How much you can earn on your SaaS in five years? Numbers revealed.

In the previous entry, I've covered the budget topic. I have explained how much money I'll need to create a product which is a software cost estimation tool. In this entry I'll talk about budget forecasting- it will help to understand how much money and in what time my product will make.

Before I get into the numbers, I would like to highlight a few things and make some remarks. The budget forecast is a huge topic, and some experts are learning for years to make the budget forecast predictable. I'm an amateur in this area, but I think I've managed to create a budget forecast that is exact enough to help me to decide whether to start working and invest in the product or not.

Budget forecast tool

I've tried a few tools that are helping to create such a forecast, although I found these tools to be made for funded startups. When you are bootstrapping, you have a different cost structure, and these tools did not apply to my situation.

I decided to create a robust tool, something based on a spreadsheet, that will help me to generate forecasts easily. With some factors I can change and a dashboard where I'll see how much I have to invest and in what time I'll make the income.

Expenses assumptions

When creating this tool, I had to make a lot of assumptions. Some numbers popped out of my head. However, I aided myself with the experience that I've gained while creating previous products, as well as when creating products for my customers.

The first assumption is related to expenses structure. In the previous entry, I've explained what would be the cost structure for the MVP. But when it comes to planning the budget, MVP is just a start line. I've created a forecast for five years, as I think about this as a long-term investment.

I've assumed some costs that I'll spend on maintaining the product or enhancing it as well as the expenses that are related to marketing and ads. The difference between a funded startup and bootstrapped startup is that there are no salaries. The salaries are not considered at all. It's important to remember this as it may give a false image of the revenue. However, I assume that there won't be any salaries, at least in the first couple of years.

Income assumptions

The next assumptions are related to income. It is a more complex topic. I had to assume how many subscriptions plans I'll have and what their price will be. I've thought there would be two subscription plans: a "basic" plan which I'll launch after I make an MVP and it will cost $40. The "advanced" plan, something that I think I'll launch after a year or maybe sooner, will cost $80. I don't know exactly how much it will cost, but I had to make some assumptions. I took these numbers, and I've used these numbers for the next calculations.

Another assumption that is related to the income structure is the customer base. I assume that I have a couple of subscriptions in the first year, and then, every next month, there will be a linear growth. I've made it a factor and initially assumed 5% of the monthly growth. I know it should be done annually but to make it easier. I can decrease this growth factor to 3% or 4% and also I can increase that factor to 8%. I think 5% is achievable.

Things that were omitted

I am aware that there are many factors to be considered when planning the budget, not only product price and the number of clients - for example, a churn rate. People will cancel their subscription, but I did not take into consideration to make this forecast easier.

Forecast summary

Even with all of these assumptions, the result of the forecast is exciting. I know that this is a laboratory example, and probably expenses will be twice as high and income will be at least twice as lower. Despite its imperfection, it shows that after a year and a half the product will start making a profit, where monthly revenue is greater than monthly expenses.

After three years after launching such a product, it will make income. It means that after three years, all of the expenses will be covered from the revenue, the product will start making actual money. After the next two years, five years in total, the result will make $170,000 of the income where the expenses will be $140,000.

You may ask yourself: "is it worth it?". Is it worth spending five years of hard work to earn $170,000? For some of you, it will be worth it, for some of you it will not. I think the conclusion is showing why so many investors are rejecting many software-as-a-service ideas. Simply because the numbers don't add up. My forecast won't be too exciting for investors. They're looking for millions, and if you add the salary structure, so you'll have a couple of employees, then expenses will be something around 1 million or even even more.

Think about how many customers you have to reach to make a profit that will cover all of these expenses. In my forecast, after five years, I'll have something around 320 customers.

What's next?

The key missing part here is how many potential customers are out there. What is the market size? I finish with my Market Research that will reveal the market size. If there are only one thousand potential customers and I have to reach 320 customers, then covering 30% of the market is something, in my opinion, not doable. However, if it's 10,000 or 20,000 of the potential customers, then I think it's worth the effort.