June 16, 2020

How SaaS Entrepreneurs Can Plan for 5 Common (Yet Unexpected) Start-up Costs

Along with building a first-year pricing model, one of your main considerations when setting a price for your new product is understanding the dynamic nature of startup expenses. As a first time entrepreneur it can be tricky to track down and plan for all of the potential expenses you may run into. If you’re optimistic you might think you can always catch up on things later when you get the business up and running, but like your pricing model, your expense model must take the long view. The biggest pitfall for first-time entrepreneurs is thinking about what’s right in front of them to the exclusion of everything else, and this is especially true with costs.

In this post, we’ll run through common expenses for SaaS startups that many first-time entrepreneurs do not anticipate. They’re not so much “hidden” expenses–trust us, you’ll notice them–but they are likely to take a back seat to your basic product development costs, which tend to be more front-of-mind. For that reason, you won’t see engineering costs per se on this list, though we will discuss phases of product development that you may not have considered in your back-of-the-napkin planning sessions. We have also stayed away from providing cost estimates, since they vary so widely between products and markets.

5 Unexpected Costs for SaaS Startups

1. Scope Creep

Anyone who has worked on a big project of any kind knows that big projects love to get bigger. Even if you diligently pursue an efficient, streamlined product, it’s just not always possible to predict exactly how much time and capital it will take to get there. And there’s always a chance that the product needs to get bigger than you planned in order to provide value to your target customers.

A smart startup budget accounts for this possibility of “scope creep,” based on the number of times the product owner changes their mind, unforeseen constraints that force an alternative and especially if you’re working directly with a developer. The most basic cost model is “time plus materials,” which may seem cheaper than building in a flex or contingency, but the reality is that you take on the risk of any unknown overages, and you absorb them at a phase of the project when money is tight plus you have the least leverage for renegotiating rates. Of course, most entrepreneurs would be thrilled with a “fixed fee” arrangement, which simply shifts that risk onto the developer. Fixed bids with flex budgets for contingencies are usually a good compromise, but the key is to establish clear guidelines and good communication early in order to reduce conflict about project overages later.

2. Marketing and Audience Building

Chances are you’re entering a sector with lots of incumbents offering at least broadly similar solutions. But even if you think you’ve found a niche in the market, the very thing that makes you unique may also make you hard to find, because potential customers don’t know to look for you. On top of all that, SaaS platforms can be particularly difficult or expensive to market, since they provide more abstract services that are often hard to distinguish from competitors.

There’s no shortage of hard-and-fast rules for how much your startup should spend on marketing and customer acquisition, but the truth is it depends on whom you’re trying to reach and how. If your target customers are very-connected social media hounds, you may be able to craft relatively inexpensive campaigns on Facebook, Instagram, or Twitter (though these are all pretty crowded spaces, so you still shouldn’t assume you can do it all for free from your home office). If you’re trying to reach CEOs of companies, on the other hand, you’re looking at a much different (and possibly much higher) cover charge. Direct mail, TV, radio–all of these have different costs and different audiences.

The thing to remember is that even the least expensive marketing plan is a waste of money if it doesn’t reach the people you need to reach. There’s no getting around the imperative to know your target customers, what their problems are, and how to reach them.

3. Advisers

As you grow in your first year and beyond, you’ll need more eyes than your own on your business, including areas way out of your area of expertise. Employees come with H.R. and insurance and other expenses; virtually every aspect of your business has some potential legal exposure that needs to be carefully examined; and even gifted entrepreneurs are not always whiz-kids when it comes to keeping the books, so you may need to pay for accounting support, too. Along with people to delegate to, you will need people to get counsel from: coaches, consultants, and even a Board of Directors can shorten the time it takes to get something done or talk you out of rookie mistakes before you make them.

Of course, wisdom consists of finding the right kind of help at the right cost. More than one new venture has been sunk under the weight of snowballing consultant’s fees. Advisers are like any other costs: they need to be actively managed, with clear scopes and expectations, or else they will manage themselves, and you will pay the bill whether or not you have gotten the value you expected. But it’s easy to make the opposite mistake, to assume that your own undoubtedly excellent brain contains all the wisdom and insight you’ll need to be successful. Choosing the right experts to advise you is about understanding your own limitations and being willing to pay for quality advice.

4. Smaller Ancillary Costs

From annual subscriptions to app stores to hosting costs during and after launch, SaaS startups accumulate small, secondary expenses that are far too easy to dismiss as mere “overhead.” You will probably need to purchase licenses for GSuite, Office365, or other productivity programs. You’ll need a Customer Support Ticketing system, a Product Management and Documentation system, and email and SMS services. An effective cost projection must account for the seemingly “small” expenses that have a way of adding up to big money. Depending on your product, it may take a while to achieve an “economy of scale” with these expenses, where your revenue offsets them enough that they become truly minor line items.

This is where a pro forma analysis is especially useful. It helps you make sure that your revenue model matches up with your real expenses, not just the big ones. It’s counterintuitive, because the big expenses are so, well, big, and they have a way of sucking all the oxygen out of the room. But nothing is more disheartening than the death by a thousand cuts that happens when you make the mistake of assuming “small” costs will simply take care of themselves.

5. Post-Launch Developer Support

After you launch your new SaaS platform, you’re going to need people to handle customer complaints and help tickets from users. At least you hope you will, because that will mean that people are using your product and fulfilling the indispensable function of showing you where it needs to improve. Indeed, the volume of this support may need to escalate as business grows: you will need a crew to fix bugs, to address non-critical pre-launch concerns that may have been postponed to keep to a schedule or a budget, and even to start work on Version 2.0.

The point is, you’ll need more than just a maintenance contract, you’ll need a continuing partnership to develop service improvements and new, better features in response to real customer feedback, perhaps even before you’re profitable. Like budgeting for “scope creep,” securing developer support after you launch is a matter of negotiation. It may or may not come at a significant additional cost, but it’s not infinite in any case, so you’ll need to factor it into your first-phase expenses.

The True Cost of a SaaS MVP

In the next few weeks, we’ll write favorably about building MVP’s, or “minimum viable products,” an approach to product design that aims for the least amount of functionality that can still find a viable market. And it’s certainly true that an MVP can give you lots of leverage in the struggle between expenses and revenue, especially early in your venture. But it’s also possible to become so focused on the cost of developing that minimum viable product that you neglect to spend money on the aspects of your startup that will make your product viable in the first place. Remember that the MVP strategy only works with an expense model that looks beyond the product itself to the whole host of costs you’ll encounter in the complete first phase of your business.

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