SaaS ("Software as a Service") is the new Field of Dreams. Too many great online applications falter, for want of an effective business model. . Video of this presentation @ http://la2m.org/events/turning-software-service-saas-revenue

1. Revenue as a Service
The business end of SaaS
LA2M, January 13, 2010

2. Fields of Dream
2000 2010
If you build it, If they come,
they will come it’ll make money
Monuments Mel Brooks’
in the desert “The Producers”
www.work.com www.bolt.com
(www.business.com) (www.ning.com)
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3. Software as a Service
• Write-once, run-once - a/k/a “Timesharing”
• Teletype, Uniscope, VT-100, Ontel, ...
• Diversity of terminals:
• Web widgets, ...
• Mobile apps, ...
• MMORPGs (SL, Wii), ...
• Chumby, iPod, Kindle, Tomtom, ...
• The A B C’S of SaaS:
• Ads, Brokerage, Charity, and Subscription
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4. NOT SaaS
• Brick-and-mortar • e-Commerce
e-Commerce sites, digital pure-plays,
hollanders.com, e.g. iTunes.com, e.g.
• Banks/brokers, • Online financial
service portals, e.g. service pure-plays,
bankofamerica.com e.g. paypal.com
• annarbornews.com • annarbor.com
• SaaS businesses have entirely different economics
that set them apart from other online businesses
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5. SaaS Cost Centers
Marketing
• Listening
• Setting Expectations
Retention Closed
Conversion Pipeline
Attraction Informable
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6. SaaS Cost Centers
Engineering
• Managing Infrastructure
• Managing R&D - Enhancements and Escalations
• Managing Release Trains
New Features Development Staging
Bug Fixes Testing Release

7. SaaS Cost Centers
Customer Service
Customer Service
Issue
• Issue Resolution
• Voice of the Customer V.o.Cust
• Issue Escalation
V.o.Comp
• Voice of the Company
Happy
Pays
Touchpoint Branding Happy
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8. SaaS Cost Centers
Operations
• Collecting Money
• Spending Money
• Saving Money
• Making Money
• Raising Money
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9. SaaS Business Models
The A B C’S:
• Ad-based revenue
• Brokerage-based
• Charity case
• Subscription
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10. SaaS Business Models
Ad model:
• Content/functionality is the “Honey baits the trap”
• The good: Woo-Hoo! Turn traffic into money.
• The bad: Rust never sleeps - sustainability is a bitch
• The ugly: Ad networks say, “thank you!”
• Web 1.0: impressions (“banners and eyeball plays”)
• Web 2.0: clickthroughs (“AdSense and PPC”) *
• Web 3.0: behavioral targeting - very investor-friendly
* Note: pay-per-conversion is not the Ad model!
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11. SaaS Business Models
Ad model success factors:
• Don’t commoditize - be jaw-droppingly compelling
• Don’t try to attract traffic - widgetize
• Don’t try to sell ads - use the ad networks
• Gather as much info on your customers as you can
• Tried and tired: web, mobile, streaming
• Innovative: gaming, GPS devices
• Listen, Listen, LISTEN
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12. 12

13. SaaS Business Models
Brokerage model:
• Make connections, take a cut
• One or many middlemen (MLM, franchise, e.g.)
• The good: very attractive value proposition
• The bad: needs exclusivity/IP to maintain market
• The ugly: many swings, few hits
• Pay-per-conversion incurs customer’s risk
• (this model only works if you can manage that risk)
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14. SaaS Business Models
Brokerage model success factors:
• Better connections command better commissions
• Don’t dig a big hole! Invest sparingly, incrementally
• IP: algorithms (Shazam, eHarmony, e.g.)
• Exclusivity: turf (Classmates, Hulu, e.g.)
• Diversify and cross-sell: (Amazon, eBay motors, e.g.)
• Give affiliates tools and put them to work!
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15. How much for How long?
$ revenues
y2 y3 y4 t
y
x
15 investments

16. SaaS Business Models
Charity model:
• FREE content/functionality - ask for donation
• The good: belonging/supporting/shame works
• The bad: NO value proposition
• The ugly: non-deterministic business
• Freemium promotion moves charity to conversion
• Community models spread work/risk/reward
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17. SaaS Business Models
Charity model success factors:
• Invest heavily in viral juice
• Invest moderately in IP lawyers
• Business model informs the balancing act
• Seek out and amplify Opinion Leaders
• Agility is key: don’t lock-in long-term resources
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18. Cost Basis Segmentation Revenue Basis
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19. SaaS Business Models
Subscription model:
• Tried and tired: Web Apps, Affinities, SocNets
• Infomediary: (“publishing”) Edmunds, Nielsen, e.g.
• Utility: infrastructure, desktop security, mobile
• Pay per ... user, usage, time, or all three!
• The good: recurring revenue, ca-CHING
• The bad: human nature: people like to own stuff
• The ugly: when you charge, expectations skyrocket
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20. SaaS Business Models
Subscription model success factors:
• Closely align fees and costs
• Outsource like crazy - DWUD/DDWUDD
• Clear ValProp: selling... Access? Functionality? Tiers?
• Tease the release train - make it customer-driven
• Open up your API’s - support 3rd party apps
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21. 5% 10%
20%
65%
10%
20%
20% Mature
15%
20%
40% 50%
20%
Grow
80% 25%
CoSD ~ Engineering
Profit ~ from Ops
Launch CoCA ~ Marketing
21 Develop CoCS ~ Cust Svc

22. SaaS Mutts
A? B? C? S? Why choose just one!
• Freemium: the Charity/Subscription mutt
• Affiliate Marketing: the Ad/Brokerage mutt
• Be careful when hybridizing with the Ad model
• The exception: house ads, community ads
• Franchising: the Brokerage/Subscription mutt
• Segment customers, NOT business models!
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23. Investment and Return
Mktg Engrg CS Ops Founder OPM Revs
Ads
Broker oy meh hmm...
Charity w00t oh, ok nope
Subscrip
-tion

24. The Money Shot
• Revs = Service Fees Collected per unit time
• this is easy: it’s just the gross price you charge
(your Business Model determines
how much of it you get to keep)
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25. The Money Shot
• Revs = Service Fees Collected per unit time
• CoSD = Cost of Service Delivery per unit time
• this is a little trickier: it’s the total Engineering
plus Customer Service costs divided by the total
number of customers in a unit time - calculus!
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26. The Money Shot
• Revs = Service Fees Collected per unit time
• CoSD = Cost of Service Delivery per unit time
• Churn = Customer Retention per unit time
• churn is the average lifespan of a customer
engagement times the attrition factor - “how
many customers lost” per unit time
• Example: avg lifespan = 3yrs & attrition = 5%/yr
churn = 3 * (1 - 0.05)3 = 2.57
26 • Overlook churn at your peril!

27. The Money Shot
• Revs = Service Fees Collected per unit time
• CoSD = Cost of Service Delivery per unit time
• Churn = Customer Retention per unit time
• CoCA = Cost of Customer Acquisition
• this is the total Marketing spend during the
period, divided by the number of new customers
acquired during that period - ugh, Calculus again
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28. The Money Shot
• Revs = Service Fees Collected per unit time
• CoSD = Cost of Service Delivery per unit time
• Churn = Customer Retention per unit time
• CoCA = Cost of Customer Acquisition
• TLCN = Total Lifetime Customer Net Revenue
TLCN = ((Revs - CoSD) * Churn) - CoCA
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29. The Money Shot
• TLCN = Total Lifetime Customer Net Revenue
• TLCN tells you how much money you can make
off each customer, over the life of the customer
• My favorite dashboard metric
• Don’t freak out if it’s sometimes negative
• Do freak out if it’s never positive
TLCN = ((Revs - CoSD) * Churn) - CoCA
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30. Thank You!
David C. Bloom
866.205.9780
www.factotem.com
TLCN = ((Revs - CoSD) * Churn) - CoCA
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