What is the minimum cost to run a software company?

OK, so you have a great idea for a web app, and you're going to start a business around this product idea charging a monthly fee for the app. Let's keep things really simple and say you're going to charge £19.99 a month (of course in the real world you may have a range of plans).

Here's a list of the minimum of what you'll need to provide your application on a monthly basis. (We'll ignore one-off items for now such as company registration and a computer);

Gives a total monthly cost of £530 (an office isn't necessary for the absolute minimum, but imagine you have a busy/noisy house and need to escape somewhere to work)

Assuming the company will be VAT registered then the VAT part of £19.99 is £2.61

Also assume you'll be using PayPal or some other payment gateway and merchant account. Either way you'll be looking at nearly 4% as a handling fee, which equates to £0.80

So after these costs each £19.99 is worth £16.58 to us.

Our minimal costs above of £530 equates to 32 customers.

Next is a salary, so far we just covered the minimum to run the company. If we're looking for a annual salary of say £30,000 with employers national insurance of ~10% on top this gives us ~£33,000, which is £2750 per month or 166 customers. (Another assumption we're throwing in here is that 1 person can run the whole company.)

We have a total monthly paying customer requirement of 227 paying customers.

I came across this article by the ever interesting Dennis Howlett, referencing an article on xero.coms web site, with this chart.

Using Xero here as an example as they have published their customer figures, you can see from this chart it took Xero 14 months to break the 200 customer barrier. Their blog article points to interim accounts, which show they are burning through millions of dollars and have 55 staff on the books. And it took them 14 months to break 200 customers. Positively for them, the chart also shows that in Jan 09 their uptake has jumped massively and that reaching a certain volume of customers seems to validate the product and a hockey stick uptake can occur.

As with everything in business it will come down to product and execution. If you come up with a product that really solves a problem, deliver it well, the uptake could be very rapid. Xero is probably a good yard stick as accounting software is an app every business needs, so for a generic product their figures are a good reference. Therefore to assume a customer growth faster than theirs would require a very defined route to market.

In summary running a SAAS company providing a product at £19.99 a month, requires a minimum of 227 paying customers to cover company costs and pay an annual salary of £30,000. And reaching that level of paying cutomers will in all likelyhood take well over a year and possiblely many more. Not impossible to do, but provides a reality check when thinking 'I've got a good idea for a web app'.

Do these figures look valid to you, is there anything you would add or remove from the minimum costs? Please leave a comment and I'll update the costs, the aim is to detail accurately the minimum costs to running a SAAS company, or do you think the possibility of bootstrapping a SAAS business has now passed and a large initial capital injection is required?