You don’t have to be an experienced CFO to understand and improve your company’s economic performance. In fact, with this high-level guide you can dive right in by learning how to discover, develop, and optimize your economic model.
When most software companies are founded, they follow a similar developmental path.
First, company founders work hard to build a solution with a great product-market fit. Next, as the business gains traction, its team begins to focus on growing the company’s user and customer base. Finally (and often concurrent with the previous step), the business continually pushes its people to establish a clear competitive advantage in its market.
But as most entrepreneurs know, there’s much more to building a great, big software company than those three things.
Jason Lemkin, author of the popular SaaS blog, saastr.com, points to the one metric SaaS founders and CEOs should be focusing on first. Hint: It’s not revenue growth, or churn, or even lifetime customer value, but he argues it’s the true key to your long-term success.
In the SaaS world, there are a lot of metrics that founders proclaim as the harbingers of sustainability and corporate health. For instance, some might argue that it’s all about revenue growth rate or churn. Others suggest that lifetime customer value or average revenue per customer are SaaS metrics that deserve top billing.
For EchoSign co-founder and CEO Jason Lemkin, however, those SaaS metrics aren’t nearly as important as one particularly crucial driver of SaaS company success and growth:
Skip the arguments and read six lessons on the freemium model to decide if it’s right for you.
Jules Meltz and Daniel Barney of IVP write in TechCrunch that freemium is under fire. “For some,” the two say, “freemium is a costly trap, a business model that sacrifices revenues and forces a startup to support freeloaders who will never become paying customers.” To help decide if freemium is the right model for your business, Meltz and Barney present six lessons for software companies considering which way to go.
Startups face stiff-enough competition as it is. Make it a little easier by changing the game – start selling value, not price.
Product strategist Rocky Argawal writes in VentureBeat that selling value not price is a recurring theme when he talks to companies, and “Virgin America exemplifies that.” Argawal points out that “too many companies try to compete on price, which is a hard competitive advantage to sustain,” since “someone can always undercut you.”
Hardware costs and development resources get cheaper every day, so the freemium model continues to survive. Learn how to turn a profit in the freemium age.
Shane Snow, cofounder of Contently.com, writes in this post for Fast Company that “building technology has never been cheaper” or faster, thanks to platforms like Heroku that let coders save huge amounts of development time.
Startups have had success in the past with the freemium business model, but is it time to retire it?
Rags Srinivasan sees growing discontent with freemium and a “return to the roots of marketing” that starts with customer needs and gets “your fair share of the value created.” In this guest post for Gigaom he points to inherent problems with the freemium approach, saying that it wrongly leads “startup founders to focus on the product rather than customer needs.”
Churn is a major drain on any SaaS company attempting to scale. Negative churn, on the other hand, can massively accelerate the company’s growth.
“As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a large number,” writes VC David Skok. “That loss of revenue requires more and more bookings coming from new customers just to replace the churn.”
Simply put, the software-as-a-service delivery model has been blowing up. But one of the major factors contributing to its rapid adoption has gone relatively undermentioned: recurring revenue offerings.
“Unlike traditional financial models, which are built around one-time transactions or upfront fees, recurring revenue business models focus on a series of smaller, ongoing, subscription-based transactions,” writes Tom Dibble, president and CEO of Aria Systems, a provider of cloud billing and subscription management solutions. “Users can consume a service or product as much as they like in an on-demand manner, as opposed to having to buy the entire offering up-front.”