Hi all -
Last week I started thinking about what I’m calling demand products and haven’t been able to stop thinking about them.
Their promise is a world where bootstrapping is easier, scaling goes much faster, and funding needs are smaller or non-existent.
Let’s dig in.
The problem with SaaS CAC Cashflow
Everyone focuses on LTV/CAC ratio: Is the long-term value of your customer worth at least three times what you spend to acquire them?
Nobody’s thinking about cashflow: How long does it take for you to earn back the cash you spend acquiring the customer?
If you spend $1,000 to acquire a customer for a $100 MRR product and have a 1-month sales cycle plus 1-month trial period, it takes you 12 months to earn back the cash you spent acquiring a customer.
Which means you need to raise money. A lot of it. Want to acquire 100 customers per month? That’s $100k in just customer acquisition costs every month. Obviously this compounds month-on-month: In Year 1 you’ll spend $1.2M and only earn $550k in revenue in Year 1, based on my simple model below:
Your bank account bottoms out at -$650k, assuming zero churn, stable acquisition costs, etc.
This is the classic “J-Curve” from startup 101. Your cash position is VERY negative for a while… and then comes the hockey stick growth:
This “J-curve” plagues startups.
It’s why bootstrapped companies often rely on SEO for traffic, unwilling or unable to spend a lot of money on ads because it takes so long to get paid back.
It’s why software companies often have to raise a ton of money and get massively diluted.
Cashflow really matters. An example: If I simply redo my model from above to assume that there is NO sales cycle and NO trial, your “J-Curve” bottoms out at -$450k. Getting revenue in 2 months earlier gives you $200k back!
But this still requires a lot of money. Remember, $450k is just your acquisition costs. You’ll also have to spend money on engineering, product, support, etc.
Finally, let’s look at this model another way. What if you gave a 10% discount to customers who paid up-front? How would that impact your bank account?
You got it - no CAC-working-capital funding needed.
But wait… what if you got revenue from customers BEFORE you have to pay your LinkedIn ads bill?
You would no longer need to limit your CAC spend to $100k per month, because you’d have a negative cash conversion cycle. You get revenue in the bank before you pay for the cost of acquiring that revenue.
But… software can’t have a negative cash conversion cycle
Probably right. Software buyers expect freemium, trials, 30-60+ day sales cycles, and/or revenue paid monthly instead of annually. These things KILL your cash balance.
If you can get enough customers to pre-pay for an annual contract within 30 days of seeing an ad that you can break even on CAC costs, amazing - do that.
If your software product doesn’t (yet) work like that - or you’re not in an industry where that makes sense, maybe consider a demand product.
Demand products are paid digital products. Tools, not software. Things like:
Courses
Playbooks
E-books
Things in the $100-$500 range that B2B buyers are likely to impulse-buy, especially on their corporate cards.
This price range likely covers your CAC from ads; because these are “impulse” purchases, you’ll get paid by customers before you have to pay for those ads.
Even if you just break even or are modestly profitable on your demand product, that’s fine! You can:
Upsell your software product
Cross-sell another demand product (this time with $0 CAC)
Building demand products that don’t suck
I was talking with a friend about demand products, and he expressed how this model only seems to work with online hucksters… people who sell $5k online courses that teach you how to be a millionaire by selling $5k online courses to idiots.
I then asked friends about digital products they’ve purchased online. A few examples of non-huckster digital products:
Victor Cheng’s “Look Over My Shoulder” program for consulting case interview prep
Nathan Barry’s $499 “Mastering Product Launches” course
“Training the Street” courses for future finance bros
These provide practical tools that help real people accomplish real things.
I bought Victor Cheng’s course back in college. Listening to his case interview practice sessions was more than worth the money I spent.
Demand products and triggers
For us software folks, these digital products should provide the highest quality leads for our software products. Who’s more likely to spend money on software - some random person who downloaded a free e-book, or someone who put a credit card down for a digital product that we designed specifically to signal that they’re a good buyer?
That’s why we should create demand products that optimize for two things:
They can achieve the negative cash conversion cycle effect and support an effectively infinite ads budget
When someone buys the course, they are signaling that they are a high-quality lead for our software products
If these two things are true - you can scale at lightspeed, cash-efficiently.
And that’s where thinking about triggers comes in.
Recall my friends who run a software quality testing automation SaaS product? I’ve talked about them a bunch, but they’re a great example.
They’ve realized that customers buy their software after hiring for a particular role. Hiring that role is the trigger for them to be in the market for QA automation software.
So, a few different demand products they could consider testing would be:
Playbook for hiring your first QA automation engineers
The CTO’s 6-month playbook for automating QA
Frankly, I’m not sure which of these would achieve Criteria 1: Negative cash conversion cycle effect. However, either would probably satisfy Criteria 2: High-quality lead for software product.
To be clear: I’m not saying that they should do this now. Or that everyone should launch demand products. But I do believe:
For new startups, building and scaling demand products first could be a cash-efficient way to build a company that evolves into a software company
For startups with product-market fit, launching demand products could be a way to scale faster and WAY more cash-efficiently
What do you think?