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5 Ways to Minimize Expenses for SaaS Startups

One of the biggest concerns that many Software as a Service (SaaS) startups have is the sheer amount of overhead. This can be especially difficult in the early stages when revenues are low as a steady customer base has not yet been established.

However, there are five easy ways that SaaS startups can minimize their operating expenses and make sure they have enough cash on hand to stay afloat without having to search for angel investors, investment capital, or take out high-interest business loans.

Outsource Customer Service

Instead of paying a full-time customer service team salary plus benefits to handle customer inquiries, complaints, or other communications, it can all be outsourced to contact center solution firms. These companies represent a massive improvement on traditional centers that only handle telephone calls, as they will also respond to emails, social media posts, live chat requests, and more.

This is particularly valuable from a budgeting standpoint, as paying a set monthly or yearly fee helps simplify costs, reduces the amount of money spent on wages, and frees up money that can then be used to help grow the business. The amount of money saved by not having to train new employees or re-train those who struggle or are inefficient by itself justifies the move.

Planning and Budgeting

Planning and budgeting may seem like an obvious solution but many entrepreneur's hopes and dreams have been dashed due to improper budgeting and poor planning. According to a study by US Bank, 82% of small businesses end up failing because they don't have enough cash flow to remain open. In the tech sector, it's closer to 90%.

By maintaining a budget and sticking to it as much as humanly possible, businesses can make sure they have enough liquid cash to remain open. The budget can remain flexible, of course, as unspent money can be distributed from one area to another to make sure the company operates at the highest levels.

One of the most difficult parts of leadership for some people is having to put their foot down, so to speak, and say "no". It may be tempting to buy that new $100 espresso maker for the break room or give employees paid vacations in the first few months of their employment to avoid hurting their feelings or keep them happy, but if the money isn't in the budget, it can have disastrous consequences if the company runs out of liquid cash to pay for essentials.

Identify Fixed Costs and Variable Costs

Speaking of budgets, once the rough figures are in place, the next step is to separate "fixed costs" and "variable costs". Fixed costs are those that are "set in stone" like the lease payment on office space or the labor cost for salaried employees. Variable costs are the flexible ones that can be reduced or increased depending on business needs and the availability of funds.

It may be possible to reduce some fixed costs, although this will usually require finding a different supplier or buying items in bulk to get a wholesale discount. In most cases, however, the cost is "fixed" for a reason. With office space rent, for example, the cost of moving the business space to a different location could be higher than the amount of savings.

Variable costs, on the other hand, can usually be reduced more easily. The amount of overhead that should be dedicated to the cost of labor (i.e., employee salaries) will depend on the exact needs of the SaaS startup in question but experts suggest anywhere from 25% to 40% of total expenses should go to employee compensation. If a company goes too high in an effort to keep employees happy, the cost might end up being too high.

For SaaS startups in particular, an important cost that is sometimes overlooked is the cost of hosting. Sometimes, AWS (formerly Amazon Web Services), Google Cloud, or other providers are chosen because the company considers them to be more prestigious or a good value. However, making even a temporary switch can save a significant amount.

Reduce a High Cost of Debt

One strategy often used by startups or other small businesses to quickly access liquid cash is to use a line of credit, small business loan, or credit card to make purchases, especially during the early days when the company has yet to obtain more than a handful of clients, if any.

However, these strategies almost invariably involve repaying that money with interest, which is referred to as "the cost of debt." If a company is paying 8% interest on its expenses, revenues will logically have to be 9% higher before it becomes profitable.

By not incurring a high cost of debt and instead securing interest-free loans, grants, or other forms of borrowing that have little-to-no interest involved, companies can save a lot of money in the long-term and become profitable significantly more quickly. If credit cards are used, they should be paid off as much as possible before the end of the month to ensure that no interest has to be paid.

Targeted Advertising

Advertising is the cornerstone of every SaaS startup's success, as people aren't likely to buy software if they've never heard of it. However, according to a 2016 report, billions of dollars every year are lost by companies who purchase advertising that isn't targeted.

An ad that is funny, interesting, informative, and employs successful brand strategies can take a company from the brink of failure and make sure it quickly becomes profitable. However, if a majority of those ads are being seen by non-tech-savvy senior citizens or teenagers who don't need, use, want, or even understand SaaS offerings, it won't be likely to produce enough new clients to keep the business sustainable.

By targeting ads to those most likely to be interested in the product, SaaS startups can get a higher return on investment for their advertising dollars. Google, one of the most successful tech companies in history and its many different services, is at its heart an advertising company that became successful thanks to the innovation of targeted advertising.

Final Thoughts

These are just a few ways that startup SaaS companies can minimize their expenses and become profitable and sustainable more quickly. By avoiding taking on excess debt, keeping unavoidable expenses like employee salaries low, and outsourcing when possible, SaaS companies will be able to stay focused on improving and advertising their software instead of worrying about where the money to pay those salaries will come from in the weeks ahead.

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Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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