Profit 101 Video: How to get 50% Profit Margins, Part 2
Oct 19, 2023
Achieve 50% Profit Margins in a Software Business
If you haven't yet seen part one, you can watch or read it here: How to get 50% profit margins video, part 1
All right, well today, in our pursuit of 50% margins, we're going to talk about two things: pricing and insourcing.
Let's start with pricing. Let's say you have a SaaS product that costs $100 a month. Remember, from our last discussion, if you want 50% margins, then by definition, half of your revenue should be profit margin and the other half goes towards running the business. You have certain expenses that you can't avoid, such as the cost of goods, which leaves you with something like a third of your revenue to run the business on.
Let's dig a little deeper. If you have a $100 monthly price, which totals to $1,200 a year, and let's say you have 100 clients, that's $120,000 in revenue. But what if you needed one customer support person for every 100 clients? And let's say half of an account executive. So what does a customer support person cost? If we take into account their salary, benefits, payroll taxes, office space, and other expenses, it could easily be around $100,000.
Now, if we say the account executive costs the same, this company is fundamentally upside down. They've spent more than they've earned just on these two roles. How do we square this circle? You can either automate processes and have less customer success and a more automated sales funnel, or you can raise prices.
For instance, if you charge $300 a month, that's $3,600 a year. If you have 100 clients, that's $360,000 in revenue. Suddenly, the expenses for customer support and account executives become manageable.
What I'm trying to convey is that it's fine to have a $100 a month or even a $9 a month price point. But your scale needs to reflect it. For B2B software pricing, many startups underprice out of fear. But once you have demand, once people are buying, you need to consider raising prices.
You can start low, but be bold in increasing prices once you've got some amount of product-market fit. Once customers are actually buying, then you can consider whether raising prices would slow down your sales or if it's just as hard to win a customer either way.
All right, that's the pricing side of the equation.
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