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Doug Nebeker ("Doug")
Starting to play around with learning web application development and idly wondering: how does one know how to compute or at least estimate the "break even" number, per user, for a web service, such that you can be sure to price the subscription somewhere higher than that number to make a profit?
I've done a bit of Googling for this, but so far all I've found is more of pricing arguments based on what the customer is willing to pay, but nothing so far on what the minimum price has to be to even be at all worth doing.
Just as an example to make it very clear: let's say your web service costs you (paid from you to Amazon Web Services or whatever), the owner, $4.37 per month, per 10 hrs of average customer use, per customer each month. If you expect that most customers will use your service about 1 hour a day, then that's 30 hrs a month, so you would have to charge at least $4.37 * 3 = $13.11/month as your break even number, and then whatever else you might charge for your profit. (So, $15-$30/month?).
I just made those numbers up. But the point is, how do you go about getting a good estimate? What factors do you have to keep in mind? I know at some level the answer will come down to, "You calculate your bandwidth costs charged to your by your provider, and then you calculate how much bandwidth is used by a specific user action...and then...", etc., but I can also imagine it is fairly easy to goof up this math or leave out some factors*. Anyway, if you could point me to a resource or just provide some tips, that's be great.
(*Apparently Robin Chase of Zipcar miscalculated the pricing for the first go of Zipcar...which she called "way too low" and she had to raise prices by 25%).
For many (most?) applications, the hosting costs are not significant, a few cents per month per user.
Obviously video sharing is a different issue, but for a typical web app, each user takes a few Mb of storage and bandwidth.
I haven't seen Robin Chase 's actual quote, but I suspect the costs had to do with buying cars, reserved parking locations, insurance, gas prices, cards and car lock mechanisms rather than the few cents per user spent on web app hosting.
Friday, January 17, 2014
Have you seen this show Shark Tank?
Guys come in and want $100,000 or such for some idea they have. They always have some sort of prototype at least, and a few sales.
It's always the same thing. They claim some estimate of how much it is worth. Then the real entrepreneurs, the VCs, ask them for REAL sales numbers. They try to claim theoretical numbers. The VCs want to know, how much are you selling NOW, how many customers have bought this already?
The VCs don't care about estimates because all estimates are BS. Only real hard data means anything.
Likewise with your current task. It can vary dramatically depending on the type of service, how much customer support is needed, how many data centers you have to rent worldwide to provide acceptable latency, etc. You don't provide the data needed. But that's OK, even with it it wouldn't matter.
Build it and see how well it goes. That gets you real data.
One approach would be to start off with a PaaS that has a free tier, such as Heroku or AppFog. When you get to the point where you're hitting the viable limits of the free tier, you would have some hard data to work with. At that point, you could adjust your prices as needed.
It seems fair to say that this should be listed under premature optimisation. Also, if your business has such fine margins that the precise hosting costs are significant, you'll probably have other fires to fight.
Best approach is to look at it from the "value to the customer" point of view, as that's really all that matters.
If you "estimate" that you'll have 1000 paying customers, your numbers will be dramatically different than if you "estimate" 10000 paying customers.
And an "estimate" is really just a wild ass guess. You just can't predict any of that which invalidates any math you'll do using those numbers.
I've created quite a few projects and I was never able predict how popular they'll be. Not even roughly.
Plus, like others said, a $20/month Digital Ocean server will handle hundreds of users of a typical web app. Your marginal cost per user is pennies - almost all your revenue is your profit.
Saturday, January 18, 2014
Good points, all. Gracias.
I guess I was asking because I am thinking about investing a large amount of time/energy/care into learning web development, but I don't want to even go down that road if it is a dead end in terms of profitability. Sure, you might say, look at all the companies making billions on the web... yes, but they're large, or if it is a little company we might say it is a fluke, a one in 10,000 chance. I know sometimes the "little guy" can be deceived as to whether an area is still likely to be profitable for him. One example of this is iPhone apps--some things I've read suggest that the vast majority of iOS devs don't make much money at all. There are lots of other businesses where making a profit is like skating uphill (small coffeshops, I've read, e.g.).
My point is that I'd want to know if I'm looking at mandatory per user bandwidth costs that create a margin that is difficult to make a profit with for the average "little guy" web app entrepreneur in 2014...
Sylvain's answer suggests that I shouldn't be concerned (unless I'm doing a video site, but I wouldn't do that), since per user bandwidth/hosting costs are quite cheap. So that's good news.
I can tell you that actual hosting costs for my web app (and I'll include hosting costs, SSL cert costs, and domain name registration costs) total up to 2.7% of revenue. And my app is far from successful. Most of the "cost" is my time (he says as he's sitting here on Sunday morning testing the web app in 12 different browser versions on several different VM's).
Saturday, January 18, 2014
Web applications are not dead . . . I think they are one of the best opportunities for small businesses 1 to 2 man teams to make recurring revenue.
As far as worrying about hosting costs . . .
@DHH has a great quote . . .
"The great thing about charging money for what you do is Scaling Problems RULE."
Needing to upgrade your hosting for a SaaS app is a good thing.
@DHH's Startup School Talk
It would be difficult to under price your SaaS app where it didn't cover hosting costs . . . the cost will be time to handle support emails, improve and expand development of the app. And marketing the app to build subscribers.
More thoughts . . .
Learning to develop web applications is a great skill . . . especially if you already have programming skills or it's something you're interested in.
I would recommend developing an application for yourself first something that solves one of your pain points.
I'm not sure of your background but if you are a web developer and have experience with PHP or Wordpress I would recommend creating a web application in PHP mySQL initially . . . create the log in system and the application from scratch. So you understand the ins and outs of how everything connects and works. Then once you have created a few small apps look at learning a frame work like Ruby on Rails.
If you're interested in web application development you can get up to speed pretty quickly. Especially if you enjoy reading blog posts and tutorials about it.
For a profitable web application I would focus on B2B. It's a lot easier to sell a monthly service to a business rather than a consumer. If your app can make a business $5,000 per month in additional revenue by solving a pain point they will happily pay you $500/mo.
Worst case if you enjoy creating web applications you can always sell your services/skills to others as a consultant. Or get a Rails development job.
Keep in mind a SaaS app is a slow up hill climb to profitability . . . typically 18 to 24 months to get up to replace your day job income . . . if it's pretty successful.
Here are some great resources to outline some thoughts and best practices on building a SaaS app.
@DHH's talk is a great starting point to get you inspired.
Then I would listen to SUFTRoU from episode 1:
Google Patio11, Brennan Dunn, Nathan Barry and Amy Hoy. Listen to their interviews and read their blogs.
Good luck in 2014.
Sunday, January 19, 2014
@Mark Nemtsas, thanks for the hard numbers. Encouraging and helpful.
@Scott U, thanks very much for the thorough addressing of my question and the encouraging facts and links for more. I think given what you've written (as well as everyone else who has answered my question--all helpful), I'm going to slowly motor forward in learning web development...in my case, with Django. We'll see what, if anything, happens.
Read http://blog.asmartbear.com/why-i-dont-like-the-ltv-metric.html and all the preceding posts in the series.
Tuesday, January 21, 2014
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