How much of your creative time have you invested in designing the business model for your SaaS subscription startup?
There are two kinds of startup founders.
The first believes success will naturally emerge from the product idea. The second believes success will happen only through a powerful business model.
Which kind of founder do you relate with?
The risk about being the first type of founder is that your amazing product can’t guarantee your business success.
In this post, you’ll learn a framework to build a business model hypothesis for your SaaS subscription startup, so you can increase its chances to take off.
🖐 Hey, just a parenthesis here...
Are you leading (or intending to lead) a SaaS subscription startup?
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A BUSINESS MODEL? WHAT IS IT?
Before we jump into the framework, let’s first answer a key question: what exactly is a business model?
“A business model describes the rationale of how an organization creates, delivers, and captures value.”
Alexander Osterwalder, Business Model Generation
In other words, it’s your strategy on how you’ll build a successful business from your SaaS product idea.
Choosing the price, defining how you’ll deliver your solution, assessing your business metrics, beating competition… Whew… it’s better to organize it all. Right?
Of course! To do that, let’s use a framework called Lean Canvas.
THE LEAN CANVAS FRAMEWORK
The Lean Canvas was created by Ash Maurya, as an adaptation of Osterwalder’s Business Model Canvas. It is made of 9 components that will form the basis of your startup’s business model.
P.S.: Wanna know more about the Lean Canvas framework? Read Ash’s book “Running Lean“.
Okay, let me finally introduce you to… The Lean Canvas:
But please, don’t just stare at it. Grab this free editable pdf and start working on it right away.
Did you download it? Cool.
Is your solution there?
Yep, it’s definitely one important component of your business model. But, it’s not the only one.
So, if you’ve been talking just about your product’s features, it’s time to open your mind.
Your job isn’t just building the best solution, but owning the entire business model and making all the pieces fit.
Ash Maurya – Running Lean: Iterate from Plan A to a Plan That Works (Lean Series)
Okay, let’s prepare your smart brain so you can use it to design a killer business model.
Starting with the problem…
1. THE PROBLEM
Making people adopt your SaaS product and pay you a subscription fee is definitely a challenge. But, before persuading them to subscribe, you must convince them to listen to you.
They have a thousand thoughts flying inside their minds.
Why would they care about a new SaaS product?
The answer will vary, depending on the person we ask this question to.
But, one thing is certain; It has to be something that will radically change their lives for the better.
So, your first mission, my dear founder, is to identify the problem or the gap that is preventing your customers from getting a much better life.
In the case of your SaaS subscription startup, you must also be sure that the problem you’ve identified:
- Happens recurrently (high-frequency)
- Is effectively/conveniently solved through the cloud
- Causes them a big frustration (relevance)
👉 P.S.: Ash Maurya suggests you map up to 3 problems for each customer segment.
Existing Alternatives
Once you’ve nailed the problem, it’s time to list the existing alternatives used by your customers to completely or partially solve it. Start by answering these questions:
- What other solutions do your customers use?
- Do they choose living with the problem and simply facing its consequences?
- Have they built adaptations to partially offset the harm caused by the problem?
Remember: your research about existing alternatives must go beyond SaaS products. It’s about any alternative that may reduce the problem and/or its consequences.
👉 DO IT:
A) List 3 different problems your potential customers have
B) List existing alternatives through which your customers deal with these problems today
2. CUSTOMER SEGMENTS
After defining the problem(s), it’s time to shift the focus towards the people affected by it.
When you deeply know your customers, it’s much easier to design a SaaS subscription product they’ll love.
Since your product may serve different people, it’s your job to map the customer segments and their use cases.
Early Adopters:
Customer segments differ from one another in many forms.
But there is one characteristic you should be aware of: how much each customer segment cares about solving the problem.
That means some of your customers will consider the problem an “Armageddon”, while others will consider it just a “smooth tremor”.
Since you’re still working to validate your hypothesis, start with the most desperate ones—the “early adopters”. Offer them an incomplete (but effective) solution. If they still want it, you’ve found a really relevant problem.
If you’ve done a great job in identifying the problem and the contexts in which it occurs, you’ll have enough knowledge to assume who your early adopters are.
For your SaaS Subscription Product, find a context in which the problem occurs in the highest frequency or causes the biggest damage (in the short or long term). Probably, in such scenarios, you’ll find those people desperate to hear about a solution and pay for it.
Work hard to find your early adopters, because they hold the key to unlock your SaaS subscription startup traction.
👉 DO IT: A) Describe the customer segments your product may serve B) Identify the early adopters for your SaaS subscription product
3. UNIQUE VALUE PROPOSITION
The third step you must accomplish to design your SaaS Subscription Startup business model is to define the Unique Value Proposition.
Your UVP should present:
- The big transformation your product will produce in your customers’ lives
- How your SaaS product will deliver the transformation, in general terms.
Let’s see how some SaaS subscription companies state their UVPs (extracted from their websites):
- Netflix: “Unlimited movies, TV shows, and more. Watch anywhere. Cancel anytime.”
- Calendly: “Easy scheduling ahead. Calendly is your hub for scheduling meetings professionally and efficiently, eliminating the hassle of back-and-forth emails so you can get back to work.”
- CoSchedule: Organize All Of Your Marketing In One Place. From Any Place.
- Setapp: Think tasks, not apps. Setapp curates apps for you, so you can focus on work.
👉 DO IT: A) Describe the main transformation your customers will perceive in their lives, after subscribing to your solution B) Describe, in general terms, how your product will deliver the transformation
4. SOLUTION
The “solution” block is quite tricky.
It’s tricky because, in general, SaaS startup founders are in love with their product’s features and algorithms.
Probably, you’ve invested so many hours in envisioning a dream product that you ended up imagining the most complete product in the world. Right?
However, considering your mission is to check if your startup assumptions are right or not, you must focus on what exactly needs to be validated about your solution.
The first assumption to be validated about your SaaS solution is how effectively it delivers your Unique Value Proposition.
In other words, you want to define the least number of features needed to solve your customers’ problem.
This rough and imperfect vehicle is called the Minimum Viable Product (MVP).
What is beautiful about an MVP is that it forces you to understand the pillars of your SaaS subscription product.
👉 DO IT: A) Define your MVP (the minimum set of features to effectively solve early adopters problem). B) Criticize the features you've included (can you take one of them and still be able to solve the problem? Do it.)
P.S.: If you want to know more about validation methods, check this post.
5. CHANNELS
This is your hypothesis about how your SaaS startup will acquire new subscribers.
Your path to customers can be built in many different ways (if you think you’re limited to just one or two channels, I recommend you read Traction, by Gabriel Weinberg)
As any other part of your business model, what you’ll write in this block still needs to be validated.
No one in the world can predict what will be the best channel for your startup, in your market, in your scenario. That’s why your mission is to come up with a strong channel hypothesis to be tested.
To build this solid rationale, use:
- Your knowledge about your customer segments/early adopters: where are they found? Where should you expect to find the most promising prospects?
- The channels that are already being used by similar products: but be careful. Just replicating what other similar businesses do may prevent you from being creative and discovering more profitable channels than your competitors.
B2C vs B2B
In the case of SaaS subscription startups, you may find a big difference between channels used for B2B and B2C.
If you’re offering a B2B SaaS subscription, have in mind the several different individuals that will be part of your customer acquisition process. Some of them will work outside client organizations (distributors, agents, etc) and some will work inside (managers, analysts, procurement employees, etc).
On the other hand, if you’re selling B2C SaaS subscriptions, you may count on a much more direct channel to reach your customers.
👉 DO IT: A) Define up to 3 promising channels and the logic sequence to acquire new subscribers.
6. REVENUE STREAMS
In this block, you’ll design your hypothesis for how your startup will monetize the value it created for its customers.
For SaaS subscription startups, it seems obvious to say “subscription” as a revenue stream (although you should also consider including other revenue streams: e.g., additional services).
But, more than just defining how you’ll charge your subscribers, this is also the time for you to define how much you’ll charge for your subscription plans.
Although there isn’t a universal formula to calculate the exact price you should charge, some aspects can drive your pricing decision. Let’s see:
- Recurring value perceived by your customers (how big is the impact in their lives?)
- Purchase power (how much can they afford?)
- Market size (how many customers are there in the market? How much would you have to charge to achieve positive results?)
- Your cost structure (see next item)
👉 DO IT: A) Define your revenue streams B) Define your first pricing strategy
7. COST STRUCTURE
I know, I know. You don’t explode in excitement when you read “Cost structure”. Right?
But, investing your time to understand your startup’s costs may completely change the game for you.
The costs needed to generate and deliver the value of your solution will determine important things such as:
- The gross margin each subscription will generate
- The number of subscriptions you must sell to generate profit
- The amount of funding you’ll need to validate your product.
But what costs are we talking about?
- Validation costs: your best estimate for building and testing the MVP
- Operating Expenses: your best estimate for the recurring costs to keep the business alive (e.g., rent, energy, salaries, etc.)
- Cost of Goods Sold (COGS): your best estimate for the costs needed to create and deliver the value (hosting services, customer success salaries, support salaries, etc.)
Such as we’ve seen in the “Channels” component, there are significant differences between B2B and B2C companies’ cost structures.
From day one, start understanding what cost structure your startup will require from you.
👉 DO IT: A) Estimate the validation costs B) Estimate the operating expenses C) Estimate the Costs of Goods Sold (COGS)
8. KEY METRICS
By defining your startup’s key metrics, you prove you understand two essential things.
The first one is that measuring progress is key for any startup founder who wants to achieve success. How can you know things are working or not? Yes, through metrics.
The second one is that it’s unproductive to monitor every possible metric of your startup. Okay, you can use tons of data to generate tons of metrics. But, you must define the ones that will really make the difference.
If you’re still scratching your head to find your SaaS subscription startup’s key metrics, I suggest you start with the model introduced by Dave McClure called “The Pirate Metrics“.
The Pirate Metrics: AARRR
Okay, if you haven’t guessed yet: Pirate metrics because the acronym seems a pirate yelling (“AARRR!”).
But let’s see what the acronym stands for:
- Acquisition: The moment someone provides you his/her personal data (which permits you to identify and directly contact him/her)
- Activation: The moment someone experiences the core value of your product for the first time.
- Retention: The moment someone experienced the value for a recurrent time (considering the ideal time frame for your SaaS product)
- Revenue: The amount of revenue you’re generating through your subscriptions
- Referral: The moment a current user makes someone else start using your product too.
Once you’ve defined your key metrics, it’s time to define how you’ll generate them.
P.S.: Put your efforts to avoid building a too complicated process to measure your metrics.
👉 DO IT: A) Define your key metrics B) Define the process through which you'll measure them
9. UNFAIR ADVANTAGE
And here we go to the ninth component of your Lean Canvas.
Here your mission is to create a shield against future competitors.
What happens when your business model is validated and your SaaS subscription startup gets in the traction stage?
Besides saving a bottle of champagne for this glorious moment, you must also design a strategy to prevent other companies from replicating what you just built.
But, is there really something a startup can do to prevent being easily copied by more powerful companies?
Yep, there is! The unfair advantage.
Check out some examples of unfair advantages:
- Insider Information: to have access to specific information that is not publicly available, nor can be dug easily.
- Experts/influencers endorsements: to count with a strong endorsement from someone in your team or from a stakeholder.
- A dream team: a team of stars that are able to produce extraordinary results.
- Network effects: using the connection between SaaS users to make it more valuable (than a platform with fewer people).
- Community: using the community bonds, identity, and history, to prevent people from searching for other alternatives.
👉 DO IT: A) Identify your potential unfair advantage (list two, choose one) B) Define a way of leveraging this advantage (What do you must do to harness its power?)
AAAAAAAND…. ACTION!
Designing the Lean Canvas of your SaaS subscription startup is indeed a great step. It will challenge you to build a good rationale for your business hypothesis.
When founders focus solely on features and algorithms, they end up with a weak (or absent) logic for their businesses.
So, it’s time for you to take action.
If you feel stuck with one or more of the nine blocks, it’s evidence you need to invest your time and energy in your business model:
—“I don’t know what to consider as my startup’s costs!” — Exactly, that’s why you need to learn about it.
—“I have no idea of what unfair advantage to build!” — Yep, and that’s a risk you should take care of right now.
Read. Research. Ask others. Model successful SaaS subscription companies. Be creative. Test it. Iterate it. Pivot it.
But, especially DO IT.
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