Are you an entrepreneur looking to establish a SaaS-based business model but don’t know where to begin? This article may provide some insight into a valuable asset called a business plan.
What is a Business Plan?
Entrepreneurs often hear people tell them they need a business plan; you can’t live without a business plan. If you want to succeed, you need to have a business plan. These words, spoken by people with experience and credentials, are words of wisdom that will probably be the stepping stone for entrepreneurs. Does this document signify the holy grail for entrepreneurs that people have made it sound like? Absolutely!
A business plan is a document that will establish your business identity and credibility. It is a proof of concept, a pitch deck, a ladder to climb when you hit rock bottom, a compass to guide you through your journey, and most importantly, it is a document through which you will understand your business more intimately. Invest in a business plan! It is the safest and most rewarding investment money can buy!
What is SaaS?
SaaS (Service as a Software) is all the talk these days! After all, it does sound sassy!
Given the prominence of technology in the age driven by digitization and the Internet, the SaaS model is becoming extremely popular. SaaS means that you have software that people can use, and you are selling it as a service rather than as a one-time commodity sale.
What is SaaS (a bit more detailed explanation)
Like any subscription-based service (think gym memberships etc.), you provide software for people to which people subscribe and pay you a monthly/quarterly/yearly fee depending on how you set up your business pricing criteria. It would be best if you spent time chunking your pricing strategy because it all comes down to how well you plan everything. Once you have attained a client, they have become a subscriber. Now, you need to provide auxiliary services that will include help with implementing your software, periodic maintenance, upgrades/updates, and any other services that will help you keep ahead of the competition. Your software will only get you so far. If your service quality is not up to the standard, you will lose your client to the competition. And that is the worst way to go because your reputation is damaged. So, not only do you have to focus on making sure your software is up to the mark, but you have to make sure that your customer service skills are exceptional! What does any of this have to do with pricing? While many believe that the SaaS model is a hit, many entrepreneurs back down because of the losses they sustain.
SaaS: Considering Your Price
So why exactly aren’t you making money from the get-go when SaaS is all the hype? The reason for this is because of how this model operates. To obtain a client, you will have to incur costs, such as marketing, visiting clients, etc. Furthermore, your pricing should be aligned with your competitors, to some extent, to attract your clients. If you want to charge a higher price, be prepared to justify it. The subscription price will not be that high to sufficiently cover those expenses you incurred immediately. You will also be providing all the auxiliary services; therefore, you would be incurring additional expenses. In essence, you should not expect to make a profit for at least 6-8 months on each client that you obtain. Any additional client from there will cost you more. Likewise, it will take you more time to become profitable. This is exactly what you need to consider when determining your price.
What does any of this have to do with a business plan?
The SaaS business model is still relatively new, and many entrepreneurs fail to grasp the concept and how it works. This often leads them to believe that they can make huge profits without realizing how tough it is to get through the initial periods. Furthermore, it is even harder to explain this concept to potential investors. That is why you really need to focus your business plan on ensuring that the investor understands the idea and why you will sustain losses initially. Your business plan will be aimed at building investor confidence.
The first thing you need to have in your business plan is obviously your executive summary, which is basically the last thing you will write. Therefore, we shall talk more about this later. Let’s get done to the SaaS specifics of your business plan.
About Your Software
Your business plan will require careful planning and a detailed analysis of many factors. Your business plan will be different from other businesses. Unlike many business plans, your company overview must include a detailed breakdown of your software, explaining how it is different, what are the additional benefits of using this software compared to what is available in the market, future plans and expectations on development, and the services you plan to provide to customers. This will go a long way in explaining your prices as well. The investor will want to see what your software brings to the table and if the price you are planning to charge will be acceptable by the market. Remember, investors are very clever. Just because they do not know your business does not mean they don’t understand numbers! They will always be knowledgeable individuals, or they will definitely hire someone else to do the heavy lifting. Don’t feel confident just because you have a complicated business model. You need to sell it, right!
Understanding Your Competitors
In addition to a detailed explanation of your software and services, your market research will have to be thorough. You must really understand the pricing strategies of your competitors and the auxiliary services they provide. Knowing and understanding the market trends will really help you develop a strategy as well. If you know other startup SaaS businesses’ success stories, you can probably replicate them and build on them to come out even better!
Market Positioning
Next, you need to determine how you will position yourself in the market, explain in the document what exactly your software does and how it is different, what kind of support services you will provide and how you justify your pricing strategy. This is different from your product explanation that we discussed earlier. This is where you quantify your software and your services.
Key Performance Indictors
Another important aspect of your business model will be specific ratios that apply to SaaS business models. This includes Customer Acquisition Cost (CAC), Lifetime Value (LTV), Monthly Recurring Revenue (MRR), and Monthly Recurring Revenue Churn (MRR Churn), to name a few. CAC is a simple ratio that tells you how much it costs for you to get a customer. This is calculated by summing up all your direct costs (marketing costs + costs of visiting clients + any other costs incurred to get a client) and dividing it by the total number of clients you acquired. This can be done annually as well as monthly. LTV is the average income derived per customer. This is calculated by taking the total revenue earned from subscriptions and dividing it by the net customer count you attained during that period. MRR identifies the amount of fixed revenue that you are retaining every month. This goes a long way in telling you how well you are retaining your customers. This is calculated by taking the net number of users for one month and multiplying that by the subscription rate. The MRR Churn rate calculates how much revenue you are losing. In other words, it tells you how many customers are leaving you. This is calculated similarly to the MRR, except you are taking the number of customers lost during the month and multiplying that with your subscription rate. This will tell you how much revenue you are losing each month. If the MRR should be greater than the MRR churn rate, you are doing something wrong!
Financial Analysis
Finally, you will need to explain your financial model to your investors methodically. They need to understand how you are justifying the losses you will sustain. This will mean explaining how you plan to cover those initial losses as well. Telling your investors that this is the norm for the industry will not do them any good. You also have to tell them how you will offset this and keep going forward. They want to know your plan of action if things go south and you continue to make losses. You will need to explain that the initial losses will be offset in the latter years in your financial section. Still, during the initial stages, you plan to commit yourself to invest in getting customers, which is why you will have to sustain losses. If you cannot explain this to the investors so they can understand, they will walk away!
The Punch Line
These are all the things you need to consider when making a business plan for a SaaS-based business model that differentiates it from other business plans! The executive summary exists in every business plan. This is a one-page long summary of your entire business plan. However, do not undervalue the power of this one page. This will determine the faith of the rest of your business plan. If your executive summary is not captivating or convincing, the investor will not bother reading another word of your business plan! So make sure your executive summary is a knock-out punch! Otherwise, your business plan will be another document at the bottom of a costly paper shredding machine!
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