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Time & Money
People that are new to the industry rarely realize the amount of time and energy it actually takes to get a product to market. From ideation to market penetration, my experience is that most companies come in at around two years. Many of these businesses will have sales and/or market testing revenue prior to that time. But by the time they find their niche, their messaging, have the system set up for their users, and are able to start growing is very often around 2 years.
For whatever it is that you’re building, unless it is exceedingly simple, plan on it taking at least a year to get the product right and understand your market fit. Then plan on another year of iterating on the product, getting to know your customers, building systems that match their needs, and starting to really take off.
I’m not suggesting you can’t do it faster, I’m just giving you a good idea of what to plan for. Plenty of companies do this a lot faster, but plenty of companies also thought they could do it a lot faster and it ended up taking a lot longer or never evening getting to market. So as you’re planning your project, if you are racing to beat a competitor and they’re already a year ahead of you, you’re probably not going to beat them. If that’s the case, just remember that it’s a big world and there are a lot of buyers out there.
Understanding costs and revenue can quickly be the difference between being in and out of business. For the most part, SaaS businesses have fairly high margins, which is one of the biggest draws to this sector. It’s easy to think that because your margins are so high that you can withstand a few more costs, but that kind of thinking can quickly sink your business.
Personally, I had this happen with my business MedRev. It is a patient experience analysis SaaS that works by sending out satisfaction surveys to patients from clinics, offices, and hospitals and returning back to them actionable information on how to improve their companies and processes. When we were getting started, I didn’t put much thought into the cost of systems operations outside of support because “How much could it possibly cost to send a few emails and texts?” It turns out it’s a lot if you’re going to be in compliance with all the US healthcare regulations, also known as HIPAA. To get all of our training, insurance, other legal issues, and security within the system, the costs turned out to be exceptionally high. The difference between sending out surveys while complying with HIPAA regulations versus just sending out business surveys turns out to be SIX TIMES more expensive! If we hadn’t already been so far into the system when I realized how low the margins were actually going to be, I may not have pursued it in the first place.
But that’s a company that didn’t crash from unrealized costs, and there are plenty that did. In particular, one interview with a friend who wished to go nameless to protect the identities of his investors described a business that went totally bust from unconsidered costs.
In his words “I didn’t need the full-time staff, I didn’t need the warehouse space, I didn’t need the office, and I certainly didn’t need all the perks we gave ourselves. But we got it because we thought we did. In the end, I could have done the whole thing working from home with no employees at all. Even though we made almost 200k at launch, the cost ended up killing us. Had I taken a step back at so many different points leading up to the end, maybe I could have made the hard decisions and cut the bleed, but I just didn’t realize it.”
It’s the same story I’ve heard so very often, and have said myself. You have to take the time to do the math, and as my Mom says “Run the numbers,” or you’ll be out of business.
This is not a simple table of data that you can just fill out a couple of fields and understand if this is going to work or not. We also need to do this in a spreadsheet so you can make complex modifications.
Whether you’re bootstrapping it or getting some big dollars, unless you’re Uber you’re going to need to know when to expect to be cash flow positive and profitable. Building this expectation into your plan is a necessary part of any business plan.
Most experienced business owners would say “Of course you have to do this!” So I only bring it up because I have seen so many SaaS businesses that think they will somehow just make money at some point and that will be fine, without giving any thought toward checking to be sure their income or investment will support the timeline of business development and their go to market strategy.
So let’s figure out how long it’s going to take before your business starts making money. The spreadsheet here will take you through some example costs and timelines so you can get a good idea of how things will look for you.
What is the cost to build the system? - choose a round number, then double it.
What are your monthly costs?
How long will it take to gain market share? - pick an estimated time of at least 1 year and double it.
What is your growth rate - start at 1% for AT LEAST the first 4 months, then you can go up to 2% to 5%. Aim for 20% within 6 months.
In this first part, we are just going to add some estimates, but in the future, we’re going to dig deep into these numbers so you can get a good idea of actual costs. The concept to grasp here is that your costs and revenue will grow over time. The goal is that your revenue grows faster than your costs and your end up making a profit that can also offset the initial capital outlay you put into the business.