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Spinning out your internal product
You've productized some of your processes, now what?
My personal experience of moving from agency to SaaS was where we had an idea that was completely unrelated to the services we offered to our agency clients. Our SaaS was in digital signage, something we’d never provided for anyone in our previous 10+ years of existence. But for many other agencies, the SaaS product emerges from the services that the agency is already offering their clients.
I hear this regularly: “we’ve turned some of our processes into SaaS products but we’re not sure where to take them”. Unfortunately there isn’t a one-size-fits-all solution to this, but there are some universal themes. Here are the six areas to consider if you want to prepare for SaaS scale.
1. Vision and Plan
If there is more than one founder, or even if it’s just you, you need a vision of where you want to go and a plan. Otherwise you run the risk of running around in circles. For example, if 90% of your revenue is from providing services today and 10% from SaaS, what do you want that to look like in 12 months? What about 3 years?
Assuming you want to make it more than 50% SaaS, you can (very broadly) do that in three ways:
Sell less services (decide that you are going to restrict the level of professional services you offer and push all new clients to your SaaS product).
Sell more SaaS (keep the level of pro services you offer currently, but make a concerted effort to push the SaaS as hard as you can so it eventually eclipses your SaaS revenue).
Charge your clients differently (look at what services are actually recurring and could be included as part of a SaaS subscription).
The key thing here is deciding what you are: are you a consultancy with a SaaS product, or a SaaS business with a significant amount of professional services? Don’t expect any of this to happen magically. It requires a deliberate and concerted effort.
Do you see your SaaS revenue giving way to SaaS revenue?
Or could you maintain your current services revenue AND grow the SaaS revenue aggressively over the next few years?
2. Quantify the ‘Funding Gap’
Building, launching, then scaling a product doesn’t happen overnight. There is a gap between the first bit of work done on the product and the point at which it covers its costs. This is what I call the Funding Gap. Founders are often put off really pushing their SaaS because they worry they may end up losing all of their money. And part of this fear comes from the idea that they’re stepping into the unknown. While none of us can tell the future, quantifying how much money you might need to deliver your plan isn’t impossible. It may, of course, be that you find there is no gap.
I’m working on a little tool of my own to help founders determine exactly these numbers based on industry benchmarks (let me know if you would like to see it when it’s ready!).
3. Plugging the ‘Funding Gap’
Assuming you conclude there is a funding gap, how do you plug it? Let’s say you work out that you need $500k between now and your product being EBITDA positive. What does that mean? Do you have the funds yourself? Do you have some of the funds? Should you fund, say, the first $100k of it yourself and then raise investment when you hit a specific milestone?
4. Shifting to more of a SaaS Mindset
Agency and SaaS models are different and need a change in mindset. This isn’t something that has to happen overnight, but it might be worth assessing how the business needs to evolve down the line. These are generalisations but based on my own experience and the experiences of others I’ve seen.
Agencies generally tend to operate out of margins and these are typically on a monthly or quarterly basis. So long as you end the month (or quarter) in profit, then all is good. If you hired someone and the business can cover their costs whilst they ramp up, then we’re pretty happy with that.
The challenge comes when the SaaS product has to fit in with that mindset too. Then it’s more ‘we can hire someone new and spend some time on building the SaaS’ so long as at the end of the month or quarter, the numbers balance. This isn’t a terrible way to behave, especially when the product is in its infancy, but it’s not the way to scale.
Similarly, when selling to clients, it feels more comfortable to justify every cost based on time spent (as in dev time) or cost to the company (as in hosting), as opposed to just telling them that the licence fee is what it is because of the value it creates and includes pretty much anything that isn’t bespoke to them.
Your Finance Director/VP Finance will be more focused on gross margins than net margins because they will be taking a longer term view. At the same time, they will also want to understand how capital efficient the business is. When I ran an agency we just did whatever it took to win the work. But with SaaS, you need to be very clear on how much it actually costs to win each new customer. If your unit metrics end up demonstrating that it costs more to win a customer than they will ever pay you in a lifetime, then it doesn’t matter how much money you’ve raised, the business is unsustainable.
At an agency the customer is King, but with SaaS, the product is King. By that I mean, an agency team will try and accommodate whatever the client says they need. If it means hacking something that you built for someone else, that’s all good. But with SaaS, you have to try and make one thing as valuable to as many people as possible. You can’t afford technical debt if you truly want to scale. So product decisions are based on what the product team believe the market truly needs rather than what one particular customer is screaming for. Saying ‘no’ to a client’s request feels very strange to an agency founder.
5. SaaS Operations
Similarly SaaS companies tend to be structured differently to agencies. As the SaaS part of the business grows, it may be that the operations need to evolve too. Some specific operational differences I’ve seen:
Lead volumes need to be predictable and scaleable which tends to mean more automation. Think lead magnets, retargeting, drip campaigns, SDR to qualify leads, Account Execs to close them. Commission forms a higher part of the sales team’s overall comp plan. Marketing may be more geared towards lead gen rather than networking and PR.
Whereas you might have to be in a physical location to sell services, SaaS can be sold pretty much anywhere. It’s not unusual to be based in one continent and sell heavily into another.
Instead of Account Managers or Project Managers looking after the clients throughout the entire project to ensure you get paid at the end of it, you have Customer Success Managers looking after onboarding and conducting periodical business reviews with the aim of preventing churn and increasing expansion revenue. This team adds revenue to the bottom line. Your net revenue retention number will be as important as, if not more important than, your new business number.
Instead of Heads of Divisions or Account Directors, you will see VPs of functional specialisms: VP Marketing, VP Engineering, VP Product, VP Customer Success etc.
Tools and Systems: you can pretty much manage clients via spreadsheets when you are only dealing with a handful of them at any one time. But when you have hundreds or thousands of customers you need more tools to keep a handle on things: especially when it comes to properly analysing the data around the business.
6. Preparing for Scale and Growth
Scaling a consultancy is linear since it relies on the number of people you can hire which makes it harder to scale quickly. SaaS, on the other hand, can grow exponentially in part because the product can service a large number of customers without a direct link to the number of employees. And let’s face it, you probably wouldn’t want to engage in a SaaS business unless you thought you could successfully scale it.
However, because your business can scale rapidly, it can quickly put a strain on parts of the business (in spite of the fact that the volume of customers aren’t so directly reliant on the number of employees). Hiring people rapidly is hard and can also upset the culture without a plan to manage it. The best advice here is to do just that: make a plan for how the team will be structured as you grow, before you grow. What would your company look like if it was predominantly selling SaaS and was twice the size it is today? Who would do what? What roles would you need to fill? Making a plan is way, way better than making it up as you go along.
As I frequently say, being an agency founder gives you an advantage when it comes to launching a SaaS, but it’s good to be aware of what’s coming down the line, too as things will start to look different.