Last editedApr 20233 min read
Every SaaS business starts with the best of intentions – and a carefully thought-through business plan. By the time you have proven your business model, you will also have an in-depth understanding of your cost base. In fact, one deeply transparent SaaS business, Cushion, has put its monthly costs online for all to see!
Yet some niggling costs have a habit of dropping under the radar – until you reach scale and it turns out that they represent a major cost to your profitability. Here are some common offenders.
Insurances: If you employ staff, Employer’s Liability insurance is mandatory. But many startups get going without other types of insurance cover, and then realise that winning larger contracts and tenders requires the professionalism of Professional Indemnity, Key Person and other types of cover.
Transaction costs: Consumers love the convenience of credit cards. But behind each transaction is a raft of merchant service charges, processing fees, authorisation fees and chargeback costs which can comfortably amount to 3-5% of a transaction. And in the words of Amad Ebrahimi, the founder of Merchant Maverick, “some processors make it as difficult as possible to know how much markup you’re paying by using bewildering terms and pricing models that would baffle even the most experienced business owner”.
Employee turnover: The ‘job for life’ is long gone. The Economist reports that whilst young people aren’t endlessly job-hopping as the press would have us believe, tenure for men under 35 has dipped below three years. The cost of losing that experience and buying in new talent can be huge – around £3000 in recruitment costs alone. You could argue that as a business grows, employee movement is less damaging, as you are unlikely to depend so much on a few key individuals. But whilst the company may be strategically safer, failing to recognise and account for the ebb and flow of employees will sap away at your profitability; and for modern SaaS businesses where cost and profit are cumulative and therefore amplified, it can be devastating. Failing to account for employee costs also means you can’t plan for it, or optimise employee churn rates.
Banking: All banks are not created equal and (usually after a year’s grace of free banking) you can expect to face a barrage of incidental charges, including transaction costs for paying bills (unless you’re paying by Direct Debit). If you accept that a bank needs to make a bit of money from you to survive, the answer is to ensure that you give them money for something that’s useful to you. Per-transaction banking is frightening for a SaaS business. But overdraft banking might be exactly what you need in those early months. If you don’t know what you’re paying for, and especially if it involves uncapped fees, you’re definitely at risk of the hidden costs of scaling.
Why the surprise?
With hindsight, all of these costs are simple to understand. So why are they consistently a surprise to entrepreneurs?
Siamac Rezaiezadeh, GoCardless’ SaaS sector specialist, says: “The first challenge is that these costs may simply go unnoticed. Great SaaS businesses start small and then can scale up with dramatic growth in a matter of months. 3% card processing fees on a small turnover might not amount to much and so the expense goes under the radar; but in a global online operation with recurring monthly transaction fees, suddenly the numbers become substantial:
At 1000 customers, these small levies are unnoticeable; besides, you’re likely too small to negotiate and too sales-focused to optimise.
At 10,000 customers, these are noticeable fees but you’ll have other priorities.
At 100,000 customers, suddenly it’s a major cost centre, risk factor and blot on the balance sheet."
You may also simply not be measuring these costs in an accountable way. Insurances are often subsumed into miscellaneous operating costs, and (worse still) can be the responsibility of different people in an organisation.
Transaction costs also hover between being treated as a cost-of sale and an operational expense – indeed the processing ecosystem does its best to keep this confusing! And employee turnover is rarely measured effectively outside of high-churn functions like call centres. In each case, forecasting professionals can be oblivious.
And then there is opacity. Transaction fees are notoriously opaque: merchants must account for a blend of fixed, proportional and incurred costs from payment gateway providers, credit card processors, banks and the big associations (Mastercard and Visa) – it is often unclear what is being charged and why; and it is also unlikely that the trajectory of your business’ growth will perfectly match your choice of provider.
Optimise the business
Given the heads-up, all these issues can also be resolved, or at least minimised.
Rezaiezadeh says: “When these costs grow, they suddenly become worth paying attention to. And at the same time, the tools to do the optimising become ever more economical and logical to pursue.”
So for transaction costs, you can use payment methods with lower transaction fees, including bank-to-bank payments like Direct Debit (typically 1%). Direct Debit providers like GoCardless cut out some of the complexity of the ecosystem, and also only charge one fee - for successful transactions – making processing visibly a sales cost rather than an operational cost.
And once a CFO has given these hidden costs their rightful place on the P&L, the process of optimising them is never done. Even the largest and most efficient businesses are looking for more value. Amazon – no slouch on efficiency – states in its 2016 Annual Report that: “We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs…” – that’s right: after product, transaction costs are uppermost in Jeff Bezos’ mind.
But only when you know what you’re spending can you hope to optimise and limit it. Visibility and proactivity are the crucial disciplines for SaaS profits.