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Just spotted this article on CNN the other day I thought I’d share. Take a look at: http://money.cnn.com/shortURL/

This is about http://www.rackspace.com and their focus and determined approach to finding profit in their business model. They are doing great and seem to be on track for some good surplus. It got me thinking though.

Lately I’ve spent some time running numbers (yes I’m a numbers geek) on the known numbers surrounding 5 of the big players in the SaaS industry and a few very new SaaS startups that have been in the media. Whilst I don’t know the true figures, on first glance, it seems that compared to traditional download software, SaaS isn’t pulling the same level of profit.

To my estimates (based on industry experience), profits of the established leaders is in the 10-20% mark and the potential profitability of some new players coming through is non-existent (based on estimated cost of aquisition/retention vs sale price).

It seems that gone are the days of ‘Bob and Bill’ in the garage making 100,000 a month selling downloadable code on expense of $100p/m and we’re entering a new era of unprofitable ‘Web2.0 and SaaS’. Sure, some people are making money, but could the Web2.0/SaaS hype be taking focus from the real issue? Sustainable business models with good margins? It’s no good making a world class Web2.0 product if the business model is unsustainable.

For example, I look around and see many companies ripping off BaseCamp, both in design and business model, but simple maths can tell you they are dreaming if they think they can magically arrive at profit just by ‘looking Web2.0’. It doesn’t matter how ‘fresh’ you look. If the balance sheet doesn’t stack up, it’s just smoke and mirrors, or worse, a house of cards.

A lot of the new players think that to be successful you simply need to have:

  • A web2.0 website/product
  • Big ugly buttons, and a strategic lack of functionality
  • Lots of users
  • Low price point

But in reality, to make a profit you need to have:

  • An established market need
  • A tested mature solution
  • A sustainable business model
  • Pricing based on value, but considering your expenses
  • User number is irrelevant, but have good margins on sales
  • Low expenses until proven
  • Low inertia client managed support
  • A baseline of free marketing
  • All administration automated
  • Less, but multiskilled staff

Also, Funding and investment at an early/prelaunch stage before the revenue model is tested and breakeven reached is in my opinion the deathnail on future profitability. I would like to see more companies prove their business model works before scaling up.

Anyway, the real point here is to not just consider the product design. Anybody can make a better burger (McDonalds analogy), but rather to keep profit as a main focus as you develop your business model.

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About the author:
Julian Stone, CEO – Project, Task & Time Management specialist for: ProActiveSoftware.com, ProWorkflow.com & Julian101.com

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About The Author:
Julian Stone begin_of_the_skype_highlighting     end_of_the_skype_highlighting is the CEO of ProActive Software, developers and creators of the leading web based project management software http://www.proworkflow.com.