- Hey there, I'm Dan Martell,
serial entrepreneur investor and creator of SAAS Academy
in this episode, I'm gonna share with you
the definition of SAAS.
Why is it hot?
Why are people creating them?
Why are they so valuable?
And be sure to say at the end,
cause if you're interested in this topic,
I'm telling you how to get access to my idea,
to exit mini course on how you can build your own SAAS
product let's get into.
(upbeat music)
So I've been building software as a service company,
SAAS for the last 23 years, yes.
I know I look so young
and you're like, how is that possible?
Did you start when you were five?
No, I am older, but now I know I look older
I got grey hair, but I wanna tell you this.
Cause my friend Marty recently, I was at his house
and I've known Marty literally since I was 12.
And he goes, Hey man, can I ask you a question?
I'm like, yeah, what's up?
And he goes, what does SAAS mean?
Again I've known him my whole life.
I share about it on social media, on Instagram, on Facebook,
on TikTok on all these social platforms.
And he never felt comfortable enough to ask me.
So for Marty, even though I already explained it to him,
SAAS stands for software as a service.
I'm gonna get into the definition.
I'm gonna get into why it's interesting,
but here's some cool facts, okay.
40% year on year growth.
Okay.
It's an industry that's growing like crazy
and the valuations, if you have a software company,
the valuations are five to 10 times top line revenue.
So just to give you context,
if you're in the restaurant industry,
you may get away with one times top line revenue.
If you're in the service industry,
it's usually 0.7 top line revenue.
Most of those businesses focus on EBITDA
earnings before interest tax in amortisation
anyways, EBITDA.
The reason why SAAS is so powerful is because of the
subscription concept, but I gotta tell you what it is first,
before I tell you about the financial economics
and why it's so powerful, let's get into it.
Number one, what is SAAS?
So software as a service is essentially
a new method for delivering software applications.
So at your work, okay,
or on your computer,
you probably have tools that you use
back in the day they used to be installed on local servers
and use sometimes a client server window to
get access to the servers.
And that's why if you went to the,
you know, you go to the bank
and they'd have like these terminals with black screens
and texts and they would just like hit F1
and all these buttons
that's because that computer was connected to
a more powerful server,
which changed now in the delivery method is it's
using the internet to,
for you to get access to these applications.
Okay.
These softwares as a service now
and a lot of people make the mistake.
They think anything subscription is SAAS.
It's not, it's not subscription as a service it's software.
Okay.
So it has to be a tool
and it's usually they're delivered through a web interface
or a mobile app,
but that is the big idea is that it's using
the internet now not a local network.
It's not client server to deliver the software.
Number two, Why is it new?
Well, back in the day,
you used to have to like buy the hardware.
So you had to buy servers,
you had to buy the software from the software creators
and you had to instal it in a server room
and then set up the terminals
and get people access to the server.
And they could do the applications, the accounting,
the management of the business, whatever it was
what's changed now is that an in the middle,
there was this thing called ASP
application service providers, where as a business,
if I didn't wanna invest millions of dollars in servers
and software licences, et cetera,
I could just pay another company to host it all for me.
And then they would charge me a subscription for it, right?
So that's the beginning of,
and sometimes it was a multi-year contracts.
It wasn't necessarily a monthly subscription,
but they would not make me have to pay for
the whole upfront investment.
And then I could just pay for the amount of usage I had.
So if I had 10 employees today
and a hundred employees next year,
I'd only have to pay for the 10 today.
The challenge with the ASP model was is that these
application service provider, these companies would then
have all these different versions of software
and systems across all these different servers,
because some companies would upgrade
some other companies that could configure
and change the code.
And essentially they had literally just
a server farm full of different in sources.
There was no efficiencies.
What happened with software as a service when you're
connecting in to the same code base, even though
they will provide security separations called multitenant,
not getting get into the technical terms,
but with software as a service now,
instead of having a company that manages
all these different softwares,
the software company says, look,
we'll host it for you.
We'll put it up on the internet.
We'll give you the ability to add your team members
and security and all this stuff.
And you just pay us a monthly subscription for it.
So that's where software as a service allows you to
essentially pay by the drink.
You don't have to pay for the glass or the jug of water.
You can just say, if I take a drink,
you're gonna charge me this month.
If I take a lot of drinks,
you're gonna charge me a little bit more.
And that's called metered pricing.
So software as a service essentially allowed us to not have
to make a big investment upfront
and have somebody else host it for us.
Number three, why is this preferred?
There's four main reasons why software as a service is
preferred as a business buying software.
Number one, Opex versus Capex
operating expenses are things you can write off.
Okay.
Capital expense typically you can't write it off.
You have to depreciate it over time.
Well servers and software and all that stuff.
Those typically in the past were capex capital investments.
Now what happens is,
as software as a service becomes something that you pay for
to deliver the business.
Like you use the tool to deliver value to your customer.
You can now transfer this over to operating expenses,
operating expenses you can write off.
So it's actually more tax efficient.
So that's number one.
Number two is time value of money.
Instead of having to have $2,$3 million
or go borrow $2 or $3 million ,
to buy what's called, you know, an ERP
an enterprise resource planning tool to run your company.
Now I can just pay a little bit every month
and get that going.
So I don't have to put a lot of capital today
into a big investment.
I can put little pieces,
so I have more capital to invest in marketing, in sales
and customer success to grow my company.
Number three, we need to focus on speed of deployment.
If I need to procure the hardware,
instal the operating system,
find place in a data room and do all this work.
Then the time that I decide, Hey,
we really need this solution to do better accounting
or better project management or whatever it is,
the speed to actually getting something my company can use
might be months, right
now I can just literally go online to start a trial,
check it out, add all the people on my team,
and we could be get going in the same hour.
Isn't that crazy?
That's why I love it so much.
And then success of using the software now, instead of it,
you buy the server and you instal the software.
Now you, as a business owner,
have to figure out how to be successful with the software.
The success of it is now pushed back onto
the software creator, because if it's not easy to use,
it's not easy to get deployed.
If it's not fast to get value,
then you're just gonna go find somebody else that solves
a similar problem, because there's no effort.
I didn't make a big investment up front.
I'm in a trial.
A lot of these softwares of service,
they have a trial 14 days, seven days, 30 days
for me to play with it, to see if I like it.
So now all of a sudden
me being successful with this new tool is put
the responsibility onto the software creator.
So the interface is better.
It's faster, it's clear.
It's integrates with all my other tools
for me to be more successful in that is a beautiful thing.
Number four, why is it growing well?
There's this famous investor
and entrepreneur named Marc Andreessen.
And he has this great quote that kind of summarises why it's
been growing 40% compounded year over year.
And that is that "software is eating the world."
Meaning that everywhere you look, no matter what your job,
your role, your business, your function is,
there's probably a software that's super niche.
It's in your vertical.
That's coming in that over time will get rid of jobs.
Will get rid of manual process.
Will get rid of the requirement to be creative.
I mean, you just look at something like Canva.
Canva is this simple tool that allows anybody that wants to
create social media assets, different imagery,
promotional materials, et cetera,
to not have to be a designer, not have to,
to buy Photoshop or even know how do those tools
or even know what good design looks like.
They take care of all of it.
And for them by the transaction, by the month,
you can pay them to have access to this power that they've
spent hundreds of millions of dollars in that you pay,
you know, $10 or $15 a month, so you can get it.
And it's become an incredibly powerful business,
but that's just such a simple example,
but the big idea is mobile growth
that's made it so powerful.
And then the subscription business model,
there's something powerful when you say every month,
especially you charge on a monthly basis and people can
cancel at any time that I need to make sure I create so much
value that every one of my customers decides to renew for
the next month.
And I create so much more value that they not only renew
they tell their friends about it and it continues to grow.
And every month I have more profit hitting the bottom line
because the average software as a service business makes 87%
gross margin because a new customer or 10 new customers,
or a hundred new customers for the most part has a
fractional amount of cost to the business.
So they can grow very rapidly.
All of that gross margin hits the bottom line, that profit,
and it allows them to reinvest in marketing and sales
and customer success in software development in R and D.
So they can make an even better product.
And it's just a beautiful, beautiful business model.
Subscription business model is one of my favourites.
Only one I've ever done my whole life.
That's all my companies I've ever invested have been
software as a service companies,
all the ones I've ever built, because I love it.
So those are the big ideas.
So quick recap,
four things that make SAAS awesome.
Real quick.
What is SAAS?
The method for delivering software.
Number two, why is it new?
It's not, it's been around since nineties,
but it's now got a new name because of the internet.
Number three, why's it preferred?
Because of time value of money
and then speed of deployment and success.
And number four,
why is it growing?
Because the world is being eaten by software
and the subscription business model is so powerful.
As I mentioned at the beginning of this episode,
I wanna share with you and exclusive resource called the
idea to exit mini course.
It's literally me across three videos teaching you exactly
how to identify a great business opportunity to build SAAS,
how to pre-sell it to your ideal customer,
use that pre-sales to hire a team,
get it built by using clickable prototype.
So you don't get somebody to build something that the
customer didn't want,
and then use that if you want to have other people help you
fund that growth,
you can click the link below to get access to your idea,
to exit mini course for free there's no cost.
And if you like this video,
be sure to subscribe to my channel,
share it with somebody you think it could serve
and be sure to leave a comment.
And let me know if you have any questions
with that as per usual,
I wanna challenge you to live a bigger life
and a bigger business, and I'll see you next Monday.
Oh, Oh, I've got the idea to exit mini course
I totally forgot.