This post has been updated on November 17, 2023
Calculating Saas Development Cost: Profit vs. SpendThe potential to earn passive income by building a Software as a Service (SaaS) system is very alluring, but how much money will you have to invest 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 show 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 that people with a great SaaS idea ask is:
Is building software worth the investment?
First Let’s Look at Some SaaS Trends and Statistics
For full details on finding your Cost to Build a SaaS, check out our 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 our 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.
Need some help planning, designing, building, or marketing your idea? Contact us to find out how we can help make your SaaS the best it can be!
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 constructed. 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 the myth that your SaaS can be created and brought into the marketplace and then fend for itself, leaving you free to focus on your next big idea. But it 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 require less of your attention over time.
We’ve never met anyone who said that 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. We can’t cover everything you need to know in this one article, so also check out our piece on getting your SaaS startup going in the right direction: Starting a Successful SaaS Business.
Since your SaaS will continue to need ongoing support after release, you’ll need to budget for your SaaS hosting costs, supplementary software costs, bug fixes, and more.
Common ongoing costs to build and maintain a SaaS
- 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 application and promotional website.
- Insurance – For the facilities, workers, liability…everything.
- Software – This means researching and deciding on an entire suite of specialized software, including, but not limited to: videoconferencing, time 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. However, 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 steal 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 design, build, and implement new features, they ensure 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 SaaSAnother 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 building a tool and 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. Opting to build a tool 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. Get started with your SaaS estimation the easy way with our SaaS Estimation Guide!
SaaS Development Costs and Timelines
Let’s grab a cup of coffee and discuss how to estimate your SaaS development cost. 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): Validate your concept to ensure that, when the work is done, there will be people who will pay to use your software. This involves researching potential competitors, scouring message boards and other areas of the internet for complaints, and sitting down with people in your target market 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 validate 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 and likely 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. 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 in some ways is an extension of it. 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 in your SaaS user experience.
- Project Management (around 20% of all development and design time): A project manager might seem like a sideline player, but in actuality, they are 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, designers, and QA’s are, as well as what it’s like to collaborate with you and any other decision-makers on your team. If the rest of your team needs babysitting, your project manager could be spending a lot of extra time helping them get it together, which means extra money for you. Choose an experienced project manager and thank us later.
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 complexity. SaaS offerings can take hundreds or thousands of hours to complete, depending on the end-product you are aiming for. If you’re looking for some real-world examples of final costs for various SaaS builds, we have those later in this article, but you will 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 – 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 because 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.
- Building in Other Systems: This involves more coding, essentially, but adding in additional functionality also means ensuring that your system plays nicely with others. Common items here are enabling automated emails from your server to your users upon completion of various tasks, and using a payment processor to take subscription payments. You may also need to integrate your software with other systems, depending on what your SaaS is designed to do.
- User Management: This will be how your users log in and out, edit their profiles, change passwords, reset lost passwords, edit teams (for example, adding or removing people from their teams), and more. This is one of those areas that can really turn off your users if it’s not done thoughtfully. If their management options are flexible, your users will 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.
- Building Tests: You will need 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. If possible, we recommend that you spend the time up front to build 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 met 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.
Then, there’s pricing.
Offsetting your cost to build a SaaS, and making sure the software is profitable, is going to be dependent on how much revenue you have coming in.
Keep flexibility in pricing clearly in mind to ensure profitability. If you set your prices and packages and rigidly adhere to them, even as new features are added, at some point your initial calculations no longer apply.
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 decision. It would definitely be a bad move to, for example, double prices overnight for existing customers. The concept of “grandfathering” customers in exists for good reason, but you would limit yourself by refusing to even look at adjusting pricing as time goes by.
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 SaaS systems 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 dependent on how many times you need to backtrack 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 desktop 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 most efficient for everybody involved. For this reason, and others, we sometimes suggest that a B2B SaaS startup should plan on strictly using the desktop platform to start. Most development can be done using methods that make the service mobile responsive right out of the gate anyway. While this won’t result in a fully 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.
Finding SaaS Personnel
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.
First, you’ll need to decide where to hire your freelancers from. This will have major implications in terms of cost; for example, developers in North America will have the highest rates, particularly in Information Security, and they may be looking for full-time work with benefits. Location can also impact communication with your team due to time-zone differences and language barriers.
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. In contrast, if a freelancer leaves or can otherwise no longer work, it will be up to you to find a new resource and explain the development up to this point to that new person. Also, many good devs are wary of picking up a project that has been abandoned by another person, because most often that means cleaning up someone else’s sloppy code. If your worst nightmare involves getting stuck with a half-finished SaaS system and no one to turn to, 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 and tools 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 took three years consisting of three 2-3 month phases with a lot of testing in between. This system 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 practice management service that would interface with machines in hospitals, and connect to their billing and insurance systems, took $500K to develop. 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.
- Lastly, a complex SaaS platform that was conceived, built and marketed by our team: 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 haunt you 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 that are used internally to impact businesses in amazingly beneficial ways, improving the way they operate to increase their bottom line and bring about positive changes at multiple levels. So, despite how daunting it all is, if you have a good idea, you may want to go for it.