Hey, Software-as-a-Service Company: is your SaaS product really that profitable?

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By Armin Gebauer

June 24, 2022

Software-as-a-Service businesses are thought to be very profitable garnering industry leading valuations and multiples in both transactions and investment. Companies focus of growth metrics like the cost of customer acquisition (CAC) and customer lifetime value (LTV). As important as those metrics, there needs to be vigilance  on the structural costs they face to keep their software state of the art and running. Both engineering and product executives must maintain vigilance and creativity in their execution to ensure these healthy margins don’t become losses. Is there a way to reduce fixed costs and make SaaS profitable? Read on to find out more.

When you think about it, most of your admired internet platforms are essentially SaaS: from Netflix to Shopify, software ten years after the oft quoted words of Marc Andreessen has eaten the world. The biggest advantages this model has is the simplicity of onboarding and using this software but also the constant flow of valuable new features that become available on these internet-deployed solutions. 

Some people say excitedly that SaaS as a business produces great margins. But if we analyze information from public SaaS IPOs we’ll find that their margins are actually far from ideal: of 73 public SaaS IPOs, 53 are generating operating losses. As you can imagine, companies that have already reached IPO stage are past their startup days: their margins should probably reflect so.

I’ve given this apparent conundrum some thought and realized that, while variable costs for SaaS are low (think hosting, servers and cost of sale), fixed costs are extremely high (developers and engineers that keep the software running and creating value). Additionally, most SaaS companies have no apparent way of reducing said fixed costs if they want to stay current, thus creating an ongoing challenge to margins and profits. Except they do have a way: through Staff Augmentation.

Staff Augmentation is a formidable way to provide SaaS companies some much-needed relief by reducing their fixed costs without harming their productivity. It offers teams that are elastic to demand, with top talent and skills, ready to help them grow their offering in a capital-efficient manner. 

SaaS companies become very profitable once they develop an elastic cost model where their customer base grows exponentially based on a manageable and predictable model to deliver stable and innovative software to customers. At Arionkoder, we’re ready to help you transform your SaaS business into an efficient and valuable enterprise.

Contact me to discover how we can help your SaaS thrive at armin@arionkoder.com 

Armin Gebauer, VP Customer Strategy

Reference article: https://www.ciodive.com/news/software-industry-marc-andreessen/605301/