This is part 5 of our Software-as-a-Service (SaaS) business model series and it will summarise the key aspects of the previous articles using Slack as an example.
SaaS is an important subcategory of Linear Subscription Business Models.
Categorising SaaS - where's Slack?
Slack is an exciting tool in the flourishing productivity SaaS space.
This mind map shows a high level overview on one way of categorising SaaS.
It makes sense to categorise & map solutions according to criteria that are relevant to your considerations, e.g.:
- If you want to understand the competitive space in one subcategory, build a map around that subcategory
- In our mindmap we are distinguishing between differences in business model elements. But you could also differential between important feature sets or other criteria
What is Slack?
Slack is a channel-based communication and messaging tool. It is a team and business collaboration tool. Slack overcomes some key problems with emails.
Each channel has a feed that people can post messages, documents, etc into. The communication trail is persistent and anyone can see it. Users who get added to channels can access the entire history And unlike email trails, messages do not disappear in people’s inboxes.
Channels can be defined by users under any criteria, e.g. by project, product, an initiative, a department, etc. Most users will be part of several channels
It has also document management, tagging, filter and search functions as well as direct communication, video chat, etc
Important R&D business model considerations
There are some important R&D business model considerations that hold true for most SaaS solutions (not just for Slack). These are:
- Focus on some core value propositions: These dont need to be entirely new. Many SaaS have started by focussing on core modules or even functions of legacy solutions. This shows you that there is already a market and that the market is already educated through existing solutions
- Look at developments in organisational changes over the last 10 years for your SaaS solution and make sure your solution is much better suited for these changes than existing solutions. If your solution is not for businesses but say individuals then make sure you understand any changes over the last decade relevant to your solution. It is often very difficult for legacy solutions to adapt to such changes because they often necessitate a paradigm and major architectural change of their solution
- Users should be able to get started with no friction and get immediate returns on the time they spend
- Ideally, your solution adds more value a more users join - this will help to spread the word. This is also called single-sided network effects
- Your SaaS solution needs to work in common browsers and should have an app
- Make sure you have many relevant integrations. This is a much easier way to "add" features to your solution than to develop them yourself. You are creating an ecosystem around your solution with moderate efforts
Sales & Marketing
We have also learned why emerging SaaS companies use different sales & marketing approaches.
The key reason is that sales & marketing tends to be the biggest cost items. If you dont have new, innovative sales & marketing ideas, your solution will likely never scale.
You will be left behind with the huge marketing budgets of other players.
In part 3 we discussed the business model elements related to sales & marketing.
Some key ideas were to enter companies from the bottom up. See also the video in the box below.
Important Customer Metrics
In part 4 of our SaaS series, we learned about 5 customer metrics that are important for SaaS businesses as well as for linear Subscription Business Models.
- Annual Recurring Revenue (ARR) by cohort
- Customer Lifetime Value (CLV)
- Customer Acquisition Cost (CAC)
- Paid Customers (=businesses)
- Paid Customers >$100k/year
Check out the article for more details on each of these metrics.
We also realised how much revenue comes from a small subset of large customers. In Slack's case this made up 50% of total revenue generated by less than 1% of companies.
This differs of course but the general observation is quite common in the SaaS space.
We then brought these metrics together in a dashboard. Here we see an example how it could look like. Remember that we want to adjust the cadence to something that can help us with decision making for the short, medium and long term.
You can use other metrics but many of the ones shown here are strong candidates for key customer metrics.
Netflix business model
Subscription biz model
Business Model Canvas Slack
Let's close of our Slack example with their business model canvas (BMC). The numbers below relate to the innovation tactics highlighted in the BMC.
(1) Their go-to-market approach is from the bottom-up.
(2) The cloud architecture allows Slack to run in a browser without their users having to go through software installation permissions which are increasingly prevalent in larger companies.
The Freemium model offers a limited yet useful set of functionality which avoids payment frictions.
Within corporates this bypasses procurement and/or expense reimbursement processes which can be another friction.
Users can start being productive within minutes of signing up.
(3) But since it is a collaboration tool it becomes more valuable as more users participate. This is how Slack spreads within companies organically from the bottom-up through word-of-mouth.
(4) One-sided network effects increase value of the tool as more people use it.
Slack Connect is a more recent technology that extends the network effects securely beyond one company.
(5) The initial self-service users become the leads for Slack’s sales teams.
(6) Slack’s customer success teams supports users with online material, FAQs, etc:
- most of the educational resources are free & web-based
- typically, there are communities of users and superusers, etc
(7) Slack supports so called Slack champions within companies to spread the word and develop relevant use cases.
(8) As the self-adoption progresses, their local field sales teams target decision makers higher up the hierarchy including business unit managers or the C-level as appropriate.
An important way of doing so are internally generated use cases.
It is this audience that will be deciding on the enterprise license deals which come at customised pricing.
(9) The cost of the Freemium accounts go under sales and marketing costs which are very high in the early years and can exceed 100% of revenue as the company scales.
All of this is a playbook that many SaaS software companies use and that you should know as an innovator.
This is an abridged version of the respective lesson that we cover in our SaaS courses. You can learn more about the SaaS business model elements there.