I learned a number of lessons with my last business. At the time I thought I had everything figured out from distribution to my upsell, and I was going to either get funding or acquired. I even moved to San Francisco.
Over five years ago, when the very concepts for my company were just forming, I never considered that an a la carte business model would ultimately doom me to the same kind of cycle as the client work that I started my business to avoid. At first, I was just so happy to be making money, I never really thought about what would happen if sales stopped trickling in. I mean I was profitable within 90 days with almost no investment, what could go wrong?
How was I supposed to know that in 5 years time Google was going to radically change their ranking algorithms and devalue tens of millions of my backlinks? Or predict the rise of Themeforest, let alone that WordPress would restrict the user experience of selecting a theme for your website?
Now don’t get me wrong, I did consider the possibility that some of these things might happen before they did, but ultimately I set myself up for living month-to-month as a business in the worst way possible way. As I gained new customers, my overhead grew erratically. I needed to support my products and the more sales I got, the worse the burden became. There was no way to scale properly as I didn’t know what kind of resources I would need for the next month. Meanwhile, the world changed, and I didn’t have the cash flow to change with it.
I eventually sold the company for a respectable exit, but I’m hardly retiring off it. Which is why I’ve spent the last several months trying to solve this problem, so that you can learn from my mistakes.
Lesson #1: Don’t go after the wrong customers.
Someone willing to buy something once for $30 dollars is not the same kind of person willing to spend $30 per month, or even per year. When someone buys your digital good or service from you, and just takes it and runs, there’s no further relationship or commitment to build on. The opportunity is typically gone. There is no guarantee they will buy your next product.
Lesson #2: Recurring revenue is king.
I wasn’t Apple, I was foolish to copy an iTunes-like download based business model. Even Apple is now pushing their monthly subscription service in place of downloads with Apple Music. While it is reassuring Apple made the same mistake I did, unfortunately I didn’t have billions in the bank to pivot with.
Recurring revenue is the most important component of any software service based business.
Had I built my business to be a recurring revenue service model I could have lived off that revenue potentially for the rest of my life, and would have been able to expand my team and grow with my business. Instead I was burning money I didn’t really have working on future predictions that didn’t always work out. Which was stressful, to say the least.
So what is software as a service?
Software as a service is a software licensing and delivery model that is centrally hosted by the software developer who then charges the user a monthly or yearly fee in order to continue to use, and get support for the product. In other words: it’s software that lives in the cloud that users can subscribe to, much like Netflix, or Adobe’s Creative Cloud.
Recently, many older companies like Adobe, have switched to SaaS or subscription based models and many newer companies like SalesForce, are simply based on them. Even recurring monthly box models have taken off such as the Dollar Shave Club, where customers pay a monthly rate for physical goods.
Software as a Service ensures that when you find a customer, they’re committed to using your product, and will provide feedback to remain a customer. It also ensures that you will make money from them again in the future, as long as they don’t cancel.
The key to software as a service is by providing ongoing value for your customers. Your software actually needs to solve an ongoing problem or pain point for your customers so that they continue to subscribe.
The problems I was solving for my customers wasn’t enough, it didn’t provide for an ongoing revenue model. However, there are now solutions such as what we’re doing with WPdocker to not only solve this problem, but automate it.
So please learn from my mistakes, and focus your attention on building a sustainable software service business. Selling one off solutions isn’t going to put your kids through college.