Getting paying subscribers - that is by far the biggest expense for any SaaS provider. And so that means a SaaS company has to be pretty careful about the way it spends its money.

Spending Money to Lose Money

Drew Houston of Dropbox learned the hard way what can happen when he decided to do an AdWords campaign. It cost Dropbox $233 to $388 to attract customers. But the product sold for $99. Houston had one word to describe the experience:

But what he came away with is a handy equation for the SaaS company thinking about its costs:

CAC stands for "customer acquisition costs." CLV is defined as "customer lifetime value."

As Peter Cohen explains, on the CAC side it may be big events, high priced events and clever but way too expensive giveaways. CLV issues may be not turning free subscribers into paying ones.

Houston provides an insightful story about the failure of best practices and the success that comes when you invest in your own community.

Dropbox Startup Lessons Learned

Racing Against the Clock

You can try to make up for the CAC by trying to make up in the long run for your short term losses. This approach means that the SaaS provider has to reduce the CAC costs and make lots of money before the cash gets all burned up

This can be a deadly game but it can work. SucessFactors did it. According to Cohen:

"CAC/annual revenue reached 112% at one point, but over time has come down to a more sustainable 53%. They out-grew the cash burn."

Bailing with a Tea Cup

This is a problem of underspending. Sales and especially, marketing, can be seen as a hindrance. We see it way too often. Antipathy for marketing leads to cynicism and sometimes outright hostility. But it is the sales and marketing who do the heavy lifting. They are responsible for getting the leads and making the sales.

But if there is always the pressure to do it on the cheap then it can lead to problems. The company doesn't have the resources in sales and marketing to get the job done.

Cohen:

"SaaS companies will typically spend much more on sales and marketing as a percentage of revenues than their licensed software brethren. Concur, for example, spends 31% of its annual subscription revenues on sales and marketing, and Salesforce.com spends 54%. For nearly all companies, customer acquisition costs will be the single largest expense on the income statement."

Running a SaaS service is not for the faint of heart. But the geeks in us feel that Dropbox is the best example of a company that built on the loyalty of its early adopters. Word of mouth helped them reach 1 million subscribers - that's something most services never achieve.

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