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It’s a hard balance being in the Software/SaaS (Software As A Service) industry. We can put lots of time and focus into systems and development, but sales may suffer… or we focus on sales and then development suffers… ProActive Software (www.proworkflow.com) has bootstrapped (growth through no funding, and only sweat equity) to profitability thus far and this is fun to a point however if the intention is to bootstrap through to profitability as we’ve done, the issue is 100% correct allocation of resources between development, sales, systems and marketing.

We don’t have a truckload of resource, rather a smaller dedicated team and no massive flash offices (ProActive is largely a virtual team). There are a few contractors globally but we do A LOT with what we have.

We’re up to a good number of dedicated servers in California and one in NZ, and are in profit. So the years of hard work have paid off. Revenue is looking healthy and we all earn good salaries (founders work 16hr days).

The biggest problem I see in both the local and global market is the high number of software/SaaS co’s trying to scale, but using (old school) high inertia sales and marketing.

Ie: people having to hard sell, or visit companies premises to sell. Also, trade shows and exhibitions, travelling etc…

All this is fine (if you can afford it), but the underlying business model HAS to be low inertia, otherwise, it’ll scale, but so will the costs and expense… and profit will never come.

To be in New Zealand and compete in the SaaS market globally, there needs to be minimum expense per sale, and as the revenue grows, the margins need to expand as well.
If your business’s margins shrink with scale, you’ll hit a lid and have no profitability long term… Expanding margin mean you can scale faster as you grow.

Some companies I know of think that ‘Speed to market’ is the key. You must grow fast! – Bollocks – it’s a myth! Long term sustainability is the key. Be smaller and healthy rather than rush things with the wrong model only to find out that you’ve scaled up too fast on a bad model and the only path to profitability is to take round two funding (and lose more control).

We track our competitors (as it’s a competitive market) and probably 20-30% of the competitors I track have disappeared in the past 12 months. Gone! We won’t allow that to happen to ProActive Software  ;-)

In my personal opinion, Founders should also take a company to revenue BEFORE taking investment to scale – otherwise you simply give away too much of the company and the investment goes into R&D (Investment should go to Sales/marketing). Not only that, but it’s those bootstrap years that help you truely discover the ‘profit recipe’ of your business. You can’t spend needlessly – every dollar out must return. This thinking can be lost or clouded if too much investment comes in too early.

Ultimately there is one formula we ALL must adhere to to succeed long term.

COST TO AQUIRE a Sale
   < Must be Less than
AVERAGE REVENUE from a Sale

Where most companies get it wrong is on the ‘Cost to Aquire a Sale’ part. They make plenty of sales, but when you look at their model and costs, with trade shows, print ads, high sales costs etc they can blow 30x or more the monthly revenue they’ll gain..

Ie: A software co may spend (if analysed) $1000-2000 in time and company resource to land an average $50 per month sale. This means they’re not in profit until that customer has been with them 30 months. On this note, every company has a different ‘Average Customer Retention’ time.
This may be 3 months or 2 years, but simple maths will tell you that if it takes 30 months to get to profit and the ‘Average Customer Retention’ time is 12 months… Guess what… you have a problem… and you’ll be chasing 2nd round funding sooner or later to stay afloat.

Understanding the key metrics around ‘Cost to Aquire a Sale & Average Revenue from a Sale’ is a key issue we all need to focus on – every day…

That’s my 2 cents for the morning… Time for a coffee!

 

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About the author:
Julian Stone, CEO – Project Management Software visionary 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.