Why SaaS Profitability is Hard?
Over the last few years of being a software product manager, I've become obsessed with margin. There are three times when a product manager needs to think about margin. First during ideation, second during design, and third during go-to-market. In this article, we will look at each phase and what to do to maximize the margin.
When you first come up with a new software product idea, you need to consider what the customer will be willing to pay, and if that price will leave you enough margin to run a sustainable business. You might say, "but my software will have an ad-based revenue stream!" You still need to consider how much you can make on ad revenue versus how much it costs to operate the software. In the beginning, you can make a rough estimate using the AWS pricing calculator to gauge how much it might cost to run. A common misstep in this phase is to focus only on the initial capital investment. If there isn't enough margin in the operation of the software, it is hard to justify building it.
During design, you as the product manager need to stay closely involved in the decisions made. If your engineering and architecture team doesn't understand your cost goals they can easily make technology and design decisions that vastly increase your costs. When trade-offs are being made, be sure to have a seat at the table and ask the tough questions about the implication of each. When it comes to managing data, give your team guidelines on how long the data should be kept and how quickly your customer needs to be able to retrieve the data. Hot storage is significantly more expensive than cold storage. When it comes to running analytics/AI/ML, think about scheduling processing to an off-peak time and caching output for a period of time instead of rerunning on demand. These little design changes can save a lot if you are in a tight pricing competition.
Finally, as you move into your go-to-market phase of the product release, it's time to get real numbers on both your costs and pricing. Have your team run production-level tests to see how much it will actually cost to operate. Revalidate your assumptions about pricing. Put some prices in front of friendly customers to see their willingness to pay. Once you have these two sides of the equation, ensure that you have some margin. Consider packaging options including freemium and in-app purchases.
You need to focus on innovation to increase the value of your product, but if you haven't considered margin it will be a tough road to get the funding you need to run a vibrant thriving SaaS. I hope these tips help you as you travel down the road towards profitability.
