A lot of people are attracted to building SaaS products (software as a service) because it needs to be built once and it can keep getting recurring revenue.
FreshDesk which later became FreshWorks with a suite of software products became a unicorn startup (with a value of more than a billion dollars) in the same route. Zoho also leveraged the power of SaaS. They developed products in India and sold them to the world.
I also have built a SaaS product called OptinChat.com and it is a software that does the job of collecting the names and email IDs of website visitors using a chatbot instead of a form. It has made more than $200,000 in revenue to date.
But SaaS is not as shiny as it looks on the outside.
The problem with software is that it requires constant updates so you can’t build it once and forget it. And most importantly, many companies are willing to reduce the prices to gain more market share and that reduces their margins. Too many people competing for the same market share makes it a commodity (like the airline industry).
For example, FreshDesk was “inspired” by ZenDesk a similar help-desk software but many moved to FreshDesk because it was cheaper and better. Tomorrow someone else can build something for cheaper, or even for free, and they would start taking away the market share. Unless there are strong moats, SaaS is a race to the bottom.
We moved from Intercom to Crisp because Crisp gave the same service to us at a cheaper price. We moved from Unbounce to Dorik for the same reason. We moved from FreshDesk to a cheaper Google Chrome plugin that did the same job for us. We moved from Zapier to Pabbly Connect because Pabbly is as good and comes at a lower cost.
No customer will pay more than what is needed for a specific service. There might be moving costs but if the new solution is cheap enough, the moving cost will be paid to move.
To survive long enough to become a Goliath, SaaS companies have to raise funds, reduce prices, and pay more for acquiring customers, else they will start losing market share and then their valuation. It is a big challenge. Margins are a luxury and making the customers stick to you is challenging.
SaaS companies are cash-burning machines. It is very hard to make them throw out positive cash flow every month. That means being in losses or near-zero margins for a long time and waiting for the time when you become the only game in town, and if everything goes according to plan, then it will all be worth it.
I don’t have anything against SaaS companies. I am also planning to build software and digital platforms in the future to give a shot at a massive exponential scale.
If the software is made into a platform with a demand-side and supply side, it can create a moat for itself. But that requires heavy funding to capture market share in the beginning, at a loss, to become the only player in town. Go big or go home is the mantra that goes around in such business models.
You need time to survive a go big or go home scenario even to bet on it. If you are just getting started building a business, first build something that can produce cash flow, then invest it back into scalable software with network effects. And while you are at it, pay yourself as well.
The Benefits of Building an Agency
When you build a services agency, as a digital marketing agency, it takes a lot of human time.
Running a successful agency requires:
- Market research and identifying potential clients
- Marketing and branding (mostly through content marketing which we will discuss in future emails).
- Targeted outreach (combined with inbound marketing)
- Generating RFPs (request for proposals)
- Creating customized proposals
- Sales meetings generation
- Closure and sign off
- Serving the service promised using a proven process and system (executed by highly skilled team members)
- Observation and listening to client’s challenges
- Optimizing the service for retention
- Revenue expansion through additional services
- Building reputation through client results
That’s 14 steps already. I might have missed a few. And if I have to expand on the onboarding and service part, that will have another 20 steps each.
Service as a System
It looks like a complicated task to build systems and processes but understand that building these systems itself is a product. The product does the service for you.
When you write code to create software, you are instructing the computer on what to do. When you instruct computers on what to do, you can rely on them because they can do a lot of repetitive tasks without taking a break.
However, there are many tasks that computers cannot do (like understanding client requirements and helping the client get results).
When you are building processes for your agency, you are writing a code. But the code is to instruct humans on the exact steps to make sure that the client is getting results and is happy with the service.
Systems and processes are unique to different businesses and their requirements. If you focus on a niche (and niches are better at a small scale), you will be able to have unique insights about the businesses that you serve that are not available to your competitors.
You are basically building a SaaS but this is “service as a system”. The systems and processes that you build become assets and a “product” that can multiply value for your customers efficiently with low energy and resource consumption.
100,000+ Domains Registered Everyday
According to multiple reports from domain name associations and companies, at least 100,000 domains are registered every day across the world.
Most of them are existing businesses coming online. This means that these businesses have a product, product-market fit, customers, traction, and most importantly, revenue.
They need to adapt to sell online and they will be ready to invest in Digital Marketing.
That’s why there is a huge need for Digital Marketing Freelancers and Agencies that can help other businesses sell more online.
These businesses have no idea about inbound marketing, social media, websites, email list, and SEO. They don’t want to learn it right now, they just want someone else to do it for them because their core focus will be on their products and services.
Niche digital marketing agencies can be profitable, from day one.
- If you target 20 clients who will pay $50,000 a year (~$4200/month), that’s revenue of $1,000,000 a year.
- Making a 50% margin on a services agency is pretty simple. At worst you can make at least 30%. You will not have too much cash burn.
- That means that with just 20 clients, one can get a profit of $300k to $500k. (That’s 3-4 crores INR in today’s exchange rates).
Charging $4000 to $5000 per year to a client will mostly involve bundled marketing services. It would include at least 5 of the following in one way or the other.
Services that can be offered by a Digital Marketing Agency:
- Doing market research and reviewing product-market fit
- Building web-presence in the form of websites and apps
- Understanding target customers and building customer avatars
- Building content that attracts the target customer (text, video, live interactions)
- Building websites and landing pages for the distribution of the content
- Building apps for Android and iOS app ecosystem
- Generating distribution for the content via social media
- Social media channel management
- Designing elements required for the promotion of the product/service
- Community management and engagement of existing customers and leads
- Creation of lead magnets for lead generation (ebooks, tools, trials, brochures, and so on).
- Inbound marketing (SEO, search marketing)
- Outbound marketing (display ads, outreach)
- Creating funnels to convert cold leads into warm leads
- Conversion assets such as sales pages and checkout forms
- Sales as a service to help them close hot leads into paying customers
- Online reputation management to manage the brand perception of the client
- Building, integrating, and managing referral marketing and affiliate marketing systems
- User testing for usability and UI/UX design for web and mobile apps.
And there can be more that I have not mentioned here.
20 Clients at $5,000 a month = $1.2m/yr.
To manage 20 clients, you might need to build your organization to 40-60 team members. Many of the team members can be freelancers that work with you on sub-contract instead of being full-time employees.
Only account managers need to be employed full-time to make sure that there is a dedicated point of contact for the clients. Each account manager can manage 3-5 accounts. For 20 clients you need 4-6 account managers working full-time with you.
You see, building a marketing agency makes for a very good niche business that will be throwing out positive cash flow every month. If a business doesn’t give a positive cash flow, it is not an asset but a liability.
Invest Back into Building Niche Software
You can pay yourself and you can reinvest the rest of the profits into building something for the long term in your business.
For example, you can invest in building a custom software tailor-made to your clients and aim for 100 clients paying $10,000/year ($850/month) for the software. That would bring in an additional $1,000,000 a year in revenue.
If you are building something simpler and more scalable, then you can aim for 1,000 clients paying $1,000 a year ($85/mo) to achieve the same numbers.
Having an agency-first approach is not just helpful for generating the cash flow required to invest in software, but also to understand client requirements in a deeper way.
Most “big” SaaS companies would try to build something that will scale to 10,000 customers or 100,000 customers. They will ignore the micro-niches that might handle 100-1000 customers in a profitable way. But they do not have the time, energy, or focus to observe the needs of a micro-niche.
The first $1m is the toughest. It is simple but hard. It takes time, patience, and consistency. But the approach is guaranteed to work as it has worked for 1000s of agency owners. Because the market demand for digital marketing services is clear as daylight.
The second $1m will be easier because you will have capital leverage, time leverage, assets acquired by doing the business, and a better understanding of the market.
If you build a profitable micro-niche SaaS startup, you can roll over the profits from that company into building something that might be bigger and more predatory.