Calculating the Cost to Build a SaaS System: Profit vs. Spend
The potential to earn passive income by building a Software as a Service (SaaS) system is very alluring, but what will you have to put in up front to get there? Determining your cost to build a SaaS can be more complicated than you might think. We’ve built a number of SaaS systems and want to share with you how to estimate your spend on each part of the project, avoid costly mistakes and get the most for your money.
One of the first questions more people with a great idea for a SaaS ask is:
Is building software worth the investment?
Need some help planning, designing, building, or marketing your idea?
First Let’s Look at Some SaaS Trends and Statistics
Good news, recent statistics show SaaS trends are looking great. SaaS systems have taken over much of the online and B2B (business-to-business) markets over the last twenty years. In fact, 78% of organizations intend to run at least 80% on SaaS by 2022, and the overall market for cloud-based operations is already valued in the hundreds of billions, divided between SaaS, IaaS, and others.
There is a lot of competition, but there are also a lot of niches that are not yet filled. With the sheer amount of money already at play in a market that is set to grow almost exponentially, it is no wonder that many forward-thinking businesses and entrepreneurs are working to create sustainable SaaS systems.
Our CEO, Jason Long started JH Media Group almost 20 years ago and our team has been working in software development and design ever since. When it comes to SaaS development projects, we have the experience that makes the difference. We have built and marketed our own SaaS systems as well as a wide range of SaaS projects for our clients.
Over the years we’ve been through it all and we’ve put together some valuable notes on what you can generally expect in terms of cost for developing a SaaS system.
For full details on finding your Cost to Build a SaaS, check out my video:
Please note that in this video and this article SaaS cost structure is discussed in general terms. Since every SaaS system is unique, the formula for how much your SaaS will cost is also unique. Any generalizations below are completely based on experience, and individual experiences may vary. This article is meant to be used as a guideline, not a rulebook. Exact costs, in time and money, will be most accurately determined whilst planning with your development team and any experts brought in to assist. When considering potential costs in pre-planning, always aim to overestimate.
SaaS Cost Structure: Costs to Consider Before Starting Development
There are some significant factors affecting cost that should be kept in mind during the pre-planning phases of any SaaS build, no matter the size. If you jump straight into developing your software you will be missing these fundamental aspects of your SaaS cost structure.
First off, when building a SaaS, something is being created, constructed if you will. If you compare it to a construction site for a new building or road or bridge, you might be tempted to think that the various elements of code and the features that are being incorporated in the system are your building materials – and you would be wrong. When building a SaaS system, every key element of construction – the foundation, the steel beams, rivets, concrete, construction equipment, down to the blueprint, itself – is people.
Your people are the difference between crafting a lasting architectural masterpiece and throwing up a makeshift eyesore that will fall over in the first stiff breeze. You are building, not with physical material, but with expertise and man-hours. Your team is a major factor in the success of your SaaS so finding an experienced SaaS development team is key. The better your team, the better the product will be in the end.
When you build a SaaS, you build a business
One of the most common misconceptions about building a SaaS for passive income is that it can be created and brought into the marketplace and can then fend for itself leaving you free to focus on to your next big idea. But it just doesn’t work like that.
Think of your newly built SaaS system as a toddler, you’re going to have a mess to clean up if you let your SaaS run freely without supervision.
The good news is that just like a toddler, with time and attention your SaaS should take less of your attention over time.
I’ve never met anyone who said building a profitable SaaS business was a piece of cake. If it was easy, everyone would do it.
One of the best things you can do to ensure profitability is to do your homework before you start. I can’t cover everything you need to know in this one article, so check out this other article I wrote for more tips to get going in the right direction: Starting a Successful SaaS Business.
Your SaaS will continue to need ongoing support after release. This means that you’ll need a budget for your SaaS hosting costs, supplementary software costs, bug fixes, and more.
Here are some of the ongoing costs to build and maintain a SaaS that you’re likely to incur.
- A Phone Line – For a small team maybe you can get away with just one, but most likely you’ll end up needing a couple of networks – one for the office, and another for support. Your employees need to be able to communicate, and your company needs to be capable of fielding customer queries.
- Hosting – For the website and/or app.
- Insurance – For everything. The facilities, the workers…everything.
- Software – This means researching and deciding on an entire suite of specialized software, including, but not limited to: meeting, tracking, billing, project management, and CRM (Customer Relationship Management) software.
- Ongoing Development – It’s a competitive world. If you just drop a SaaS into the marketplace, you might do okay for a few weeks or months, but without constant support and updating, your service will soon fall behind on what customers need. Even if your service is catered toward a niche market, it is only a matter of time before somebody tries to improve upon what your service does and steals your business. Continued development and improvement help to secure or improve your position in the market.
- Staff – Out of everything that running a SaaS business requires, talented personnel are the most crucial. They build and implement new features; they ensure that any problems that arise are handled with speed and grace, and they provide a human face for your company to any customer who needs assistance. Of course, the more you’re willing to pay for staff, the better and deeper your hiring pool becomes.
Define the Scope of your SaaS
Another important thing to consider before leaping into the development process is the ultimate scope of your SaaS.
Will it be a tool or a platform?
Determining what kind of system you’re building is going to be one of the key choices you need to make to determine your cost to build a SaaS. Tools are more limited in scope, aiming to do just one or two things really well. Examples of tools are systems like Buffer and Hootsuite. Platforms go a bit farther, and are “full-featured”, usually containing several tools within their scope that interact and allow for much more total functionality. Examples of platforms include Facebook and Asana.
If this is your first time building a SaaS we highly recommend keeping the scope as limited as possible.
It’s common to underestimate the time it will take to build your system and to realize additional SaaS expenses later in the game. So keep it simple even if your brain is full of great ideas. Building a tool will cost far less than building a fully featured platform which will offset some of your financial risks and you can oftentimes add new features to a system after you make some money on your MVP (minimum viable product).
It is best to decide now, before getting into development, what the end-goal of the project is so that the development plan may be more accurately laid out. Once all of this has been considered, then the real work begins.
SaaS Development Costs and Timelines
It’s time to start working. You’ve got a lot ahead of you – and it’s probably a little daunting. In fact, if you look at all of the work that lies ahead and fail to be daunted…you may have personal issues that need to be brought up with somebody certified to deal with them. Or perhaps you’ve already got a solid team that you have faith in. I hope it’s the latter.
You won’t know how much it will cost until you know how long it will take.
Let’s grab a cup of coffee and get into starting to estimate your cost of actually developing a SaaS. To be clear, your SaaS development costs include much more than the actual coding. Most of the monetary costs in the development process are spent on your staff. Costs of staff vary from one SaaS to the next depending on the experience of the staff and how many people you’ve got on the project. Once you know how long your SaaS will take to build you can multiply that by the hourly rate of your employees. Therefore, it’s going to be most effective to simply provide estimates in terms of the time spent on each step. Starting with..
- Validation (10-50+ hrs): Validation is the step you take to validate your concept to ensure that, when the work is done, there will be folks wanting to pay to use your software. This involves researching potential competitors, scouring message boards and other areas of the internet for complaints, and, if your SaaS would be a solid B2B product, sitting down with owners of businesses who might become customers to learn exactly what they would look for in a product that addresses the issues you have your eye on. There are a number of ways to go about validating your concept, and the specific niche you aim to appeal to should impact the course of validation you use. This step will take at least ten hours to complete – longer, depending on how many elements you intend to include in your final product. This step also helps define your customer acquisition process.
- Planning (30-200 hrs): We live by the motto, “Well-planned projects are smooth projects”. This is the step where you need to ensure your end-goals are finalized and then plan the most efficient route to get there, and yes, you definitely need an information architect for this part. You might think that thirty or fifty or two hundred hours is way too much to spend on planning when you could be doing something, but try to keep in mind that planning is doing something. In fact, projects that spend a little more time in the planning phase, mapping out the exact phase-by-phase goals, tend to take less time and cost less, overall. This is a critical step in realizing your SaaS – don’t short yourself or your fledgling company by jumping the gun here.
- UX Design (25-200 hrs): This step is closely related to the Planning step and may seem like an extension of it and in some ways it is. Note that this isn’t UI design – the User Experience goes a bit deeper than just the User Interface. The best SaaS efforts make things intuitive for the user in every possible way. This means planning out more than just a clean, easy-to-understand aesthetic. It also means anticipating user needs and incorporating innovative, yet simple, methods to allow users to fulfill those needs. If you were thorough in the Validation step, then you may have gathered a few ideas of what your users may look for when they gain access to your SaaS.
- Project Management (20% of all development and design time): A project manager might seem like a sideline player, but in actuality, he or she is the glue that holds the project together. Project management typically takes around 20% of the total hours on the project, but it depends on how good your developers and designers are. If the rest of your team needs babysitting, your project manager could be spending a lot of extra time working helping them get it together, which means extra money for you. Choose a project manager who is both experienced and local.
By now you’ve probably noticed the wide ranges in the time estimates for the steps above, and that there is no simple, easy-to-peg timeframe for any particular SaaS. It depends on the project and how much or how little you plan to implement. They could take hundreds or thousands of hours to complete, depending on the end-product you are aiming for. But if you’re looking for some real-world examples of final costs for various SaaS builds, we have those later in this article.
It’s not simple, but there’s no way around it. You need to get a rough estimate for each portion of your project with the help of your team. If you come across a team that gives you a round-number quote right off the bat, you should be skeptical as they likely have not taken the details of your project into consideration.
Here are Some of Your More System Specific SaaS Costs
- Coding and Development: This step is self-explanatory and is where the bulk of the actual creation takes place. This step is what most SaaS creators view as the bread and butter of the project and in some ways, it is since it’s what makes your system actually do what it’s supposed to do. This is likely going to be the most costly task when it’s all said and done; especially because this step will likely have smaller echoes between each of the subsequent steps.
- Building in Other Systems: More coding, essentially, but adding in additional functionality also means ensuring that your system plays nicely with others. The simplest thing here is enabling auto-emails from your server to users or users’ clients upon completion of various tasks. You could also integrate your software with other systems. What works best for your SaaS will depend on what you’ve designed it to do.
- Building Tests: You will, of course, want to test the system and you might be thinking of ways to do that manually. If you test manually, you’ll be paying someone (or a team) for every hour of work spent and this won’t be a one-time thing. I would recommend that you spend the time up front to build in automated tests since it will save you money in the long run. If the testing process for various elements is automated, then errors are easier to find and less time is wasted. These tests will continue to be useful after release and will result in a higher-quality product.
- Alpha and Beta Testing: It is ill-advised to release your product without extensive testing. Alpha and Beta tests allow you to get valuable feedback from people who may become customers. If you sat down with any potential customers in the Validation step, they may be willing to help you test out the service. During these tests, aim to gather as much feedback as possible – and ignore the negative feedback at your own peril.
- Release and Marketing: Lastly, you have to think about your SaaS release to the public – and you need to market your release. Marketing will be essential for drawing in users, and a plan for marketing should have been discussed along with everything else in the Planning stage. You also need to ensure that other elements, such as Customer Relationship personnel and drip emails are properly in place. User testing and analytics need to be running non-stop in the first few weeks or months on the market. In other words, expect to be at your busiest when your product is released; this is not the time to kick up your feet.
Don’t wait to consider your SaaS marketing costs
A lot of SaaS builders, especially if this is the first SaaS idea they’ve fully pursued, will grossly underestimate the amount of time and money that will be needed for marketing. Unless they’ve built a robust marketing plan from the ground up for a new business, most people simply don’t know what it’s going to take. No matter how good your product is, you’re going to need a lot more than a nice marketing site and a few PPC ads.
To give you a clear picture, I made a list of the major the development and marketing tasks we had to complete for the launch of our most recent SaaS system, MedRev.
Here’s the live marketing site for MedRev, so you can see the finished product.
There are, of course, other things to keep in mind during your SaaS development work such as…
User Management. This will be how your users log in and out, to begin with. But remember that users also need to be able to edit their profiles, change passwords, edit teams (for example, adding or removing people from teams), and more. This is one of those areas which can give you an easy chance to impress your users. If their management options are flexible, then they feel like they’re in control of their experience. If they feel like their hands are tied, they’ll likely not stick around very long. Expect to add 25-100 hours to your UX Design step specifically for this element of the SaaS.
Then, there’s pricing. Offsetting your cost to build a SaaS, and making sure the software is profitable, is going to be dependant on how much you have coming in. Keep one thing clearly in mind to ensure profitability, flexibility in pricing. If you set your prices and packages and rigidly adhere to them, even as new features are added, at some point your initial math no longer applies.
Sure, the initial three-tier system might work for a year or so, but as you continue to add and adjust features and receive feedback from your customers, you may find that adding a fourth tier and adjusting prices might be the best call. It would definitely be a bad move to, say, double prices overnight for existing customers. The concept of “grandfathering” customers in exists for a reason – but you would limit yourself by refusing to even look at adjusting as time goes by. Consider this a must early on.
Put up a paywall at the beginning! No matter what your starting price is, if you’re not getting people’s credit card numbers from the beginning you’ll be missing out on dollars, and loyal customers.
Will non-paying users crush your SaaS business? We help you decide in our blog article: Putting up a SaaS Paywall To Get The Right Customers
Building a SaaS Financial Model
Now that we’ve looked at the elements for the actual development, including some rough time estimates, let’s look at what things might actually cost by the end of the project so you can start to build your unique SaaS financial model. Remember that some projects require much more work than others, and this article does not serve as a SaaS calculator to give you an exact cost. If you decide to seek help in putting together a realistic estimate, look for an experienced group that specializes in helping SaaS companies get off the ground, such as JH Media Group.
So, what’s your total cost to build a SaaS going to be?
Our experience building software as a service has revealed a few wide ranges for SaaS development.
A SaaS tool typically ends up somewhere in the $15-100k range, with the majority falling more toward the middle.
For SaaS Platforms, there is a larger range, falling between $50-250k. Again, platforms have more features, ergo, more time and money in both planning and development.
The end cost is largely dependant on how many times you need to backtrack because you had to rethink your functionality, design, or how the system will best suit your users.
One of the most costly mistakes we see, unfortunately far too often, is a client who has already spent half their budget (or more) only to scrap the original build due to poor planning and a discount development team.
Choosing a SaaS Development Platform
There are two major options for SaaS development platforms, which are PC and Mobile. Of course, having your software available on both platforms is optimal – but it does cost extra.
Most B2B SaaS companies find that their services are most useful on desktop. Employees do most of their work on desktops, so integrating into that workspace is the most efficient way to go for everybody involved. For this reason, and others, we suggest, a startup SaaS endeavor should plan on strictly using the PC platform to start.
Other reasons to avoid building a mobile SaaS system when just starting out:
- Most development can be done using methods that make the service mobile responsive right out of the gate. While this isn’t an optimized app, it still allows for functionality on mobile and can serve as a stopgap without costing anything beyond what you were already planning to pay. So, you can often get the perks of a mobile SaaS without the extra spend.
- Mobile app development is a completely different beast. Screens are smaller, and generally, the orientation is flipped from PC screens. This means an entirely different UX AND it needs to still feel like it’s the same service. Generally, it is easier to downsize your service’s UX for mobile than it is to scale up to PC.
- The cost of developing a mobile app can range from HALF to DOUBLE that of the original web app. If your project originally cost $50k, you need to tack on another $25-100k for developing the mobile app, depending on your service. That could make your SaaS cost structure balloon quickly beyond your initial estimate. It may behoove you to focus on getting the service running on one platform to begin bringing in revenue before adding a second which may have limited utility for your customers. This is a call that you need to make based on the service you provide and the needs of your customers.
- One final note to keep in mind before you delve into mobile development: when you make updates to the service, the updates need to appear, simultaneously, across all platforms – this includes the divide within the mobile platform: iOS and Android.
Let’s Revisit Your SaaS Development Costs
Once you know your platforms, you need to ensure that you have the right expertise for completing the job. After you know about how many hours the project will take, you can determine your SaaS development costs by your number of team members and their hourly rates. You may have already recruited developers to help bring your project to life, but you might still need extra help. If it comes down to hiring outside help, such as freelancers, we have a few experience-based tips.
There are two primary things to decide on in regard to hiring freelancers, and the first is where you hire them from.
Keep in mind that the below are broad generalizations based on years of personal experience and that, as with any group of people, there will be outliers – both better and worse than the general guidelines listed.
Freelancer Rates by Location
To begin, here is a rundown of an approximate price range of freelancers we have encountered by country and region:
- India: $12-35/hr
- Southeast Asia: $15-35/hr
- Eastern Europe: $20-85/hr
- Western Europe: $35-110/hr
- South America: $30-65/hr
- US/Canada: $40-250/hr
Though each worker is an individual, we have accumulated a few observations about those we have interviewed and worked with all over the world. The best sum-up is that ‘you get what you pay for’, but it goes a little deeper than that.
- Southeast Asia: Unfortunately we’ve had freelancers from Indonesia who are difficult to communicate with, both language-wise as well as well as their response time. When working with anyone in Southeast Asia, you must consider the fact that, if you are in the US, their night is your day.
- India: We’ve tried many, but our team has had little success with developers from India, but we know other folks who’ve gotten lucky found devs they love here. This one is really hit or miss. If you work with devs in India, be sure they have a very clear understanding of what you need want and that you have someone you trust to check their work regularly.
- Eastern Europe: Our developers from this region are typically good all-around and have an outstanding work ethic. They are also well-educated and speak excellent English. We have held onto many Eastern European devs over the course of several years in fact. Just make sure you have a local project manager to check in with them.
- Western Europe: This one is a big mix. The cost of developers in this area the second highest on our list, however, you may find developers here with a lot of experience or education that would make them worth the money.
- South America: This is a good region to hire from if you’re looking for good graphic design. If you are in the US, and you want to build a remote team that is in your time zone, or close to it, South America is a good place to try.
- US/Canada: Freelancers in North America tend to be better with UX Design and Informational Architecture. They are also more likely to be looking for full-time work or benefits. Another thing to note is that the most expensive developers will be those specializing in Information Security.
Should You Use Freelancers or an Agency to Develop a SaaS?
The next thing to consider is whether you hire your developers strictly as freelancers or through an agency. As far as costs, freelancers are less expensive. Agencies cost more because they must cover expenses for employees who manage their developers, project management, quality control, office space, and more. However, agencies offer security for your project’s success which is crucial.
If, for example, a developer quits the project, it becomes the agency’s responsibility to replace them; if a freelancer leaves, it’s your problem. If your freelancer quits, or you fire them, it will be up to you to find and explain the development up to this point to a new person. Also, many good devs are wary to pick up a project that has been abandoned by another person, because most often that means cleaning up someone else’s sloppy code. If getting stuck with a half-finished SaaS system and no one to turn to sounds your worst nightmare, we’d recommend using an agency.
Additionally, when you hire an agency, they have a team of experienced designers, developers and project managers which means you don’t have to hand pick your people and set up processes yourself.
Some Real-World SaaS Pricing Examples
By now you’ve got an idea of what costs to consider and how to put it all together. Now let’s get down to some real-world SaaS pricing examples to illustrate what actual projects actually cost:
- The lowest-cost SaaS project we’ve seen come out with a successful MVP was $15k.
- An advanced form-building and surveying system for a niche market which took three years consisting of three 2-3 month phases with a lot of testing cost $85k.
- A directory service with advanced searching and an advanced admin area was fairly cheap, at only $30k. The project involved manually mining data from the internet and compiling on a centralized database where it could be bundled and sold. The service utilized enhanced data-entry features to ensure high levels of productivity from the workers tasked with doing the mining. The project took a good deal of design and planning and the development ran for just a few months in a single phase.
- A healthcare system, more specifically a healthcare practice management service which would interface with machines in hospitals, and connect to their billing and insurance systems. While it was not a true SaaS because there was no logging into the service – no user accounts at all – it took a few years and $500k to develop.
- Lastly, a complex SaaS platform that was conceived, built and marketed by our team, JH Media Group: Brainleaf. This is a project planning and scoping tool used by digital agencies, freelancers, and marketers worldwide. Brainleaf has been seven years in the making, with the initial build costing between $35-40k, and over $250k invested in the software to date.
Your Cost to Build a SaaS is Ultimately Up to You
The total cost of developing a SaaS system depends on the choices you make as a business owner. By making informed decisions you can see where your money is best spent and where cutting corners will come back to bite you in the butt and end up costing more in the end. It is our hope, however, that the information discussed in this article (and in the videos above) can help entrepreneurs research and plan their initial costs and ongoing expenses so there are no (major) surprises. Spending money in the right places will ultimately improve the overall system and its profitability once the SaaS is on the market.
To end, we want to mention that the cost to build a SaaS is not the only thing to consider when bringing an idea to fruition. SaaS systems are often started as passion projects which can impact customers in amazingly beneficial ways, improving the way other businesses operate to increase their bottom line and bring about positive changes at multiple levels. So, despite how daunting it all is, if you have an idea, then go for it.
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