Building a company is expensive. Software, especially a SaaS subscription, is not.
I was recently going over our profit and loss statement and checking out some of the expenses at Zapier and realized how minuscule software expenses really are.
In fact, payroll expenses easily blow software expenses out of the water. At Zapier it’s easily 10X, and I’m sure at companies with more employees the ratio gets even bigger.
Software is Undervalued
What that tells me is that good software is undervalued.
If your average startup engineer in Silicon Valley makes $100,000 (less elsewhere, but $100,000 makes for easy math), then finding a way to make that engineer more efficient is worth a lot of money.
A piece of software could easily make a team of software engineers 10% more efficient across the board (GitHub, for example).
For example, a full-time software engineer conservatively works 160 hours a month. If a piece of software improves their productivity by 10%, that means your engineer can spend the 10% of their time saved by the software (16 hours a month) working on something that is more important.
For a team of five engineers with a piece of software that improves efficiency by 10%, that software is worth $50,000 per year to a company ($4,166/month).
The Math: That’s 5 engineers making $100,000 each per year ($500,000 for all 5). If they are 10% more efficient because of the software, the software is worth 10% of their salary. $500,000 x 10% = $50,000/year or $4,166/month.
So in a perfect economy you’d pay any amount up to $4,166/month to use that piece of software.
Say a piece of software is only able to make your engineer 0.1% more efficient. Across a team of five engineers that’s still just north of $40/month. And all the software has to do is save your engineers 10 measly minutes per month (0.1% x 160 hours x 60 minutes).
It’s Not a Perfect Economy
Ok. So this analysis is a bit flawed because, after all, we don’t live in a perfect economy and it’s almost impossible to quantify exactly how much time software saves. And the time it would take to do these ROI calculations for each piece of software is a bit absurd.
The great thing about most SaaS products on the market is that many of them don’t even come close to being that expensive.
I could buy $50/mo software all day long that saves me and my teammates hours of work every month and the ROI is huge! I don’t have to do fancy math to figure out that I’m coming out way ahead in this transaction. That $50/mo I spend on a piece of software is so trivial compared to the time and money saved by using that product.
What About Disruption?
One of the magical things about the pace of innovation in technology is that we as consumers (in the work or personal setting) get to benefit from constantly improving products that are cheaper and cheaper in price.
Software that would have cost thousands of dollars a decade ago is now being sold with the freemium business model, but the value it provides is still in the thousands of dollars!
If you are trying to grow a business, you benefit from the sheer amount of good software and the competition to build good software and provide it to you at a competitive price.
Stop Being Penny Wise and Pound Foolish
All this leads up to this point:
Stop being penny wise and pound foolish.
In the last week alone, I’ve chatted with founders at a half dozen funded startups complaining about the cost of some $50/mo piece of software that they love and is moving the needle at their companies.
That makes no sense. Especially if you have money in the bank. A more appropriate reaction would should be “Shut up and take my money!”
As a startup you have more pressing decisions to make than the $50/mo subscription to a software company that is helping your business grow. Quit worrying about a measly $50/mo and worry about those other, bigger decisions.
[Note: If you’re a Bootstrapped startup and cash poor, you’ll have to be a little bit more judicious, but I still think even bootstrapped startups should pay for good software.].
Software We Pay For - aka Dogfood
At Zapier we spend a fair amount of money on software. Here are some of the services we pay for on a monthly basis that I can’t imagine living without. These services improve our efficiency by 100+%, yet they account for just 10% of our costs compared to payroll.
Any one of these services could raise their prices by 10% and I’d keep paying them because they provide a service that I value and helps Zapier grow. If you make pricing decisions at any of the below companies please ignore this paragraph. I like money as much as the next guy. :)
- Google Apps
- Help Scout
- New Relic
This list only includes the software we pay for on a monthly basis. There are many other software products we pay for on a one-off basis.
I’ll continue to pay good money for good software. The key word, though, is good.
Just because software is relatively inexpensive to other business costs doesn’t mean you should stick to something that isn’t working.
If an employee isn’t working out you’d cut them loose. Do the same with software you don’t like or isn’t helping.
The awesome part about software is that you can take a $50/mo piece of software for a two month trial for only $100 and usually longer since free trials are epically long these days. You can’t do that with a person.
So don’t worry about the price tag. If a piece of software sounds good, give it try. If it turns out bad, turn it loose.
I’d be curious to hear what software you use in your business that is worth 10X or more what you pay. Let us know in the comments so that we can buy that software too. :)
Posted on May 6th, 2013