The consumer SaaS ceiling 🛖🚥

Deceiving vitamins, the limiting hold of carrying capacity on consumer SaaS, and the work of tending to AI-first, B2B roadmaps.

Dec 07, 2022

Welcome to the 61st edition of The SaaS Baton. A fortnightly newsletter that brings you three, hand-curated pieces of advice drawn from the thoughtful founder-to-founder exchanges and interviews taking place on Relay (curated with 💛 at Chargebee) and the interwebz. So, stay tuned!

In this edition, you’ll find the following instructive and inspiring pickings:

#1: PostHog’s co-founder and CEO, James Hawkins, reminds us how certain startup ideas can seem thrillingly evident pain-killers when in fact they’re the opposite and serves up a handy tip to diagnose (and steer clear of) them.

#2: Readwise’ co-founder, Daniel Doyon, illustrates how one can (accurately, if reluctantly) arrive at the inevitable ceiling of a typical, “truly successful” consumer SaaS business.

#3: Thematic’s co-founder and CEO, Alyona Medelyan, briefly addresses a particular predicament of AI-first, B2B startups: keeping pace with galloping AI advancements while committing to a customer-driven product roadmap.

#1: “Watch out for soft ideas”

(From: PostHog’s co-founder, James Hawkins) (Source: jefhawkins.com)

One piece of startup advice I’d give having been playing this game intensively lately is: watch out for soft ideas.
There are many problems that you can tackle, which feel very large and painful, but the solutions are kind of vague. For example, “employee retention”, “1 on 1 software”, etc..
My personal example is that we had a hypothesis that it’d be possible to help companies manage tech debt through a mini survey that integrates with their git repos and asks developers “hey, what slowed you down?”.
We got a lot of interest - hundreds and hundreds of sign ups, and a lot of regular usage, but we just weren’t convinced our solution was adequate, and we found that our commercial discussions, when they happened, also reflected this - a few bucks a month per user was ok, but not more.
Given tech debt is a hugely painful headache, we think a solution should be extremely valuable or not good enough - and this signalled to us that we were in the second bucket. The problem is tough to define, which makes getting to a solution very hard.
…the point is that we couldn’t demonstrably solve the problem right in front of prospective clients, or even existing ones.
If you can’t demonstrably solve a problem within the platform, then you’re going to have a hard time convincing people of its value. You can’t “sort of” solve something, and feel like a critical piece of product infrastructure.
Whatever we do next, a new criterion for an idea to qualify as “good” is that we are looking for a problem that we can solve right in front of people.

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#2: “The single most important concept we wish we knew”

(From: Readwise’ co-founder, Daniel Doyon) (Source: Twitter/Readwise)

Let me share some thoughts on the single most important concept we wish we knew before starting [Readwise]. It’s called 📈 CARRYING CAPACITY 📈
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We first learned of carrying capacity from our advisor [Rahul Vohra, CEO of Superhuman] In a series of LinkedIn posts from 2015, he defined it as:
“The number of users where the rate at which we lose users equals the rate at which we gain users.” Carrying capacity is particularly important in consumer SaaS because you have true churn 😥
This is in stark contrast to enterprise where the best companies not only don’t lose customers, but those customers grow in size over time.
(This is referred to as “negative net churn”)
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In consumer, there is no land & expand, corporate inertia, true network effects, or even switching costs. You will lose subscribers. Period.
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Churn is best thought of as: “What percentage of my subscriber base will cancel their subscription each month?”
As your customer base scales, you’ll notice the number of subscribers cancelling each month steadily increases even though the percentage churn remains ~fixed.
Eventually, the number of existing customers cancelling each month will equal the number of new customers subscribing.
👆 This is carrying capacity.
It’s an asymptote. You’re done growing.
If you’re adding ~1,000 subscribers/mo with a monthly churn of 10%, your carrying capacity is 10,000 subscribers.
At capacity, each month you’re losing 1,000 subs (10,000 x 10%) while replacing them with 1,000 new subs.
The limit, sadly, does exist.
“But you’ve assumed growth is linear! Isn’t growth viral?”
I had a hard time believing this too, but [Rahul Vohra] (as always) was right.
What you’ll discover is your consumer SaaS growth is surprisingly constant and linear.
There will be spikes here & there, but the trend is predominantly linear due to a mix of app stores, WOM, paid advertising, integrations, SEO/SEM, influencers, hustling, referrals, etc.
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This is truly what a successful consumer SaaS business looks like.
You can play with ARPU, steady state growth, and churn, but they’ll only stretch so much. e.g., it’s hard to charge more than $20/mo (in consumer) or drive churn below 2%.
As an entrepreneur, the assumption you’ll push back on is growth: both the magnitude and the linearity. Trust me. I get it.
But I would advise you not to expect to outperform the base rates unless you’re deep in the idea maze with a validated breakthrough. Growth is HARD.
Generally the way you grow your company from here is to go multi-product (eg: [Basecamp]), but this is easier said than done. In many ways, it’s like starting over.
If you’re lucky, maybe you find a way to pivot to bottoms up enterprise (moving out of consumer) or find some kind of network effects/growth loop. But these transformations are rare.
If you this is the outcome you seek, you should just avoid consumer SaaS from the get-go. I know the idea of spending 5+ years to build a ~$3.5M ARR biz is a tough pill to swallow.
If you had explained all this to me before [Readwise], I wouldn’t have believed you. Even a few years in, I wouldn’t have because churn takes so long to notice! But this is how it goes.
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It should also be obvious now why VC is unsustainable for this type of business. Why raise $10M to spend 5 gruelling years on a startup that’s barely worth your liquidation preference? If you want to go VC-scale, just go enterprise or consumer social.
Those are the ways. I wish I had understood carrying capacity before starting my consumer SaaS journey.

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#3: “What’s in it for the customer?”

(From: Thematic’s co-founder, Alyona Medelyan) (Source: Relay)

With the rapidly changing advances in AI, we always have to ask ourselves:
Do we try to squeeze more out of our current approach by tweaking parameters and data? Or, do we scrap it and replace it by the SOTA (state of the art, i.e. best currently performing) approach?
Our researchers always have to be on top of the latest advances while also staying pragmatic. They cannot get distracted by the shiny new thing. Because there are so many shiny new things in AI research, they wouldn’t get anything done!
So it’s a fine balance between being aware of the latest research and knowing when to deploy it!
It helps to constantly be answering: what’s in it for the customer?
An accuracy improvement of 5% or even 10% might get you published and cited, but it’s meaningless for a customer. On the other hand, small wins with a short turnaround are worthwhile.
Each quarter, we try to have a mix of big bets, smaller fixes, library/model updates, and improvements to our tooling.

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