Don’t read this article. Save your time and go read Jason Lemkin’s SaaStr blog. It’s the “Joel on Software” of blogs for SaaS businesses.
Why? Because this article is grossly simplistic when it comes to SaaS pricing:
1- Despite its title, it Doesnt actually talk at all about how pricing models effect valuation.
2- it presents a laundry list of different models with “pros” and “cons” from the company's perspective, as if that is the most important viewpoint for choosing a pricing model.
3- nothing about aligning pricing to customer value. If you sell a product that improves, say, the conversion rate on a shopping cart checkout funnel, per-user pricing would be a terrible idea since that’s doesn’t align with value.
4- it completely neglects sales concepts. High CAC is fine if LTV is > 3x. Nothing about churn, let alone net-dollar churn, Nothing about incentivizing pricing or contracts to reduce the payback period, which can be without a doubt the largest throttle on SaaS growth, and thus valuation
Don’t get overwhelmed. I suggest starting with the stuff about building an MVP, getting traction, and getting to $1MM in ARR. Even if you have read the “technical” side of those stages of a business (building prototypes fast, shipping and iterating, picking an unsexy tech stack, etc) these articles are great because they explain the business side: pricing, average deal size, cost to acquire a customer, inbound and outbound, churn rates, sales channels, lifetime customer value.
Basically all the metrics you use to judge the health of a SaaS business and thus how they are valued.
I know it’s a lot, but he does a great job ramping engineers to understand business and I have really come to enjoy the Science aspect of business (modeling, forecasting, etc).
A number of SaaS vendors have had massive cancellations because of the pandemic related downturn. This will require a revisit to the valuation logic as there is no more “recurring” when your clients go bankrupt or downscale.
All the obvious vertical plays have been hit tremendously like Tripactions (no more business trips). But even horizontal plays like HR SaaS companies like Namely have been hit big time by bankruptcies and downsizing.
I wonder if there will be a revisit to the MRR or ARR pricing model, and thus the valuation model as well.
I'm guessing we'll see a lot more linear growth, bootstrapped products rather than the incessant swarm of bogus "moonshot companies" seeking a hockeystick chart. I run a SaaS business by myself and it's more profitable than ever.
I'd be curious whether the cancellations of SaaS companies relates more to the pricing model (just being SaaS) or the industry/product. Companies like TripAction and Namely feel like they'd be hit by a pandemic regardless of whether they're SaaS or not.
I also run a bootstrapped SaaS worldbuilding business that has more churn than usual right now, but it's overshadowed by a big boost in activity and new subscribers that still put me net "up" -- assumedly because more people are inside right now, spending more time online, have more time to find and explore new things online, are organically sharing more things with their friends, and/or looking for new ways to feel productive.
Feels like the biggest reason someone would cancel their SaaS subscriptions right now is losing expendable income -- but that's not going to help them with much larger, one-off purchases of software either. I'd expect a small resurgence of "buy this software" startups after recovering a bit, but I don't expect them to last long for a lot of the same reasons they didn't (in a general sense, across the industry) last long in the 90s. With limited income, it's a lot easier for someone to pay $5/month than $50 up front, especially when you're not sure you're going to love a piece of software enough to still be using it in 10 months.
I think the valuation model includes revenue risk. An investor will be looking at this from a portfolio perspective, where diversified SaaS holdings should in aggregate generate relatively predictable revenue.
What i dont like about SaaS model is that it discriminates poor people and blocks innovation. Every SaaS is targeted to heavy users from highly developed countries. Medium tier has to provide most value, while minimal tier must be stripped from most important features, so that heavy users from developed countries wont save money choosing it.
At the end, if you are not a heavy user or from a not wealthy country you can not use SaaS.
So you have worse chances to compete with others. And you can not innovate. Because more and more tasks require having good SaaS. More and more products are only provided as Saas. You also can not buy "older" SaaS as you could buy older cheaper software.
So to sum it up as far as SaaS still is a great way to provide a lots of niche value, it discriminates people and blocks innovation.
SaaS does not block innovation or discriminate against poor people.
The main thing SaaS offers is convenience. I cannot think of a single SaaS service that you cannot do without or replace with an alternative.
In other words, if you are cash poor, but time rich, you can always find or make an alternative.
In fact, I’d say just the opposite. SaaS is great for innovation and poor people. Most SaaS have a free or a low cost tier, or a pay per usage tier. This allows anybody, poor and rich alike, to get started without any of the heavy lifting or a large upfront investment.
I agree with Saassy. SaaS was a blackbox decades ago, but successful blueprints are readily available to get anyone familiar with and to get them started with creating their own Saas bliss.
I`m researching Dynoflowmatic ERP software and with all of the valuable information available, figuring out the "D" in derp was more difficult than finding good Saas literature.
Hmmm. I don`t upvote/downvote comments and haven`t figured out if there`s any value in it or not...
I expect to create a custom module for everything, but having access to all the data, tools and software has made it a very rewarding experience thus far.
As stated in the other comment, being able to touch it makes all the difference while learning.
Measure, flow, automation didn`t have that ring to it, but dynoflowmatic was an easy way to keep me focused on my goals.
> Even if you’re not thinking about selling your SaaS business just yet, getting operating procedures implemented as if you were will help you to succeed.
A bit off-topic, but how much is the valuation of a SaaS affected by the platform/language used?
Would a SaaS worth something in a typical language (Ruby/JavaScript/PHP) with a typical framework be worthless if done in a less typical language (Haskell/Racket/Smalltalk) and/or a less typical framework?
As a company grows, its technology edge or problems often show up in the results. For instance, Google's used commodity hardware when it needed to scale search, allowing them to index more of the web, maintaining its edge, which brought more users. Twitter has had problems on product iteration. This potentially is due to its tech stack or execution, but either way it shows up in its results relative to Facebook.
There are cases where the early tech is valuable to an acquiring company. Apple's acquisition of FoundationDB comes to mind. A company could also be interested if say they needed a bunch of Go developers to rewrite their backend, and an acquihire deal made the most sense.
Why? Because this article is grossly simplistic when it comes to SaaS pricing:
1- Despite its title, it Doesnt actually talk at all about how pricing models effect valuation.
2- it presents a laundry list of different models with “pros” and “cons” from the company's perspective, as if that is the most important viewpoint for choosing a pricing model.
3- nothing about aligning pricing to customer value. If you sell a product that improves, say, the conversion rate on a shopping cart checkout funnel, per-user pricing would be a terrible idea since that’s doesn’t align with value.
4- it completely neglects sales concepts. High CAC is fine if LTV is > 3x. Nothing about churn, let alone net-dollar churn, Nothing about incentivizing pricing or contracts to reduce the payback period, which can be without a doubt the largest throttle on SaaS growth, and thus valuation