Navigating Forecasting Complexities

Forecasting is one of the most significant challenges for SaaS companies. Unlike traditional software sales, which recognize revenue upfront, SaaS businesses operate on recurring subscription models. This introduces numerous variables that can disrupt cash flow predictions, such as:

• Customer Churn Rates: How many customers discontinue their subscriptions?
• Free Trials: While effective for onboarding, they often skew projections if conversion rates aren’t carefully modeled.
• Chargebacks: Disputed charges and refunds can cause sudden revenue dips.

A CPA familiar with the SaaS ecosystem can create sophisticated forecasting models that incorporate these variables. By analyzing customer acquisition costs (CAC), churn, and lifetime value (LTV), they help companies achieve realistic and actionable projections.

Solving the Revenue Recognition Puzzle

SaaS companies face a particularly complex challenge with revenue recognition. Under accounting standards like ASC 606, revenue must be recognized over the subscription period rather than at the point of sale. This requires precise tracking of deferred revenue and compliance with stringent accounting principles.

An experienced CPA ensures that financial reporting aligns with these standards, promoting transparency and mitigating the risk of legal or regulatory repercussions. Proper revenue recognition not only keeps the company compliant but also strengthens trust with stakeholders, such as investors and board members.

Tackling Cash Flow Challenges

While recurring revenue is a cornerstone of the SaaS model, maintaining healthy cash flow can be tricky—especially for growing companies. Major upfront costs, including software development, marketing, and infrastructure, often outpace incoming subscription revenue in the early stages.

A skilled CPA can assist with:

• Cash Flow Projections: Identifying potential shortfalls and creating strategies to mitigate them.
• Pricing Strategies: Optimizing subscription plans to balance affordability and profitability.
• Customer Retention: Lowering churn and increasing LTV to stabilize cash flow.

By addressing these issues proactively, a CPA helps SaaS companies maintain financial stability during growth periods.

Scaling Seamlessly

Growth introduces new financial complexities. Expanding into new markets, offering additional products, or adjusting pricing tiers often involves navigating regulatory challenges and tax implications across jurisdictions.

A CPA with SaaS expertise can:

• Implement scalable financial systems.
• Establish robust internal controls.
• Ensure compliance with global tax regulations and accounting standards.

This enables companies to scale efficiently without compromising financial accuracy or integrity.

Supporting Investor Relations and Exit Strategies

For many SaaS businesses, attracting investors or planning for an exit—whether through an acquisition or initial public offering (IPO)—is a pivotal milestone. These scenarios demand top-tier financial transparency and meticulous reporting.

A CPA can:

• Prepare financial statements that meet the expectations of investors and regulatory bodies.
• Assist with valuation methodologies, ensuring the company is accurately appraised.
• Advise on tax strategies and deal structuring to maximize returns for stakeholders.

With a CPA’s guidance, SaaS companies can confidently approach fundraising or exit opportunities, knowing their financial house is in order.

Why Every SaaS Company Needs a CPA

The SaaS industry is fast-paced and constantly evolving. To thrive in this dynamic environment, small-to-medium-sized SaaS companies must overcome significant financial hurdles, from forecasting and revenue recognition to cash flow management and investor readiness.

A CPA doesn’t just balance the books—they become a strategic partner. With their expertise, SaaS companies gain the tools and insights needed to navigate financial challenges, unlock sustainable growth, and achieve long-term profitability.

Ready to level up your financial strategy? Contact us today to discover how a CPA can transform your SaaS business.

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Understanding the STTR Program

STTR is a competitive grant program that provides funding for early-stage research and development (R&D) projects. To qualify, a small business must partner with a research institution, such as a university or a federal laboratory. The research institution contributes at least 30% of the project effort, while the small business retains commercialization rights. This collaborative approach stimulates the transfer of technology from the research lab to the marketplace.

Securing an STTR Grant

Obtaining an STTR grant requires a well-crafted and compelling proposal. Here’s a general overview of the process:

1. Identify a Research Partner: Find a research institution with expertise aligned with your business idea. A strong partnership is essential for the success of the project.
2. Identify a Funding Opportunity: Explore STTR solicitations from various federal agencies. Each agency has specific research areas of interest.
3. Develop a Strong Proposal: Clearly articulate your research objectives, methodology, commercialization potential, and budget. The proposal should demonstrate a clear understanding of the agency’s mission and priorities.
4. Build a Solid Team: Assemble a team with the necessary expertise to execute the project. This includes scientists, engineers, and business development professionals.
5. Comply with Regulations: Adhere to the complex application and reporting requirements of the STTR program.

The Impact of STTR Grants

STTR grants have fueled innovation across a wide range of industries. Some notable examples include:

• Biotechnology: Companies have developed groundbreaking medical treatments and diagnostic tools.
• Information Technology: Advancements in software, hardware, and cybersecurity have been driven by STTR-funded projects.
• Clean Energy: Innovative solutions for renewable energy generation and storage have emerged from STTR-supported research.
• Advanced Manufacturing: New manufacturing processes and materials have been developed to improve efficiency and sustainability.

These are just a few examples, and the impact of STTR extends to numerous other sectors. By providing early-stage funding and fostering collaboration, the program has been instrumental in transforming research into marketable products and services.

The Accountant’s Role in STTR Success

Accountants bring a unique skill set to the STTR grant application and management process. Their financial expertise can be invaluable in several ways:

• Budget Development: Accountants can assist in creating detailed and accurate budgets that align with the project’s scope and goals.
• Financial Projections: Developing realistic financial projections helps demonstrate the commercial potential of the project and its impact on the business.
• Cost Analysis: Accountants can analyze the costs associated with the research and development process, identifying potential cost-saving measures.
• Grant Compliance: Ensuring compliance with complex grant regulations is crucial. Accountants can help track expenditures, maintain accurate records, and prepare required financial reports.
• Financial Analysis: By analyzing financial data, accountants can provide insights into the project’s performance and identify areas for improvement.

Accountants can also play a vital role in post-award activities, such as financial reporting, auditing, and managing intellectual property.

By working closely with scientists, engineers, and business development professionals, accountants can contribute significantly to the success of STTR projects. Their financial acumen can help maximize the impact of grant funding and accelerate the commercialization of innovative technologies.

In conclusion, the STTR program has proven to be a powerful catalyst for innovation, driving economic growth and creating new jobs. By understanding the program, building strong partnerships, and leveraging the expertise of accountants, businesses can increase their chances of securing STTR funding and achieving commercial success.

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Understanding the SBIR Program

The SBIR program works by awarding grants to small businesses to conduct research and development (R&D) with the potential for commercialization. For fintech startups, this can mean funding for cutting-edge technologies, from developing advanced fraud detection algorithms to creating innovative payment solutions.

While the prospect of securing an SBIR grant is exciting, the application process can be complex and time-consuming. This is where accountants come in.

The Accountant’s Role in SBIR Success

Accountants possess a unique skill set that can be invaluable to fintech startups navigating the SBIR landscape. Here’s how:

• Financial Projections and Budgets: Creating robust financial projections and budgets is essential for any SBIR application. Accountants can help fintech startups develop detailed financial models that demonstrate the potential impact of their innovation.
• Cost Analysis: Understanding the costs associated with research and development is crucial for determining the appropriate budget request. Accountants can help identify and quantify relevant costs, ensuring that the startup is requesting the necessary funds.
• Compliance and Reporting: SBIR grants come with specific reporting requirements. Accountants can help fintech startups navigate these complexities, ensuring that all financial information is accurate and submitted on time.
• Tax Implications: Research and development activities often qualify for tax benefits. Accountants can help fintech startups maximize these benefits, providing additional financial resources for growth.
• Financial Strategy: Accountants can offer strategic financial advice to help fintech startups make informed decisions about resource allocation, fundraising, and overall business operations.

Building a Strong Partnership

To effectively support fintech startups in the SBIR process, accountants need to develop a deep understanding of the fintech industry and the specific challenges faced by these businesses. Staying up-to-date on the latest fintech trends and technologies is essential for providing relevant and valuable advice.

By building strong relationships with fintech startups, accountants can position themselves as trusted advisors throughout the business lifecycle. This includes providing support beyond the SBIR application process, such as financial management, tax planning, and growth strategies.

The Bottom Line

The SBIR program offers a significant opportunity for fintech startups to accelerate their growth. With their financial expertise and knowledge of the business world, accountants can play a pivotal role in helping these companies achieve their goals. By partnering with fintech startups, accountants can not only make a positive impact on the industry but also strengthen their own professional reputation.

Are you a fintech startup looking for expert financial guidance? Our team of experienced accountants can help you navigate the complexities of the SBIR process and provide the support you need to succeed. Contact us today to learn more about how we can help you achieve your business goals.

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How BaaS Works

BaaS platforms provide a comprehensive suite of financial services, including payment processing, account opening, fraud prevention, and customer onboarding. These services are delivered through APIs, allowing developers to integrate them seamlessly into their applications. By leveraging BaaS, fintechs and SMBs can focus on their core competencies while benefiting from the robust financial capabilities offered by established financial institutions.

Benefits of BaaS for Fintechs

BaaS has revolutionized the fintech landscape by providing a number of advantages:

• Accelerated Time-to-Market: Fintechs can rapidly develop and launch new financial products and services by integrating pre-built banking functionalities.
• Reduced Costs: BaaS eliminates the need for significant investments in IT infrastructure, compliance, and security.
• Scalability: Fintechs can easily scale their operations as their customer base grows, as BaaS platforms are designed to handle increased workloads.
• Compliance: BaaS providers ensure adherence to regulatory requirements, reducing the compliance burden for fintechs.
• Access to Financial Services: Fintechs can offer a wider range of financial services to their customers, enhancing customer satisfaction and loyalty.

Benefits of BaaS for SMBs

BaaS empowers SMBs to enhance their financial operations and provide added value to their customers:

• Improved Cash Management: SMBs can streamline their payment processes, automate reconciliation, and optimize cash flow.
• Embedded Finance: BaaS enables SMBs to offer financial services to their customers, such as buy now, pay later (BNPL) options or embedded lending.
• Risk Management: BaaS providers offer fraud prevention and risk management tools to protect SMBs from financial losses.
• Customer Experience: By integrating financial services into their offerings, SMBs can enhance the overall customer experience.

The Role of BaaS in the Fintech Ecosystem

BaaS is a critical component of the fintech ecosystem, fostering innovation and competition. By democratizing access to financial services, BaaS has lowered the barriers to entry for fintech startups, leading to a proliferation of new and innovative financial products and services.

Furthermore, BaaS enables collaboration between fintechs and traditional financial institutions, creating new partnerships and business opportunities. For instance, fintechs can develop specialized financial solutions that complement the core banking services offered by traditional institutions.

Challenges and Opportunities

While BaaS offers numerous benefits, it also presents some challenges. Security and data privacy are paramount concerns, as sensitive financial information is involved. Additionally, ensuring seamless integration between BaaS platforms and fintech applications requires careful planning and development.

Despite these challenges, the potential of BaaS is immense. As technology continues to advance, we can expect to see even more sophisticated BaaS platforms emerge, offering a wider range of financial services and capabilities. The convergence of BaaS with emerging technologies such as artificial intelligence (AI) and blockchain has the potential to revolutionize the financial industry further.

The Role of Accountants in the BaaS Era

As BaaS continues to reshape the financial landscape, the role of accountants and CPAs is evolving. With their financial expertise and regulatory knowledge, they can be invaluable partners for both fintechs and SMBs navigating this new terrain.

Specific Services

• Due Diligence: Conducting financial due diligence for fintechs seeking investment or partnerships.
• Financial Analysis: Analyzing the financial performance of BaaS-enabled businesses and providing insights for improvement.
• Audit and Assurance: Providing assurance services to BaaS providers and their clients, enhancing trust and credibility.
• Tax Planning: Developing tax-efficient structures for BaaS-based businesses.
• Cybersecurity Risk Assessment: Evaluating the cybersecurity risks associated with BaaS and recommending mitigation measures.

In conclusion, BaaS has become a catalyst for innovation in the fintech and SMB sectors. By leveraging their expertise, accountants and CPAs can become trusted advisors to fintechs and SMBs, helping them maximize the benefits of BaaS while mitigating risks.

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The Rise of FinTech

The FinTech industry has experienced exponential growth in recent years, driven by several factors. Firstly, the increasing adoption of smartphones and internet connectivity has made financial services accessible to a wider audience. Secondly, the demand for personalized and efficient financial solutions has fueled the development of new FinTech products.

Core Areas of FinTech

FinTech encompasses a broad spectrum of activities, but some key areas have seen significant innovation.

• Payments: FinTech has revolutionized the way we pay, with digital wallets, peer-to-peer payment platforms, and mobile payment solutions becoming commonplace. These platforms offer convenience, speed, and security, making transactions seamless for consumers and businesses alike.
• Lending: Traditional lending processes can be time-consuming and bureaucratic. FinTech companies have streamlined the lending process through the use of algorithms and data analytics to assess creditworthiness more efficiently. This has led to the rise of alternative lending platforms, providing access to credit for underserved populations.
• Wealth Management: FinTech is democratizing wealth management by offering robo-advisory services. These platforms use algorithms to create personalized investment portfolios based on users’ risk tolerance and financial goals. This has made investment advice more accessible and affordable.
• InsurTech: The insurance industry is undergoing a digital transformation, with FinTech companies leveraging technology to improve underwriting, claims processing, and customer experience. InsurTech startups are also developing innovative insurance products tailored to specific needs.
• Blockchain: This underlying technology of cryptocurrencies has the potential to disrupt the financial industry by providing a secure and transparent platform for transactions. Blockchain can be applied to various areas, including payments, remittances, and trade finance.

Challenges and Opportunities

While FinTech has brought numerous benefits, it also faces challenges. Cybersecurity is a top concern, as financial data is highly sensitive. Regulatory compliance is another hurdle, as the FinTech landscape evolves rapidly. Additionally, consumer trust and education are essential for the widespread adoption of FinTech services.

All this said, accounting firms are not inherently FinTech companies. However, they are significant consumers and adopters of FinTech solutions.

The Role of QuickBooks and Similar Software

Software like QuickBooks is a crucial tool for many accounting firms, but it doesn’t automatically categorize them as FinTech. These platforms are more accurately described as accounting software, providing essential tools for managing finances. While they incorporate technology, they primarily focus on streamlining accounting processes rather than developing innovative financial services.

Accounting Firms as FinTech Adopters

Accounting firms often leverage FinTech solutions to enhance their services. This can include:

• Cloud-based accounting software: Enabling real-time access to financial data and collaboration.
• AI and machine learning: Automating tasks like data entry and fraud detection.
• Data analytics: Providing insights into financial performance.
• Blockchain technology: Ensuring data security and transparency.

By integrating these FinTech tools, accounting firms can offer more efficient, accurate, and value-added services to their clients.

The Blurring Lines

The distinction between accounting firms and FinTech companies can be blurred in some cases. Some accounting firms are developing their own FinTech solutions, such as:

• Creating proprietary software: To automate specific accounting processes or provide specialized financial analysis.
• Partnering with FinTech startups: To offer new financial services to clients.
• Investing in FinTech companies: To gain access to innovative technologies and potential returns.

While accounting firms are not typically classified as FinTech companies, they are essential players in the FinTech ecosystem. Their adoption of FinTech tools is driving innovation and improving the efficiency of financial services.

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Broad Challenges for SaaS Companies:

Unlike traditional software, SaaS offerings are often delivered digitally, blurring geographical boundaries. This makes it difficult to determine where to collect and remit sales tax. This compounds with ever-evolving regulations in different jurisdictions.

Research & Development (R&D) Credits: While SaaS companies often invest heavily in R&D, claiming the associated tax credits can be tricky. Qualifying activities and documentation requirements can be complex, requiring careful planning and record-keeping.

Establishing “nexus” – a physical or economic presence – in a state can trigger income tax filing requirements, even if you don’t have a physical office there. Managing this across multiple states can be a significant administrative burden.

Then, of course, there’s the subscription model. Recognizing revenue for recurring subscription fees can be complex compared to traditional product sales. Understanding the different methods and their tax implications is crucial.

Unique Challenges for Seattle-based SaaS Startups:

Of course, being based in Seattle — the veritable hub for tech innovation — presents additional considerations:

• Washington State Business & Occupation (B&O) Tax: The B&O Seattle tax applies to gross revenue for most businesses, including SaaS companies. Understanding the specific rules and potential exemptions for SaaS offerings is crucial.
• Seattle Business Tax: The city of Seattle levies a separate business tax on gross revenues exceeding $1 million.

That said, there’s positive opportunities as well, such as local hiring opportunities.

Seattle offers various tax incentives and benefits for companies that create jobs and promote economic development. Exploring these programs can provide significant financial advantages for your SaaS startup.

These programs aim to attract and retain talent within the local community, fostering a thriving tech ecosystem. Working with an experienced accountant can help you navigate these programs and determine if your company qualifies for any available benefits, potentially reducing your tax burden and enhancing your local hiring efforts.

Deductions to Capitalize On:

As tax day approaches (April 15th), don’t miss out on these potential deductions:

• Startup Costs: Up to $5,000 of qualified business startup or organization expenses can be deducted in the year they are incurred.
• Home Office: If you run your business from your home, you may be eligible to deduct a portion of your rent, utilities, and other expenses.
• Marketing and Advertising: Expenses related to marketing and promoting your SaaS product are generally deductible.
• Professional Fees: Legal and accounting fees associated with starting and operating your business can be deducted.
• Employee Benefits: Employer contributions to health insurance, retirement plans, and other employee benefits are typically deductible.

Investing for the Future

Beyond immediate deductions, consider strategies for long-term tax optimization. For instance, entity selection. Choosing the right business entity (sole proprietorship, LLC, or corporation) can have significant tax implications. Consult with an experienced advisor to determine the best structure for your company.

Additionally, cloud computing is essential for most SaaS businesses. These expenses can be deducted or capitalized depending on the specific service and usage. Understanding the difference helps optimize your tax strategy.

Research & Development investment. Consider increasing R&D efforts to qualify for valuable tax credits. Remember, proper documentation and record-keeping are crucial for claiming these credits.

All in all, navigating the complex world of tax regulations can be overwhelming, especially for busy startup founders. Partnering with an accounting firm experienced in the nuances of SaaS business models can be invaluable. We can help you:

• Stay compliant with all federal, state, and local tax regulations.
• Develop a tax minimization strategy that maximizes your after-tax profits.
• Claim all available deductions and credits.
• Plan for future growth and potential tax implications.

By seeking professional guidance and implementing informed strategies, you can ensure your SaaS startup thrives not only in the competitive market but also flourishes financially, leaving you free to focus on what matters most – growing your innovative business.

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Ignoring profitability for too long leads to potential cash flow issues, inability to scale, excessive dilution for founders, and pressure from investors. So what are the key things that founders and executives at SaaS businesses need to focus on to set their company up for profitable growth? Here are the top 5 areas:

1. Optimizing Customer Acquisition Costs

When it comes to SaaS metrics, Customer Acquisition Cost (CAC) is one of the most important. This refers to the average cost it takes to acquire a new paying customer. The lower this number can be kept, the quicker breakeven is reached with customer contracts, and the faster gross margins improve.

Top performing SaaS companies analyze metrics like total sales and marketing expenditure over a period divided by the new annual contract value closed over that same period. The target benchmark should be around $1 or less in spending for every $1 of new annual revenue. So if total sales and marketing costs over 3 months were $300,000 and this generated $450,000 in new customer contracts, the $300k/$450k = CAC of $0.67 is very efficient.

Anything up from $1.00 or more means payback periods on sales outlays stretch longer, putting more pressure on capital requirements. So SaaS founders must continually experiment with sales motions and marketing channels to optimize CAC – whether that’s influencer programs, SEO, trial self-service signups, enterprise sales teams, or ideally all of the above with strong retention.

2. Focusing on Retention and Net Dollar Retention

While new customer acquisition is essential, retaining and expanding revenue from that existing customer base is even more important over the long run. This is why top SaaS companies track and manage metrics like churn and net dollar retention with the same level of intensity as sales growth rates.

Churn refers to the percentage of customers that cancel or elect not to renew their contracts over a period. The best SaaS startups target keeping this churn percentage as low as possible, averaging 5% monthly churn or less (equating to 15% or less annual churn).

Net dollar retention compares expansion revenue to lost revenue from cancellations and non-renewals. Leading companies benchmark for 100%+ net dollar retention consistently. This means expansion revenue at least offsets churn, creating negative revenue churn. Reaching 120%+ net dollar retention is exceptional, fueled by customers increasing contract values and seat volumes over time as they derive more value from the product.

Accomplishing high retention and expansion levels relies heavily on stellar product design and customer success teams that proactively guide customers to gain more value and adoption. These teams essentially ensure the product becomes indispensable to the customer.

3. Crafting Pricing Plans and Packages

Pricing is another fundamental driver of SaaS company profit margins. This does not necessarily mean chasing the highest price point possible, but rather finding the optimal balance across customer segments based on willingness to pay.

For B2B SaaS products especially, wide variances can exist between enterprise, mid-market, and SMB customer needs and budgets. Top companies design pricing plans and feature packages carefully mapped to each tier. Key aspects like number of user seats, level of support/service, functionality limits, and data access controls help separate various packages.

This “good, better, best” plan approach makes it easier for buyers to understand what offering aligns to their requirements and budget rather than having to negotiate one-off custom deals constantly. It also allows simpler product development mapping what features apply at which plan levels over time.

Another pricing best practice is gradually building in modest price increases over multi-year contract terms rather than waiting to renegotiate much larger increases on renewals. This minimizes sticker shock down the road.

4. Maintaining Cost Discipline

While nailing customer acquisition, retention, and pricing models provides upside opportunity, closely managing costs is equally as important to reach healthy profit margins over time. Efficient SaaS operators benchmark for roughly 70%+ gross margins at scale.

This means keeping the cost to deliver software and support customers to around 30% or less of revenue. Areas like human capital, infrastructure expenses, third party tool costs, and facilities contribute heavily here. Unit economics modeling that accurately forecasts long-term costs per customer compared to LTV helps guide smart decision making.

Dumping excessive funding into inflated headcount, expensive office spaces, overly generous perks, and low-ROI activities threaten this cost discipline quickly however. The best leadership teams take a targeted approach to company spend – hiring critical roles slowly, matching hosting capacity to usage, limiting unnecessary tools creep, and normalizing remote policies.

5. Extending Runway Through Capital Efficiency

A final but often overlooked area is capital efficiency in funding rounds. The more value that early employees can retain while minimizing outside dilution, the more incentivized they remain to build the company sustainably.

Top startups raise enough capital to fuel operations for ideally 12-18+ months in a round rather than having to constantly recycle into the next raise every 6 months. This extends runway substantially even if at somewhat higher valuations. It also shows financial planning prowess to investors.

Coupled with the cost control measures mentioned above, extending cash burn timing locks in more value for the team early on. Then in later stages, the focus can shift more heavily to scaling profit margins rather than just growth rates.

Mastering even some of these areas early creates compounding effects over time. The ultimate path to profitability relies on compelling products that customers genuinely rely on, efficient acquisition pathways, methodical expansion of accounts, disciplined spending, and non-excessive funding rounds. SaaS founders who can balance these dimensions build companies that generate profits at scale.

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Eligibility and Past Exemptions

Different exemptions have come into law at different points in history. Here is a brief recap of how this tax break has worked in the past leading up to the present:

• Stock issued after Aug. 10, 1993 – 50%
• Assets received after Feb. 17, 2009 – 75%
• Stock issued Sept. 27, 2010 or afterwards – 100%

Eligibility for these tax breaks depends on a couple of factors. Firstly, the corporation seeking the tax break must have $50 million in gross assets or less at the time of issuing qualified small business stock. Secondly, the share holders must then hold onto their investments for 5 years or more.

Managing the Tech Industry Tax Breaks

The tax breaks have been a gift to both tech companies and to their investors. However, a 100% write off may be excessive. While investors may not be happy to begin getting a tax bill when they sell their stock, others have said that the tax breaks don’t fuel innovation as much as one would think.

In fact, Bryan Springmeyer of Springmeyer Law in Berkeley, California stated that out of the thousands of entrepreneurs he’s worked with, not one of them started their company because of the current tax provision.

It should also be mentioned that cutting the tax break from 100% back down to 50% is expected to save $5.7 billion over the course of the next 10 years. This is a substantial amount of savings, but the Columbia Law Review stated that the exemption may be worth much more in the long run.

Ultimately whether or not this proposed tax break roll back goes into affect will have a greater impact on investors in the tech industry rather than the companies themselves. Like many pieces of legislation, the supposed benefits and drawbacks are theoretical until it goes into law, and the actual effects can be seen first hand.

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It is undeniable that the revenue records originate from amazing products coupled with exceptional services. Below are ways through which big firms generate revenue.

Online Stores

With the rise of knowledge in industry science, people can transact from different parts of the world. As a result, tech companies invest in e-commerce businesses where they sell products and services via the web.

They also embrace different e-commerce models, which include:

• B2B (Business to Business) – In this case, one business sells merchandise to another for resale or use.
• B2C (Business to Consumer) – where a business sells goods or services to the end-user.

When businesses and individuals use the platform to sell their merchandise, tech firms take a portion of the sales.

Advertising

Businesses exist to provide services in exchange for profit. However, the market competition has forced companies to employ strategies that influence the purchasing behavior of individuals. Tech companies take advantage of this opportunity and provide a platform through which other companies can upsell their products.

They display ads on their websites, social networking sites and mobile applications. Advertisements may appeal to consumers leading to an increase in sales. Marketers who wish to make advertisements through these platforms pay the tech companies depending on the number of clicks, impressions and actions made by users.

Developing and Selling Products

Technology companies make a lot of money by developing a wide range of products for personal and professional use. The products vary from advanced hardware equipment, software, product solutions and home appliances. In addition, some tech companies make money by selling physical products. 

These commodities include mobile communication gadgets such as smartphones and tablets. Others specialize in the manufacture of computers, digital watches, computer peripherals, and communication-related products. Some companies concentrate on making home appliances and electronics. 

Intangible products include games, computer programs, cloud services, consulting services, product solutions, and mobile apps.

Freemiums

Freemium is a model for business where tech companies offer basic services for free and advanced features at a cost. Some of the freemium models include:

• Time limitation: Here, a product or service is available for a specified duration. Once the duration has elapsed, you have to pay to continue enjoying the service.
• Storage limit: In this model, a company offers you limited storage capacity. To exceed the set limit, you need to pay for it.
• Advertisement limit: The basic product has ads and you pay a monthly fee to take them away (course, they can also make a profit off serving ads.
• Usage limit: In this scenario, the free model has very limited features. The higher you pay, the more access you get to the given product.

While there are myriad ways tech firms make money, big companies can decide to use one or a combination of ways to attain huge profits. Start-up tech firms could use these strategies to grow and establish themselves in the industry.

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Go Paperless

It may be obvious, but going paperless is an excellent way of cutting costs. Ditching physical paperwork and opting to store data (contracts, invoices, documents, etc.) on the cloud is judicious. It’s not simply that printing eats up paper and ink (although those minimal costs do add up), but having all your forms easily accessible online saves you time. No waiting for your accountant to return, no digging around file cabinets, or revisiting the original intake order from the client — these minor minutes add up to wasted hours, days, and weeks. When you have all your paperwork digitized, you have immediate access to everything you need, saving time and money. It is imperative to transition to digital invoice, billing, and payroll systems to cut on recurring business expenses.

Marketing Your Business Online

Small business owners should ditch the traditional marketing strategies of having individuals go out to market their business. While “word-of-mouth” can be a huge driver of business, it’s difficult to quantify. Making an online presence however is as necessary as it is cost-effective. Not only do people expect a website for a business to look credible, but it is far less costly to create a blog and market your business from the comfort of your home. Social media is inescapable and is now an expectation for businesses as it offers customers an immediate lifeline to the product or service. Online marketing doesn’t require huge costs as the only initial requirement is an internet connection.

Start With Fewer Features

This is something many entrepreneurs learn first-hand from Eric Ries’ The Lean Startup method, wherein, when you try to develop a product that does everything, you wind up with something overcomplicated that most users won’t know to use. No where is this more true than in tech companies. Most tech startups want to develop myriad features to beat their competitors. However, the issue these entrepreneurs run into is added costs and time loss developing functionality that users do not find helpful or necessary.

Again, consider Eric Ries instant messenger app where countless hours were lost trying to get users to import their contacts from an existing messenger app when the reality was, users wanted to make “new connections” on the new app, not share or import their existing connections.

Start-up techs should consider having a product with fewer features. It helps to collect feedback from your target customers on the features they find helpful and the features they require you to add. Meanwhile, you can add 1, 5, and 10 year plans where you may want to add certain features, but put a pin in those for growth. Take your time to grow. As Bruce Lee once said (in paraphrased terms), “I fear not the app that has 100 features, but the app that has perfected one feature 100 times over.”

Hire Fewer People

Again, this is one of those areas that may seem obvious, but when you’re in the thick of your startup, it’s something that can be lost. Hiring and recruiting employees can be costly. Though you are setting up a business with a prosperous mind, uncertainty always looms on the business horizon. It is judicious to hire the only people you need at the specified moment, such as a product manager and CTO. For other positions that you may require employees, consider outsourcing or freelancers to do accounting tasks, content writing, and web designs. While having myriad in-house employees may seem like a good idea, it’s a lot of moving parts and, in the unstable startup world, could put your company at risk if that person leaves the company. For instance, outsourcing your tech support and web design is a great way to ensure longevity since they the outsourced agency must continually earn your business.

Similarly, some tech companies go the opposite approach and hire myriad, less costly employees, but when you expand rapidly, it can lead to things being dropped, forgotten, and a general since of “too big, too fast.” Hire essential people, treat them well and outsource where you can.

Go Remote

Renting out office space at the start of your business is not a great idea (especially considering the current circumstances), but especially since you can operate within the confines of your house. Most tech companies are growing big while working remotely and using collaboration tools (Skype, Zoom, Google Hangouts, etc.). Going remote saves on the money that would be spent on renting out some space. Going remote also helps you to move from metropolitans to cheaper rural towns. Last, it also enables you to broaden your search; you aren’t limited to people within your geographic radius, but can literally hire the top talent (often for less money) halfway across the country.

Photo by Paul Calescu on Unsplash

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