If you are keeping tabs on the news from the software business, you must already know that the no-code world has been buzzing with activity lately: New products being launched every week, venture capitalists signing seven-, eight- and even nine-figure cheques to get on the bandwagon and co-founders giving interviews like victorious generals. For someone receiving daily newsletters on the technology and software industry, it is like watching the movie stars passing by on the red carpet before the Academy Awards.
However, there is a catch. Almost none of the SaaS businesses are turning a profit. They manage to attract funds thanks to their exponential growth rates, but nearly all of them, including the media darlings such as Salesforce and ones with a cult following like Spotify, are bleeding money.
Taking a look at the income statements of most SaaS businesses would reveal that these businesses are operating with negative net incomes and negative gross margins. Being incapable of turning a gross profit and having astonishingly high levels of cash burn rate prolong their payback periods, throwing shade on their status as investments. This reminds us of the fact that having a good business idea and turning that idea into business are two different things. A business idea may be promising, but whether it can take off before the money runs out is another story.
Because of the brightness of the spotlights, it might be difficult for us to truly grasp the financial situation these giants are in. But once you understand how deep your pockets should be to survive with operating margins of -50 or -100 percent, these companies lose some of their glamor. The figures are so high that a regular person can have a hard time relating to those stars of the software business and their stories. The situation begs the question, "Is the startup business really an all-or-nothing game where you either conquer the world or go bust?" There must be a more human side to software entrepreneurship.
That side happens to be micro SaaS companies. They are the middle ground for regular people who do not have deep pockets to invest huge sums or charisma to attract investment right away. People of modest means pursuing modest goals. People who do not dream of a world empire but would be more than content with a small plot of land they could call theirs.
As we reconsider our priorities in life in a post-pandemic world, understanding how micro SaaS companies work can show us another way into the future. So, let's take a closer look at this more relatable breed and its endeavors.
Micro SaaS, a term coined by the entrepreneur Tyler Tringas, refers to a small SaaS business run by a solo entrepreneur or a team of fewer than five people. These SaaS businesses focus on solving a particular problem for a small customer base, addressing a small, underserved niche in a larger market segment. The business idea central to their efforts could be as simple as a new calendar app, a local grocery service, or an app to keep track of your personal finances.
Micro SaaS companies owe their success to their razor-sharp focus and impeccable execution. The core idea is executed so effectively that customers get hooked immediately. Micro SaaS apps tend to be lean, shying away from offering a plethora of features that result in a bloated feeling. The micro SaaS business model is the embodiment of the famous maxim by Paul Graham:
“It’s better to have 100 people [who] love you than finding a million who just sort of like you.”
Micro SaaS startups aim to build a devoted customer base by offering them the perfect solution for their pains. They then strive to attain sustainable and predictable growth rates by capitalizing on their customers' devotion. In that regard, the almost manic interest big shot SaaS businesses show in increasing user numbers is non-existent in their little brothers.
Not prioritizing exponential monthly growth, micro SaaS startups can ignore the vast set of SaaS metrics regular SaaS startups should monitor. Customer churn rate is the primary SaaS metric they should keep an eye on. Goals like slashing churn and improving customer retention come to replace growth as the critical goals for micro SaaS companies. It is possible to achieve high retention rates in 3 simple steps:
- Maintaining a more personal communication with customers. You need to know your customers well enough to offer them solutions tailored to their specific needs.
- Removing friction as much as possible. This will reduce time-to-value so that your customers will get to appreciate the value you are offering before they start feeling lost within the app.
- Being accessible and ensuring customer success. Owning up to your mistakes and correcting them as soon as possible go a long way toward building trust and earning customer loyalty.
A high customer retention rate is vital for the long-term health of a micro SaaS startup. The longer the bond with customers lasts, the more opportunities for cross-selling and upselling there will be. This will help maximize customer lifetime value for a micro SaaS startup.
Lacking funds and human resources to scale until they become sustainable businesses, micro SaaS startups have to leverage the SaaS ecosystem to solve their problems. Today, services like hosting, payment processing or email marketing are readily available in the market. All one has to do is pick and choose according to the needs of the business.
Micro SaaS ideas are not as ambitious as the ones that set out to transform the way the world operates. Their goals are limited to starting a business with the means at hand and driving organic growth at a more leisurely pace. As they rely on word of mouth rather than sales and marketing, micro SaaS startups can avoid the two main sources of high operating expenses regular SaaS businesses have to budget for.
Most of the time, you won't have to spend months or years on your micro SaaS idea before it takes off and starts making money for you. The return on your modest investment will bear fruit more quickly than a big SaaS project, which will boost your motivation to reach new heights.
The pressure to succeed is not too big with micro SaaS companies because of the modest amount of money involved. Additionally, micro SaaS customers tend to be more tolerant of mistakes as long as the effort is there to make up for them. Hence, inexperienced beginners have a chance to learn and grow with their business, unlike SaaS giants, where a single mistake can cost millions of dollars.
Some micro SaaS projects start as side hustles and only become full-time jobs when they prove their worth. A slowly growing micro SaaS business that generates enough income can save an entrepreneur from his office job, affording him flexible work hours and more freedom as to wherever he wants to live and work. It may even serve as passive income since it won’t demand frantic attention to every detail like bigger SaaS projects.
The success of micro SaaS businesses is closely linked to how well they understand their customers. The small size of their customer base makes it easier to talk to customers, understand their jobs-to-be-done, perfect the solution devised, and solve problems as soon as they arise.
However, the limited size of the customer base also works against micro SaaS companies by putting a cap on their potential. Doing away with this strategy and expanding into different segments naturally means the loss of the personal touch that makes these companies so special in the eyes of their customers.
Lack of exponential growth means that it is unlikely for a micro SaaS to reach the heights some SaaS giants have scaled. Still, there are many examples that have achieved five- or six-figure MRRs, like SuperLemon and Storemapper, respectively.
After weighing the risks and opportunities, assessing the ROI, and comparing it with the effort needed to get a micro SaaS startup up and running, one cannot help but think that this business model will only get more popular among white-collar people in the future. Reevaluating their life choices since the beginning of the global pandemic, these people will find in micro SaaS the purpose they feel they lack in their lives.
And then, there is the promise of a five- or six-figure monthly income, which would be quite a raise for someone coming out of his 9-5 work schedule. Not too shabby for us regular folks, is it?