How do the cultures between high and low margin companies differ?
Let me echo Marc Bodnick’s post.
For the first time I am, in part, running a low margin company.
“SaaStr, Inc.” is our events/media/etc. business. In 2017, it will do $10m-$11m in bookings this year (up from $0 2 years ago) and probably $20m in 2018. But the blended margins are around 18–20%.
This is radically different from software.
With 75%-80%-90% margins, you have huge room for error. Get the sales comp plan wrong? No big deal. A marketing program that sort of works, but is a bit expensive? That’s OK.
But with a low margin business:
- Small mistakes can be a disaster. We miscalculated the food + beverage expenses for the 2016 SaaStr Annual, and I lost $400,000 in the blink of a Google Sheet cell — three days before the event. I still haven’t made that $400,000 back yet.
- Low cost employees and contractors become critical. In a typical internet/software company, at scale, you can generate $1m+ per employee. With 80%-90% margins, that means all-in, you can pay pretty well. But in a low margin business, there is very little room here. You need to fill out the team with fairly low cost resources and volunteers.
- Quality is always at odds with the budget. There is always a temptation to cut corners to get that margin up in a way you don’t have with a high margin business. For example, if we ran the SaaStrAnnual.com for “profit” the way commercial events are run, we could hit a 40–50% margin. That’s a lot more money. But we’d sacrifice our quality, aesthetic, and experience. The venue would be boring, the sessions clipped, the parties dull, the stages and experiences turn-key at best. We’d have to leave San Francisco, too, for the South Bay. San Francisco is an insanely expensive place to produce a large event, likely the most expensive in the world. (Smaller events, much less so).
- Marketing programs have to be measured ruthlessly. It costs up $915 per attendee for the 2018 SaaStr Annual, and the average attendee pays less than that for a ticket. So marketing programs that don’t perform incredibly well just bleed cash. Spending $200 to sell a ticket we lose $200 on is a ticket to bleeding cash. Vs. in a software business, basically any marketing initiative that returns $1 in recurring revenue for $1 spent it worth it.
- Surprises kill you.Similar to the first point. Resources that send you a bill 50% higher than planned, or that play games with contracts, aren’t just stress points like in a high-margin business. Here, they can destroy whatever profit margin you have.
Having said all that, it’s an interesting challenge. Being less sloppy means you also have to be more rigorous. That’s a new experience for me, and intellectually interesting.