This is one of those "How long is a piece of string?" questions. It depends on each individual business' circumstances. The vast majority of SaaS businesses run in a multitenant fashion and don't have meaningful hosting-based COGS for a marginal trial. (I know those two examples you picked are not representative of the typical SaaS, but I'm going to take this in another direction anyhow.)
This might be news to much of the peanut gallery, so here we go: COGS (cost-of-goods-sold: servers, etc) is not nearly the dominant hard cost associated with free trials. It is, overwhelmingly, cost of customer acquisition -- i.e. the marketing spend required to attract one customer at the margin. B2B SaaS companies routinely pay hundreds of dollars to get one new account at the typical $29 to $249 monthly price points.
Why do we do this? Because of the SaaS LTV formula: monthly price / churn rate. If you have a mediocre-ish 5% churn, then a $30 a month account is worth $600. If you can buy them for $200 apiece, why not do so? ("Massive stress-inducing cashflow crunches!" Good answer, and that's the classic reason why SaaS companies raise money despite having near-zero COGS and products which can be bootstrapped to market.)
$200 per new account businesses might imply, in a card-not-required-upfront model, 2% conversion rates on $4 trials which have converted at 25% from $1 clicks. Or, in a card-required-upfront-model, 25% conversion rate from trial, $10+ clicks.
To elaborate on patio11's point: I actually do spin up an ec2 instance per customer, and even then it's not really a relevant cost compared to the cost of acquiring customers.
Why would I do such a wasteful thing? It's totally not worth the engineering effort right now to switch to a more efficient multitenant architecture. Even a single new customer is worth more to me than I'd save in a year.
Twenty-first century rule of thumb: If the single-tenant architecture is the thing that you build first, because it's less effort, you should probably never bother with multi-tenant, unless a truly compelling rationale appears. VPSes are cheap and they will keep getting cheaper.
Multi-tenant is such a pain. Your customers become coupled on so many axes: Security, performance, downtime, resource management, versions of software in production, retirement of obsolete hardware. Everything one customer does effects others; you can't touch one customer's setup without potentially affecting others; if you try and coordinate the customers via email or phone, deadlocks will happen and progress will grind to a halt.
I worked on a product that launched multi-tenant and swiftly pivoted to single-tenant; it saved our bacon. Before that the support team was working overtime issuing lame apologies: "Uh, sorry about your lost sales due to slow performance; your
neighbor has no idea how SQL works."
Counter point to this was a recent client who is working to consolidate the seperate VPS' because the combined data of different clients is so much more valuable - insights About customer data even when gleaned from competitors is useful.
(Talking about terabytes of usage data in aggregate here btw). YMMV
Any rule of thumb as general as the one I proposed is bound to have exceptions. For one, when the tenants know each other and have formed a consortium to allow their data to be aggregated, it's not the kind of "multi-tenant" I had in mind. Now, instead of a bunch of independent renters, we have a condo association.
My first instinct in a situation like this would be to ask: "Why not build a separate data warehouse and have some worker processes copy the clients' usage data over there, in batches or in a stream, raw or pre-processed as you prefer? Then the data can be be indexed however you want and JOINed with wild abandon, without further perturbing the individual client systems and their existing, presumably working architecture." Isn't that the old-school IT way? Yeah, I know, terabytes, but a terabyte isn't as scary as it used to be. Of course, the devil is in the details and I'm sure there are reasons.
To be fair those were some of the to and fro arguments we had - mostly I think it came down to the pain of data transfer (by then it had moved three disks iirc). A Hadoop cluster was being built when I left. I guess I should catch up and see how it's going.
But yes - definitely not the typical SaaS use case
My own coffee is still a commute away but pbiggar reminded me of some similar comments from yourself
600 LTV - but don't spend more than 1/3 on acquisition (200)
Assuming 4% trial to cust conversion we need 25 trials to get one customer. At 4 USD per trial that's 100USD
Assuming 1% click to trial conversion we need 2500 clicks to get 25 trials. That's expensive. So we need much better click to trial conversions. Assuming 1USD per click we need a 25% click to trial conversion.
I think it feels more likely to swap those rates around (4% click to trial, 25% trial to customer) but whatever my intuition is still waaaay out.
But either way it surprises me how tight 200 USD customer acquisition is. It sounds pretty close to the steak dinner high touch sales you mention (I can think of some very nice places in London to lunch a client for 200 bucks) but in reality it's eaten away by conversion rates far far faster than my intuition allows.
Thank you - whatever the "real" figures are working this through helps align my intuition with Mother Nature and if you had not put the numbers up I would not have worked it through - and when my billion dollar SaaS launches I would not have had the right intuition - which is the whole point of the exercise !
If you're getting single digit click-to-trial conversion rates in a low-touch model with no card required, you're doing things wrong. 25% is a benchmark and people who are really good with ad targeting and squeeze page design can get 40%+.
(This is a major reason why, if you actually have a high-touch model or your software isn't of the kind that someone clicking an ad can reasonably buy on the spot, you will attempt to sell them on "Give me your email and I'll give you something you want" rather than "Give me five minutes and I'll persuade you to try this software.")
I have a lot of data on landing page performance but, unfortunately, most of it is confidential. Bingo Card Creator is the easiest one for me to talk about, and that's almost locked at 25% squeeze page to trial signup for several years running.
$200 per new account businesses might imply, in a card-not-required-upfront model, 2% conversion rates on $4 trials which have converted at 25% from $1 clicks. Or, in a card-required-upfront-model, 25% conversion rate from trial, $10+ clicks.
I re-endorse this math, with the elaboration that $10+ clicks was me being handwavy about $12.50.
I was not challenging the experience behind the maths, just I don't quite follow the formula
I think that the above means 2 out of 100 trialists will become customers and 1 out of 4 people who click on a ad will become trialists. So with 200 clicks we will get 50 trials and then one payin customer
If the trial costs us 4 USD in hosting fees that means we pay 200 bucks (50x4) for the trials, and 200 bucks for each 1 dollar click through (if that's how click throughs work).
So that seems to be 400 bucks to acquire a customer. This could be changed in so many places (cost of hosting etc) that the actual figures aren't really important - just trying to follow the rough proportions
As you can tell my uncertainty on how click throughs work indicate I am trying to understand the landscape - not challenge your experiences.
I am however very surprised that click to "free trial" is such a big conversion (25%) but after that they can't be bothered to go further. My takeaway from this, completely at odds with what I would have guessed last week, is to always take a credit card at sign up. Anyone who can be bothered to open the wallet is probably really interested.
And if they don't open the wallet, grab that email :-)
Tl;dr I believe you. I just don't quite follow the details - and that's where the devil lies I am told.
Comments
This is one of those "How long is a piece of string?" questions. It depends on each individual business' circumstances. The vast majority of SaaS businesses run in a multitenant fashion and don't have meaningful hosting-based COGS for a marginal trial. (I know those two examples you picked are not representative of the typical SaaS, but I'm going to take this in another direction anyhow.)
This might be news to much of the peanut gallery, so here we go: COGS (cost-of-goods-sold: servers, etc) is not nearly the dominant hard cost associated with free trials. It is, overwhelmingly, cost of customer acquisition -- i.e. the marketing spend required to attract one customer at the margin. B2B SaaS companies routinely pay hundreds of dollars to get one new account at the typical $29 to $249 monthly price points.
Why do we do this? Because of the SaaS LTV formula: monthly price / churn rate. If you have a mediocre-ish 5% churn, then a $30 a month account is worth $600. If you can buy them for $200 apiece, why not do so? ("Massive stress-inducing cashflow crunches!" Good answer, and that's the classic reason why SaaS companies raise money despite having near-zero COGS and products which can be bootstrapped to market.)
$200 per new account businesses might imply, in a card-not-required-upfront model, 2% conversion rates on $4 trials which have converted at 25% from $1 clicks. Or, in a card-required-upfront-model, 25% conversion rate from trial, $10+ clicks.
To elaborate on patio11's point: I actually do spin up an ec2 instance per customer, and even then it's not really a relevant cost compared to the cost of acquiring customers.
Why would I do such a wasteful thing? It's totally not worth the engineering effort right now to switch to a more efficient multitenant architecture. Even a single new customer is worth more to me than I'd save in a year.
Twenty-first century rule of thumb: If the single-tenant architecture is the thing that you build first, because it's less effort, you should probably never bother with multi-tenant, unless a truly compelling rationale appears. VPSes are cheap and they will keep getting cheaper.
Multi-tenant is such a pain. Your customers become coupled on so many axes: Security, performance, downtime, resource management, versions of software in production, retirement of obsolete hardware. Everything one customer does effects others; you can't touch one customer's setup without potentially affecting others; if you try and coordinate the customers via email or phone, deadlocks will happen and progress will grind to a halt.
I worked on a product that launched multi-tenant and swiftly pivoted to single-tenant; it saved our bacon. Before that the support team was working overtime issuing lame apologies: "Uh, sorry about your lost sales due to slow performance; your neighbor has no idea how SQL works."
Counter point to this was a recent client who is working to consolidate the seperate VPS' because the combined data of different clients is so much more valuable - insights About customer data even when gleaned from competitors is useful.
(Talking about terabytes of usage data in aggregate here btw). YMMV
Any rule of thumb as general as the one I proposed is bound to have exceptions. For one, when the tenants know each other and have formed a consortium to allow their data to be aggregated, it's not the kind of "multi-tenant" I had in mind. Now, instead of a bunch of independent renters, we have a condo association.
My first instinct in a situation like this would be to ask: "Why not build a separate data warehouse and have some worker processes copy the clients' usage data over there, in batches or in a stream, raw or pre-processed as you prefer? Then the data can be be indexed however you want and JOINed with wild abandon, without further perturbing the individual client systems and their existing, presumably working architecture." Isn't that the old-school IT way? Yeah, I know, terabytes, but a terabyte isn't as scary as it used to be. Of course, the devil is in the details and I'm sure there are reasons.
To be fair those were some of the to and fro arguments we had - mostly I think it came down to the pain of data transfer (by then it had moved three disks iirc). A Hadoop cluster was being built when I left. I guess I should catch up and see how it's going.
But yes - definitely not the typical SaaS use case
I seem to be struggling with the maths in this
This implies we spent 400 + 400 USD to get two customers or a cost of acquisition of 400USDThe other card-required one seems to be
So that's 4400 to get 25 customers or 176 USD per customer (much closer to 200I am not nit-picking for the same of it - just trying to follow what seems to be something deeply ingrained in saas owners psyches.
Edit:
Just in case it's obvious I want to say it has been a long day and I have a cold :-)
Possible that I botched mental math at 3 AM, let me check if after morning coffee.
My own coffee is still a commute away but pbiggar reminded me of some similar comments from yourself
600 LTV - but don't spend more than 1/3 on acquisition (200)
Assuming 4% trial to cust conversion we need 25 trials to get one customer. At 4 USD per trial that's 100USD
Assuming 1% click to trial conversion we need 2500 clicks to get 25 trials. That's expensive. So we need much better click to trial conversions. Assuming 1USD per click we need a 25% click to trial conversion.
I think it feels more likely to swap those rates around (4% click to trial, 25% trial to customer) but whatever my intuition is still waaaay out.
But either way it surprises me how tight 200 USD customer acquisition is. It sounds pretty close to the steak dinner high touch sales you mention (I can think of some very nice places in London to lunch a client for 200 bucks) but in reality it's eaten away by conversion rates far far faster than my intuition allows.
Thank you - whatever the "real" figures are working this through helps align my intuition with Mother Nature and if you had not put the numbers up I would not have worked it through - and when my billion dollar SaaS launches I would not have had the right intuition - which is the whole point of the exercise !
I miss excel :-)
If you're getting single digit click-to-trial conversion rates in a low-touch model with no card required, you're doing things wrong. 25% is a benchmark and people who are really good with ad targeting and squeeze page design can get 40%+.
(This is a major reason why, if you actually have a high-touch model or your software isn't of the kind that someone clicking an ad can reasonably buy on the spot, you will attempt to sell them on "Give me your email and I'll give you something you want" rather than "Give me five minutes and I'll persuade you to try this software.")
I have a lot of data on landing page performance but, unfortunately, most of it is confidential. Bingo Card Creator is the easiest one for me to talk about, and that's almost locked at 25% squeeze page to trial signup for several years running.
Apologies for the delay -- been a long day.
$200 per new account businesses might imply, in a card-not-required-upfront model, 2% conversion rates on $4 trials which have converted at 25% from $1 clicks. Or, in a card-required-upfront-model, 25% conversion rate from trial, $10+ clicks.
I re-endorse this math, with the elaboration that $10+ clicks was me being handwavy about $12.50.
I was not challenging the experience behind the maths, just I don't quite follow the formula
I think that the above means 2 out of 100 trialists will become customers and 1 out of 4 people who click on a ad will become trialists. So with 200 clicks we will get 50 trials and then one payin customer
If the trial costs us 4 USD in hosting fees that means we pay 200 bucks (50x4) for the trials, and 200 bucks for each 1 dollar click through (if that's how click throughs work).
So that seems to be 400 bucks to acquire a customer. This could be changed in so many places (cost of hosting etc) that the actual figures aren't really important - just trying to follow the rough proportions
As you can tell my uncertainty on how click throughs work indicate I am trying to understand the landscape - not challenge your experiences.
I am however very surprised that click to "free trial" is such a big conversion (25%) but after that they can't be bothered to go further. My takeaway from this, completely at odds with what I would have guessed last week, is to always take a credit card at sign up. Anyone who can be bothered to open the wallet is probably really interested.
And if they don't open the wallet, grab that email :-)
Tl;dr I believe you. I just don't quite follow the details - and that's where the devil lies I am told.