Jason Cohen, the CTO and co-founder of WP Engine wrote a very interesting POV on “The Unprofitable Saas Business Model Trap” exactly about 6 years ago. Now you will think that articles written so long back must have lost relevance – but surprisingly for SAAS startups there is a lot to mull over.
Although the jive at Marketo (the trigger for the article was the Marketo IPO filings and related data) could have been premature as Adobe acquired Marketo for $4.75B this year, the points made are lesson for all SAAS founders.
Essentially Jason Cohen questions the very basic assumptions that typically is referred even today :
- CAC should be recoverable in a period of time ( he refers to 18 months; arguably today a better benchmark is 12 months)
- Growing a company by paying for acquiring customers will pile on more and more unprofitable operations.
- So the notion that a company can remain unprofitable as long as the growth (rate) is healthy(?) is questionable.
According to Cohen, the accepted Saas business model doesn’t make sense. Here is why –
The combination of 18 months pay back of CAC, with 75% retention and 30% cost to serve (arguably this has also come down significantly with the proliferation and rising competition in cloud services) and 15% each for R&D and G&A the real profit (even with a GPM of 70%) could be as low as 0.1 of annual revenue.
The solution :
- Manage Cancellations / churn through upsell/upgrades.
- Use viral growth to reduce cost of acquisition.
- Increase GPM
- Build in a service / consulting component to increase stickiness.
The fourth point is from the lively discussion that follows and I strongly recommend you read those.
Where I learnt it #197
Link to article by Jason Cohen – https://blog.asmartbear.com/unprofitable-saas-business-model.html
