Jul 09, 2012
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The Internet has created an unprecedented opportunity to build a highly profitable and scalable business online without the traditional overheads and investment that was once needed. The economies of scale of creating such a business allow you to build a reliable, scalable company with much less risk than just about any other type of modern business. In this post I will be exploring the huge opportunity of building a Software as a Service business and how you can create a prosperous and exciting company online.
The traditional risk of starting a business is something that puts many people off from taking the leap from full time employment to starting their own venture. Starting a company is usually built on an assumption that there is an opportunity for a product or service that you can provide. However, no business idea survives the first contact with customers, and so you must endeavour to find a repeatable and scalable business model that will work. For a complete guide to finding a scalable and repeatable business model, I urge you to read The Four Steps to the Epiphany by Steve Blank.
Building an online Software as a Service business allows you to start extremely small, but with the opportunity to scale to serve potentially millions of customers in the near future once you find the right product / market fit. With a talented early team who are capable of wearing more than one hat, you can build your complete product with zero investment other than your free time and weekends. And with the plethora of enabling services for web tech startups, you only need an Internet connection to get started.
This is also one of the best opportunities to really build a global brand. Globalisation is a daunting opportunity for just about any type of business in any industry. But with an online Software as a Service company, you can easily scale to serve customers in markets all over the globe without taking the traditional risk of Globalisation.
Many people feel like they need to quit their jobs so they can work on their new venture during the day. Even worse, many people raise investment in order to support themselves and their fledgling idea through the first couple months of development.
This is a terrible way to approach this opportunity.
Firstly, if you aren’t dedicated enough to spend your free time, both nights and weekends, to build your new business, how are you going to manage when the going gets tough at some inevitable stage in the future?
Secondly, the second you take investment, you are on a ticking clock to repay that money. Investment money should only be used to quickly scale the company once you have found a repeatable and scalable business model.
I believe you should be completely dedicated to pursuing your idea as it will take 100% of your passion and hard work to make a successful business, but you need to refine your idea before dropping your responsibilities. There is no reason why you can’t create an early prototype, begin testing strategies for user acquisition and getting early traction whilst still in full time employment or doing consulting work for clients.
The beautiful thing about creating an online Software as a Service company is the extremely attractive economies of scale. Economies of scale is when the cost to serve customers falls as you add additional customers. As your service begins to scale, you will reach an inflection point where adding additional customers only marginally increases your cost to serve them. This means that you can have explosive growth in customers and revenue, without the growing pains of creating a huge enterprise to serve them. A team of less than 10 could easily handle millions of customers making the revenue per employee more attractive than in just about any other industry.
Another huge opportunity that this sort of business offers is the ability to make money, 24 hours a day, 7 days a week, 365 days a year. In a typical service company, the value of your business walks out of the door at 5 o’clock each night, and doesn’t work weekends. With a Software as a Service online company that is mostly self service, you can make money whenever a potential new customer lands on your website. The Internet never switches off, and so your business need never shut it’s front door.
The old saying goes, “I know I’m wasting half of my marketing budget, I just don’t know which half”. In traditional marketing, much of what you do is spray and pray. With online marketing (thanks largely to Google AdWords) you can track exactly how effectively your marketing budget is being spent. Google Adwords introduced the first complete feedback loop that allows you to see exactly how each advertisement is sending new customers to your website. With easy to configure free software like Google Analytics, you can then track how this influx of new customers engage with your website and exactly where you are losing new sales. This allows to to refine and optimise your website to convert these potential clients to sales.
The combination of Google Adwords and Google Analytics can work together to find your engine of growth. For example, if you have to spend on average £30 to get £100 worth of sales, you can add rocket fuel to your company with investment into this area of customer acquisition. Also, Google Adwords are priced based on market dynamics. This means that each time you spend money on Google Adwords, you are not paying a penny more than the market value of that advertisement.
The data that is available to you as the owner of an online company is unprecedented. It is extremely easy to find your cost per acquisition, life time value of your customers and at exactly which points of your sales funnel you need to optimise to increase future sales. Without a huge amount of investment, none of this data is available in traditional industries.
Another beautiful thing about building an online business is, all of your marketing efforts are guaranteed to get better with time. Say for example, as the owner of a traditional company you decide to take a full page advert in a niche magazine that targets the exact demographic of the buyer of your product. You know the readership of that magazine is 50,000 subscribers, but you have no idea how many people will actually purchase your product because of that advertisement. There is no accountability to the effectiveness of that marketing spend, and you will never know if it has worked or not.
With online marketing you can track every click, sale and transaction and you can optimise every marketing campaign you create and run to continuously improve.
However, one of the big advantages of spending your marketing budget online is that the value of your spending compounds over time.
In our traditional example, once that magazine is out of date, it will be recycled, never to be seen again. Your marketing budget has one shot at converting the reader as they flick through the magazine.
On the other hand, if you get a blog post from an influential blogger in your niche, or you create an informative video and put it on YouTube, your content will always be available and ready to drive new potential customers into your sales funnel. As you incrementally add more incoming links and you build your reputation for creating good content, you marketing spend will compound over time and increase in value.
Seth Godin was one of the first people to coin the term “Permission Marketing” which is the strategy of collecting user data with permission in order to send them further information about a topic or area that they have shown an interest in.
As I wrote about before, Email marketing is one of the most effective and efficient ways to allow potential new customers to find out about your product or company and get information about you over a period of time. Instead of being sold to, you allow the customer to make their own decision about purchasing or subscribing to your product.
This is also an extremely effective way of building a large, engaged and loyal audience who are interested in what you have to offer. Building an audience though a blog or an email list is very easy online, and gives you access to a potential market of millions.
It is far more costly to acquire customers than it is to make repeat sales. By building an engaged audience, you are creating a loyal and stable future for your business that will significantly reduce the risk of growing your revenue.
Many businesses choose to serve a few really big clients that make up the bulk of their revenue. This is an extremely flawed business model however as it exposes your company to a huge amount of risk.
When you focus on only serving a handful of really big clients, you become a slave to keeping them happy. You find yourself jumping through hoops to keep them satisfied, and the cost of serving these types of customers does not scale.
If one of your customers goes bankrupt you lose a huge chunk of your revenue, and you quickly run out of potential new clients to replace them.
Serving thousands or millions of customers is a much safer business model. By managing your churn rate, you can effectively grow your company exponentially. You benefit from the economies of scale of the Internet, and you never put yourself at risk of going bankrupt should you lose a client.
Jason Fried wrote an excellent article in Inc magazine on why his company, 37 Signals, never charges a company more than $150.
Although you are potentially leaving money on the table from certain clients who have the budget to spend on your product, you also release yourself from the shackles and responsibility to being a slave to somebody else. With this freedom, your company has the room to grow and flourish.
As you can see, starting an online Software as a Service type business offers an amazing opportunity to build a huge company. With the right, talented early founders, you can build a system to serve millions of customers with very little investment at all. As your company grows, the infrastructure to scale your company is widely available and there is a huge opportunity to build an engaged and valuable audience through effective marketing strategies.
If you are dreaming of building your own big international business, start today by experimenting with ideas and creating a prototype of your product. You won’t need to invest a penny until you are ready to, the only investment will be your time, but you will be able to take an assumption of a business model and turn it into a real, repeatable and scalable business that is ready to serve millions of customers all over the world.