thinking, the cloud is great for small startups because they can defer large fixed costs like setting up an internal sever farm until they’re big enough to not worry about the cost.

Using cloud computing services, before adding a risk weight for the possibility of not having access to your app or data when you lose internet access, the marginal cost of using that capital productively is very low and getting lower because of enormous levels of competition in the space.

At the margin, cloud computing enables patterns of sustainable specialisation and trade to be found through trial and error by entrepreneurs in the tech space far faster than even 5 years ago.