First and foremost, you need to find ways to evaluate their business model . Some vendors like Google (apps…) Salesforce and Quickbase have achieved operational scale or are profitable. But many SaaS vendors that we look at are startups or growing companies. If you can’t get their profitability, there are some quick questions that can help you evaluate their profitability. Consider the VERY simple model:
(Num Customers) * (Average Price Normalized By Year) – (# employees) * (fully loaded cost/employee)
Again, obviously a huge hand wave, but many SaaS vendors will feed you information on customers and employees – if not – beware! Show them that you can do this calculation during their sales call and they may be more willing to disclose more details on their profitability.
Why is this important? Because, quite frankly, many SaaS vendors underestimate how far they are away from both financial and operational profitability. For example, many SaaS vendors still believe that their core business will be the foundation for other, more profitable businesses. Now that SaaS vendor’s Board and investors may buy into those future businesses, but you as the customer are taking on the risk. These future businesses may never materialize and that their core business (for the product you are buying) may never reach profitability.
If it appears that the vendor needs a large number of new customers to achieve profitability, better dive deeper to learn how they will close the gap.
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