SaaS Products Leave Small Businesses Behind
The SaaS business model ignores 99% of businesses
I previously went over a few reasons why I think services firms make great startups, but I left one out: market opportunity. The SaaS business model requires certain conditions to work and most small businesses do not fit those conditions.
Let’s say you had an idea for a SaaS to improve the efficiency of grocery stores. There are about 100,000 grocery stores in the US. Assuming you could get *all* of them as customers, which is unlikely, having a product with a $20/month subscription will net you $2 million a month or $24 million a year. $24 million a year sounds like a lot of money, but that amount causes a number of problems.
The first is that $24 million is not nearly enough to get equity funding. At 10x sales, the valuation of the company would be $240 million. At 100x sales, the valuation would be $2.4 billion. However, 10x-100x sales valuations are given on the condition that growth will be fast. If the entire market in the US only nets you $24 million, there is not much more growth to be had. A company like that would have a valuation closer to 10x *earnings*. 30% would be a reasonable margin to expect. That would leave you with a valuation of $80 million.
I can’t think of an investor that is willing to wait 7-9 years on an investment for a moonshot chance at an $80 million valuation with 100% market share when there are plenty of opportunities for $1 billion valuation at a market share in the single digits.
You could try charging $2000/month to make your business more attractive. Unfortunately, that rules out every small grocery store. Margins are small enough that most of those business owners would never even consider letting you demo the software, especially since they’re likely short on time. That pricing limits you to only big supermarkets, of which there are less than 50,000. There are still additional issues with that change, but the one relevant to this discussion is that you have now just ignored over half the total market of grocery stores.
$24 million a year is not enough to get equity funding, but it is plenty of money to a bootstrapped founder. The problem with bootstrapping is that the amount of effort required to make a sale. Even if it took an hour to make a sale, that’s $20/hr. It is recurring, but that’s *just* to make the sale. It doesn’t include continuing development or customer support. And a sale to a small business is more likely going to take 5+ hours.
Millions of businesses in the US are ignored by SaaS companies for this very reason. FP&A software often costs over $2,000/month. A startup trying to break into the industry is likely to still charge at least $1,000. $2,000 a month is as much, if not more than, what we bill our clients to do all of their accounting. They’re not going to double their accounting budget for software that they then have to spend dozens of hours to learn to use.
That’s where the opportunity for a services firm is. $2,000 a month for software is a hard sell, but $2,000 a month in place of 1-2 full time employees is a much easier one. One full time employee in a state with a $15/hr minimum wage would cost roughly $2,500 a month, not including benefits or employer portions of taxes. That’s assuming you can get a decent accountant willing to work for $15/hr (you can’t).
There’s also plenty of margin in that $2,000 a month:
many businesses don’t need a full time accountant
individual staff have a variety of experience across many businesses, which makes the work more efficient
the company has a large knowledge base that any staff member can leverage
the company can build processes and technology to further improve efficiency
We excel at all these points, but it is the last point that differentiates us. Internal software tools can be built to improve efficiency. The math for prioritization is also simple: number of hours/cost to develop a feature vs the number of hours/cost it saves accounting staff every month. Since we’re not selling a SaaS, we’re also not limited to trying to build our own offerings. I’m more than happy to spend $2,000/month on a SaaS if it saves the company more than double that amount in staffing costs.
We also are not trapped by our business model. We do not have to continuously expand on a feature set to justify our revenue. That leaves room to build one off tools. It also leaves room to build tools that are too simple to sell as a SaaS, but provide value nonetheless. Basic features of FP&A software, such as graphing a trial balance sheet, are easy to build and are still incredibly useful to our clients. The margin we make offering our services is enough to develop software that further improves that margin and gives our clients the important parts of the SaaS products that ignore them.
I don’t think the advantages of a services business is limited to accounting either. For every SaaS selling to big businesses, there is an opportunity to provide services to small businesses.