The Startup Ideas Podcast - How to build a $1M+ vertical SaaS business (step-by-step guide)

Episode Date: September 25, 2024

Join me as I chat with Luke Sophinos, Founder & CEO of CourseKey, as we discuss the frameworks and strategies for building a successful vertical SaaS business. Learn how to find, validate, and launch SaaS opportunities!Timestamps: 00:00 Intro01:51 Why Vertical SaaS?05:46  How to pick your vertical11:05 Understand the industry inside-out19:11 Analyze existing solutions22:02 Automating the ideation and validation process with AI35:04 Go-to-market strategy is CRITICAL40:19 The power of the wedge product49:35 Pricing framework1) Why Vertical SaaS?• Market often overlooked by VCs chasing unicorns• Opportunity to build enduring businesses with strong retention• Still massive potential in 2024, even in "boring" industries2) How to pick your vertical:• Focus on industry, not idea• Look for:a) Large market size ($1B+)b) Fragmented (many SMBs)c) Mix of small, mid-market, enterprise3) Understand the industry inside-out:• Map end-to-end operations• Get hands on P&Ls• Follow the money - where are they spending?• Identify areas still using pen & paper4) Analyze existing solutions:• Look for legacy providers• Identify where they're using horizontal solutions• Find gaps where AI/FinTech could add value5) The power of the wedge product:• Your "get in the door" offering• Should be:a) Easy to implementb) Solves a critical problemc) Ideally free or low-cost• Example: Roofer․com's proposal tool6) Go-to-market strategy is CRITICAL:• Many industries require relationship-based sales• Product-led growth is ideal (but rare)• Get creative: Industry newsletters, memes, etc.7) The payments opportunity:• Owning the transaction can 10x your market size• Build before/after transaction, then capture it• Example: Toast in restaurants8) Pricing framework:• Understand current spend on problem you're solving• Price based on ROI you deliver• Aim for 20-50% of value created9) Keys to success:• Only build products that:• Increase revenue• Decrease costs• Prevent churn• Maintain compliance10) Validating ideas:• Don't just Google search• Talk to actual businesses• Offer to buy lunch and shadow operationsWant more free ideas? I collect the best ideas from the pod and give them to you for free in a database. Most of them cost $0 to start (my fav)Get access: https://www.gregisenberg.com/30startupideas 🎯 To build your own portfolio businesses powered by community you might enjoy my membership.You'll get my full course with all my secrets on building businesses, peer-groups to keep you accountable, business ideas every single month and more!Spots are limited.https://www.communityempire.co/📬 Join my free newsletter to get weekly startup insights for free:https://www.gregisenberg.com/70,000+ people are already subscribed.To improve your rankings your business on Google and using AI for SEO, sign up tohttp://boringmarketing.com/FIND ME ON SOCIALX/Twitter: https://twitter.com/gregisenbergInstagram: https://instagram.com/gregisenberg/LinkedIn: https://www.linkedin.com/in/gisenberg/FIND NICK ON SOCIALX/Twitter: https://x.com/lukesophinosLuke’s Newsletter: https://www.newsletter.lukesophinos.comLuke’s vSaaS Bible: https://verticalsaasbible.com

Vertical sass. You've probably heard the name and you're probably like, yeah, I wish I can create a vertical sass that prints millions of dollars. Well, I brought on the number one guy who talks about vertical sass. He's got the vertical sass Bible and He spills all his secrets on the step-by-step way to create a vertical sass. This is a guy Luke Saffinos who's got a vertical sass business that prints millions himself. He's a a vertical SaaS advisor to Atomic, which builds billion dollar businesses like him's and hers. And this might not be the most exciting podcast I've ever done. Might actually be a little bit boring. And that's the point. Vertical SaaS is boring, but that's why there's so much opportunity.

And we do use AI to come up with some fun idea. So watch the whole thing and take some notes. Enjoy. All right, I got my man, Luke, to come on and teach us about vertical SaaS, vertical software. And I know it sounds boring, but if you stick to the end of this, you're going to come out with a lot of knowledge. He's going to teach us the vertical SaaS Bible, and I'm excited to dig right into it. Awesome, Greg. Thanks for having me, man. Looking forward to it. So where do we start? You know, do we want to start with why?

vertical SaaS? Yeah, let's do that. Let's start with why vertical SaaS. So I think, you know, my thesis on this is is relatively simple and straightforward. And, you know, vertical SaaS isn't something that's new. You know, if you look back all the way to when first people really started creating software, use cases were all tied to businesses. It was tied to how can we better optimize, better, you know, create more efficiency, right? Create cost savings, time savings, revenue lift, blah, blah, blah. But I think somewhere in the last kind of 10, 15 years, a lot of that got lost and we got into the sexy, you know, VC, let's chase massive billion, multi-billion dollar opportunities and go unicorn hunting. And so what happened is you had a bunch of founders

that moved away from industry-specific software. Well, why? Because they're market constrained. You're only going after one market. And, you know, for a VC, there's just not a lot of, of individual industries that can create these, these extraordinary outcomes that they need to see. And so all these founders started chasing really broad kind of startup concepts. And obviously, you had huge winners in that, but you had a lot more, you know, grave sites. So I've looked, really, I spent the last decade building, you know, a vertical SaaS business in trade schools, which is probably one of the most boring industries you can you can contemplate but there's so much opportunity for still today in 2024 to not go build the shiny sexy thing with limitless you know market size and

hone in and focus on one industry you know one type of business uh and build software tailored for them uh and build really great businesses that are enduring strong retention you know they don't necessarily have the growth rate that the VC guys want to see in most cases. But you can build great businesses in these settings. So I'm obviously bullish on it. I've dedicated my career to it. And that's what I do. Cool. Yeah. And it's working. Like you're making millions of dollars a year in revenue. And through the process, I think, and that's why I wanted to bring you on is you've kind of figured out a playbook for the different types of vertical SaaS businesses, how to think about wedges. which is like a wedge product,

which is something I really would love for you to get into, how to think about picking a market for your vertical SaaS. And maybe I'd also just love you to go through pricing. Like how do you think about pricing your vertical SaaS? So where do you want to start? Yeah. So let's start on how to dive in and actually start one of these things. And so I think it's much more of us.

I think vertical SaaS is much more of a science than an art. I think people believe starting a software business is this artistic thing where you got to come up with some crazy big idea and you know, you got to hold it close to the vest and you can't tell anybody about it and you got to raise millions and millions of dollars. I think it's a very like mathematical, scientific approach in vertical software. And so I'd love to just walk everybody kind of through how I think about that as a place to start. And that'll lead well into wedge products. And we can give examples. of wedge products and, you know, how to actually get in the door at some of these businesses. How does that sound? That sounds perfect. Let's rip it. Let's rip it.

I like it. Jam session, baby. All right. I'm going to, I'm going to share my screen. I'll talk through this for those that are listening, but I've got a bunch of stuff kind of outlined in my quote-unquote Bible here. So let me, let me pull this up. All right.

So the first thing that you're going to see here is you're, it's, it's, it's, it's, it's, And again, back to science. So I'm a big believer in picking a industry and not an idea. So you don't come up with an idea at all. That's not the first step. That's not even the 10th step. So you have to focus on an industry. And there's certain characteristics that make an industry a really good opportunity for

vertical SaaS, right? So I have this checklist. We'll go through all the checklist. But the first thing I like honing in on is like, all right, how do I know what industries are out there? Well, there's a bunch of great resources. I've mapped out over a thousand industries. And I map them out on a couple of key things. The first one is how big they are, right? So what are the companies in those end industries actually do from a revenue standpoint? So you can see the biggest industry in the U.S. right now is general medical and surgical hospitals. They're doing

nearly a trillion in revenue and there's 2,500 companies. So the first thing I like to look at is revenue. But the second thing that's very important is how many companies are in that industry. And why this is important, well, you can see in surgical hospitals, there's only 2,500 companies in that space. So that means it's incredibly enterprise driven, right? Selling into the enterprise is incredibly difficult. You have to have a ton of product in massive feature sets to actually get something in there. So I hate top heavy industries, especially if you're a bootstrapper and you're not trying to raise, you know, tens of tens of millions or hundreds of millions of dollars.

So the segmentation and how the industry is actually broken down is is hyper, hypercritical. So the best markets to look for are, you know, bigger, bigger the better, right, especially if you're doing a venture kind of opportunity. If you're doing bootstrap, it doesn't need to be that big, but a solid amount of operating revenue. and then the segmentation. So what do I mean by that? Well, there's a healthy mix of small businesses, right? Businesses that do a couple million dollars a year in revenue. There's a healthy distribution of mid-market businesses.

You know, maybe those are companies doing 10 to, you know, 50 to 100 million dollars a year in revenue. And then business enterprise, so over $100 million. Why that's important is because as a software company, it's so much easier to get into SMBs. they require less. You can get in with a smaller feature set or maybe even one feature. And then you can add to that capability, kind of grow up a little bit, you know, take the punches

and develop kind of broader feature sets that can then go serve a midmarket and then an enterprise. So the first two things I have to look for when I'm thinking about this is, again, not an idea. We haven't even talked about an idea yet, right? It's how big is it and what's the particular segmentation? Shh, don't tell anyone, but I've got 30 plus startup ideas that could make you millions. And I'm giving them away for free. These aren't just random guesses.

They're validated concepts from entrepreneurs who've built $100 million plus businesses. I've compiled them into a one simple database. Compiled from hundreds of conversations I've had on my podcast. But the main thing is, most of these ideas don't need a single investor. Some cost nothing to start. I'm pretty much handing you a cheat cheat. The idea bank is your startup shortcut. Just click below to get access.

Your next cash-loving business is waiting for you. Questions there. Does that make sense? Yeah, go back to that for a second. When you scroll on this list, what is one or two industries that you're like, whoa, there's something here and I need to dig in. And why? Yeah, so I've broken these down actually into like individual scorecards.

So there's a couple that I really like here. So the first one that I love that I think is dying for a vertical SaaS business is machine shops. So why is machine shops interesting? Well, going back to that list, it's 200. 62 billion or 240 billion in revenue. There's 22,000 of them and it's beautifully segmented, right? So the higher this number is the better. This is basically a score. So I'm taking all thousand industries and, you know, this is up at the top of 763. So if I actually look at

machine shops, it checks a ton of my boxes because it's highly fragmented. There's a healthy amount of small businesses to go after, mid-markets to go after in a few enterprise. And the average machine shop is doing $2 million a year in revenue. Right? There's $17,000 of them. So this looks like a perfect place to build a vertical SaaS company right now. It's got a beautiful market size, beautiful segmentation. And then I have a couple on the list here that kind of things I look at after that initial piece that we'll go into. And what do you say to people who are like, wow, he's right, there is an opportunity in machine shops, but I live in Tribeca and I've never even visited a machine shop in my entire life. I don't know anything about it. Is there still an opportunity

for people? Yeah. So look, I didn't know anything about trade schools. I went to traditional education. Like I had family that went through the trade school route. But I, you know, I lived in California. I was like a tech guy, right? I started my business in college. And, you know, obviously, if you have the domain expertise and you spent a bunch of time in machine shops, right? You're going to be a step ahead of someone who hasn't. And there's a correlation with successful outcomes and actually having the industry expertise, but it's not a requisite at all. So, you know, we've built one of the biggest vertical SaaS businesses in the country for trade schools. And it's, I didn't know anything about trade schools until I started a decade ago. So there's hope. There's hope for you. Okay, cool.

I mean, look, I think it takes, again, it's back to more of this is science versus art, right? So you have to go and you have to learn everything about machine shops as you possibly can. And there's opportunity and boring, right? And I don't look at vertical software as boring because I like, I think it's incredible problem set. It's, you know, it's a puzzle that you got to put together. And the way that I try to learn about machine shops, and this, I'm sharing now on my screen something from Toast S1. So toast is a publicly traded vertical SaaS business. A lot of people know about it. They do restaurant software. Right. And what they did in their S1 is they actually visualized a restaurant in every aspect of its operations end to end. And so this is a very important part in determining if there's an opportunity in machine shops beyond the few characteristics that I talked about, right? So you have to map out the entire customer journey and the entire operations of the businesses within the industry that you're going to serve. So in ToastS1, they literally have visualization of every aspect of the restaurant, the back office, the kitchen,

the bank, the delivery piece, right? The actual restaurant itself, the bar, you know, people at home that are trying to find out about the restaurants with websites and marketing. And so you have to really understand machine shops, even if you're in Tribeca. And I did this at Korski, too. So here's my example for trade schools. Like we have, we understand, all right, the first piece of a trade school is admissions, right? It's finding students to enroll them. The second piece is actually training them.

Well, how does that look? It's not actually a classroom setting. Like they're training them in a garage, right? And they're training them with a real car. for an automotive example. And then you have all these other bits and pieces. I don't have to go into all of them. The IT team, the student services,

the compliance and regulatory piece, the placement group is actually responsible for getting folks in there. And as you actually visualize the end-to-end operations of the businesses within the industry, this is how you start to actually identify, where is the software opportunity and how big is that software opportunity?

I've never thought about it like this. and it makes so much, it's so much sense, because I always think about it from the software perspective. So there was a famous blog post called the unbundling of Craigslist, a guy named Andrew Parker wrote it, where he visualized Craigslist and all the different pieces of it and how each part was getting unbundled into, you know, I guess vertical software. So, for example, you know, there were dating, you know, people use Craigslist for dating. And then dating apps came out. People use Craigslist for short-term rentals. Airbnb came out and there's, you know, better versions of it. And I've actually written a post called the unbundling of Reddit, which is kind of the same idea, different subreddits, different, you know, vertical software. But this is kind of taking it and flipping on its head. It's saying

these are industries that have a huge physical component to it, visualize it, and then thinking about, okay, where does software play a role in making this way more efficient? Yeah, no, totally. And I, you know, it doesn't necessarily need to have a huge physical component to it, but you have to map out and visualize the end-to-end operations of any industry that you're intrigued about. You want to go after. I mean, that's the nature of vertical software. So it's there's a, you know, I have over a thousand industries in here, right?

Pharmacies, restaurants, banks, chiropractors, gas stations, you know, IT, services, right? Home centers, home health care is a really interesting one. Furniture stores is a really interesting one. Churches. There's so many industries. I have a thousand. The better business bureau has over 5,000. And so it's the science of, and we haven't even scratched the surface yet. We're just getting started, which I love. But it's how big is it? What's the segmentation? And then let's actually map out and understand kind of the end business operations. and what that looks like from A to Z. All right.

Let's keep going. Hit that scorecard. So there's a couple other things that I like to do beyond that piece. I'll jump back to the scorecard here. So the first piece is outside of, now that I've mapped out that particular, you know, end-to-end operation, something that's really important to do is get your hands on as many P&Ls as possible. So you want to look at as many P&Ls as you can from as many businesses in said industry as possible. So an easy place to start is looking at like publicly traded companies within that space and looking at their P&Ls.

Another hack that I love is I talk to as many bankers within that industry as possible. Bankers are an incredible source because they buy and sell companies all day and they typically are industry focused. And so when you get your hands on a bunch of P&Ls, you actually start to understand where are these companies spending money. And so like one of my core beliefs in software is you have to build software that either increases revenue, decrease costs, or prevents customer churn. And then depending on the industry, a fourth one would be maintains compliance. So some industry is highly regulated. that becomes like a need to have and not a nice to have some industries don't care about it. But every single business and every single industry, the CEO is trying to, and the owner

is trying to increase revenue, decrease costs, prevent as much customer, you know, churn as possible. And so I want to understand when I look at those P&Ls, like where is the money going? How much of it is being spent on people that could be automated with software, right? and in what specific functions. How much of it is being spent on software? All right. What software are they spending money on and how much are they spending on it? And what is it actually delivering or doing for them?

It's one thing, what they're saying it's doing. It's another what it's actually doing, right? But a P&L will tell you a lot. And you can start to really understand where existing expenses are going and how to create solutions that support, you know, the challenging pieces on that P&L. Makes sense. Follow the money.

That's the follow the money step. Yep. Yep. Absolutely. So outside of the following the money, the other thing I like to do is I like to spend a lot of time looking at the competition. And when I say competition, we don't even know yet what we're building, right?

We've talked about a few steps here, but we still don't even know what we're building. We're not supposed to even be idea focused, right? It's science, not art. So the next thing I like to do is say, okay, what are the existing software solutions looking like in this market? There's typically a couple of things that happen when you go deep dive on one industry. There's either massive legacy providers that are trying to do and probably are doing pretty

much everything A to Z, right? So if I go back to like the trade school example, there's probably like an ERP that's 30 years old that's doing all of this, right? So that will come up in some examples. Another thing when you're kind of studying the software competition, you'll see is, you know, is they're kind of pulling together a bunch of horizontal software solutions, right? So non-industry-specific software. So they're pulling together, you know, a CRM that's built for any type of business. They're pulling together a, you know, a source of truth or source of record or ERP that's built for any type of business. They're stitching together, you know, Slack and Gmail or Zoho or something.

And that's, I like those opportunities because it's super fragmented and they're dying for an all in one. You typically see one or the other when you dig into these industries. The third thing you see, and I promise you and people fight me on this, but I promise you, you see paper processes still. And it's 2024. I know you're going to be like, Luke, you're out of your mind. I don't believe you. We still see at trade school as a bunch of paper processes in some of these areas. But when you look at competition, it's important not to just search like trade school software, right? Like you have to look after you map out how these businesses operate A to Z. You have to look at each of these buckets and understand like what are they

actually doing in each of these key areas, right? And that's where you start to see interesting things coming because you'll say, oh my gosh, they're doing all their academics portion on paper, right? Or they're doing all their placement stuff with horizontal solutions. And this is right for a vertical component or all their compliance is like outsource, right, to some consulting shop. This is how you actually identify and uncover opportunities. It's not Google searching like restaurant software. Does that make sense? It does.

I'm just wondering if I'm, let's just say I'm building in the trade school space and I want to map out and I want to figure out who the competition is. Is there a way that AI and could kind of do some of that heavy lifting? Have you tried that yet? Quick ad break. Let me tell you about a business I invested in. It's called boringmarketing.com. So a few years ago, I met this group of people that were some of the best SEO experts in the world.

They were behind getting some of the biggest companies found on Google. And the secret sauce is they've got a set of technology and AI that could help you outrank your competition. So for my own businesses, I wanted that. I didn't want to have to rely on Mark Zuckerberg. I didn't want to depend on ads to drive customers to my businesses. I wanted to rank high in Google. That's why I like SEO, and that's why I use Boringmarketing.com, and that's why I invested in it.

They're so confident in their approach that they offer a 30-day sprint with 100% money-back guarantee. Who does that nowadays? So check it out. Highly recommend Boringmarketing.com. Yeah, you know, I like AI for the search component. You know, like we'll use chat GPT to just try to do a lot of the data. research piece of it. But my view of AI today is that a lot of this information we're talking about,

it's more like research reports and analyst reports. And so AI would be great for like the revenue size of the market, the segmentation of the market, right? More of these higher level pieces that a research company would put out. I think AI isn't going to do a great job yet on like what is every single step of the workflow for a, you know, a bank? Let's try it out just for fun. Let's try it. Let's see what it looks like. Okay, I'm going to share my screen real quick.

Okay, so what do you think I should prompt Claude maybe in your space? What do you think I should ask? Let's do, why don't we try the machine shop example? Okay, let's do it. We're going to. Yeah, why not? shops. So first question I'd ask it is like tell me about the market size in the, you know, in the United States for machine shops. For machine shops in the USA. And I'll give you like 15

questions to ask it. We'll see how it does. So that this is perfect, right? This is the, this is what we had. 40 billion annually, 25,000 machine shops, employs 300,000 people growing, to three percent. Industry is largely fragmented. Actually, this is amazing. I love it. With many small and medium-sized businesses, however, there are also a few larger players that are with some consolidation trends.

No real geographic distribution. Okay, so that's beautiful. So that's a perfect place to start, right? So the next thing I would go into is, let's pull up the scorecard. walk me through you know what a machine shop's operation looks like end to end

walk me through what a machine shop's operation would look like end to end oh man I love it this is so great changing the world I actually didn't expect it to be this good to be to be frank

it's good So what we're seeing if you're listening to is they have basically steps one through 14 with one being, if you scroll up, what was one again? It was requesting the quote. Yeah. So customer inquiry and quote, order processing, design and programming, material prep, setup, machining, quality control, inspection, documentation, package and shipping. Invoice and follow up, maintenance and cleanup. So this is beautiful. So the next thing I would ask it is like tell me what software solutions are, you know,

prevalent in the machine shop industry. And can you tie those back to, you know, the end-to-end process? Wow. Do we need to include? Do we need to qualify at this point? Like, do they need to be doing a million in revenue? Is that just complicating it? Or what do you think?

Yeah, maybe you just say like, well, you're saying what software solutions are prevalent, right? So is that enough? You think we have to be more clear. Let's let it read. Because you know what you could do. You can also say, like in this list and, you know, how many of these, how many of these softwares are like 20 or 15 years or older? I love that.

Yeah, I love that. So this is great. So it's telling us they use CRMs, ERPs, design like CAD software, right, design software, manufacturing software, machine monitoring software, quality assurance and management software, inventory management project management scheduling. And it's giving us a couple in each of these. Yeah, so why don't you ask you that? Like how many of these are less than five years old? I'm going to say list all the. softwares here that are, isn't it older than five years or older than 10 years?

Because aren't those the ones that you want to disrupt? Yeah. So there's two areas. One is legacy pieces, right? Yeah. The other angle is going to be areas where, uh, that are still on paper that haven't actually been digitized yet. Yeah.

That's number two. And then number three is where, where they're, where are they stringing together point solutions for? Right. So those things you're probably not going to get out of AI. We should try. Why not? Let's just try it. Let's just try it. Let's just use it like a real person. So we're going to say, I'm trying to come up with a vertical SaaS with my friend Luke. And we actually for machine jobs, my friend Luke.

and we have a framework. So the first is, what did you say, legacy? Yeah, so first is what areas of machine shops are still being run on pen and paper? What areas of machine shops are still being run on pen and paper? I'm going to say basically that says there is an opportunity for software. Okay. Second. I would, so the other thing I like to look at is a like AI opportunity and payments opportunity. So which, which areas are, which areas are machine shops not leveraging AI?

Hmm. So I always look at AI opportunity, fintech opportunity. I just wrote something on the payments piece that's so important. Third, I'd say, is please identify areas where machine shops are using a myriad of horizontal solutions, horizontal software solutions. This is an excellent approach, identifying opportunities for verticalsats. Whoa, you know it's getting real when they do this, this like this over here on the right, where it starts writing out in like a doctor.

I love this so much. for people listening. So on the right-hand side, there's an analysis, machine shop software opportunities analysis, area is still using pen and paper. Literally just listed out. Job tracking and scheduling. Many smaller shop seals, whiteboards,

and paper schedules, tooling and inventory, often tracked manual and logbooks, machine maintenance log, frequently kept in binders, notebooks. It's literally telling you where there's opportunity here for pen and paper. What do you think of the pen and paper section? Reactions? I think it's absolutely incredible. And so my next step here would be to go and validate all of this, right?

Right. I'll just show up that machine shops to say, I'll buy everybody. I'll buy you guys lunch today. I know I probably look like a crazy person, but I'll buy you guys lunch today if you just let me shadow the operation for today. Go validate it. Does that work? Like people will do that? Yeah. You'd be shocked. Yeah. Yeah. Cool. Especially in like blue collar industries. Like, just say, hey, I'm trying to build a software company for machine shops. And, you know, I just want to make sure that, you know, I'm building the right thing. You know, can I buy you guys lunch just to let me kind of watch and see what happens? Perfect. Cool. So pen and paper. Number two, areas not leveraging AI. Predictive maintenance. AI could anticipate machine failures before they occur. Optimize job scheduling, AI could consider multiple factors to create efficient schedules, automated quality control, AI powered computer vision could enhance inspection process, energy management, AI could optimize

machine uses to reduce energy consumption. You get the idea here. Luke, what's your reaction to the area is not leveraging AI section? I think there's, I would doubt that any of any aspect of machine shops today are probably utilizing AI, especially in SMB and mid-market. I would highly doubt it, which is great. So this is showing a ton of opportunities. I bet you there's even more. Yeah. And by the way, there's probably an opportunity to just like design this using like V0 and, you know, just design a prototype or a framer website even and just show this to a machine shop owner and be like, hey, if I built this, would this be of interest? Like getting their feedback.

Cool. And then section three, areas using multiple horizontal solution. Project management often cobblen together general purpose apps tools like Trello, Asana, spreadsheets, CRM. Many use generic CRMs not tailored to machine shops. Accounting and invoicing. General accounting software often lacks machine shop specific features, etc., etc. Luke, reaction.

It's on the money. It's on the money. I think the, so this is incredible. So AI is, is incredibly helpful kind of assistant for anybody listening to go build a vertical SaaS. I think start out with those frameworks around market size, segmentation, right? And then this can be a totally, it's your own research assistant, right?

The only thing I'd say is do not, there's no news in the building, right? So make sure you go out and spend time. I'm validating and ensuring that what we're seeing online is the reality in person. 100%. I'm going to ask it one last question, which I don't think it's going to. I don't think it's going to work, but I'm getting greedy. I'm going to say, these are all really great ideas. I honestly can't believe it.

my issue is I don't know if these are validated ideas I was thinking of going to machine shops to get their feedback um IRL

but I hope you can save me a trip validate these ideas for me Let's just see what happens. I don't have high hopes, but I was nice. Okay, so it's giving me some ideas on how I can actually validate the ideas. Look, it even wrote you a machine shop SaaS validation plan. That's pretty cool.

This is insane. It's so crazy. Yeah, cool. All right. I think the next thing that I would do, so let's zoom out for a second, right? So we've found an interesting market. It meets like the size requirements. It meets the segmentation requirements.

We've studied the end-to-end operation. We've basically have a couple different areas where we understand, you know, there's product opportunity, software product opportunity. The next piece that I think is hypercritical is, you know, you. have to really understand the go-to-market and be comfortable with the go-to-market before you go and invest a bunch of time here. And so let me give you an example of that is I see founders all the time. They build these beautiful products. They come up with incredible things. Well, you can have a great product, but a great product without users is a shitty product, right? You

know that better than anybody, Greg. And so you have to be understanding of the distribution piece. And so a way that I like to do that is I like to look at vertical SaaS companies that have scaled in that particular space. And I study their go-to-market. And I bet Claude or chat GPT would help here too, which is like, tell me, you know, one of the companies that came up there was fishbowl, right? I believe it's inventory management for machine shops. But tell me about how, you know, they got their first 10 customers, first 100 customers, first 1,000 customers. I think one of the things that founders need to be cautious of in vertical SaaS is go-to-market. is really, really difficult in a lot of these industries.

And what I mean by that is a lot of them to date have required pretty heavy outside sales models. So they're not your typical like product led motion where I can, you know, drop a product on product on or via email and get users. Like a lot of these are kind of country clubby, you know, sit down, shake hands, build relationships, types of businesses. And so if you don't want to do that, go-to-market needs to be a very key piece of your scorecard. And it needs to be a key piece of your scorecard, especially if you're looking at doing a venture, take over the world type of startup, because VCs almost always like

to invest in companies that have product-led or marketing-led customer acquisition, because it's just faster, right? If you look at sales-led publicly traded companies, companies, all of their average contract values are massive. Like the only way to build a really big company, at least based on historical data, like prove me wrong. But the only way to build a really big company if you have a sales led motion is if you have like pretty substantial ACVs. And ACV being average contract value, right?

So like if you want to grow fast, you want to lean, you want to find industries where you can acquire customers via product led or marketing led approaches. How important is building media being on social? Are the machine shop people of the world on social? What's your take? You know, look, I don't know about machine shops. I think that's one of the key things on a scorecard to dig into and figure out. I mean, people listening to your podcast, like smart people, right, creative people, ambitious people, they're going to do it differently than everybody has done it before. So it doesn't mean to do it how everybody's done it before. It means to understand how they've done it before. And so you can see what works and what hasn't

work. It doesn't mean you can add in your own flair and make a few bets that you think can, can result in faster growth or, you know, better economics or whatever. And so, yeah, I mean, newsletter, creating a machine shop newsletter, like, I'm sure those guys are on their email, right? Yeah. I bet you a lot of those companies aren't doing that well. So it's all industry dependent. And I bet you, like if you ask me, if you put me in a corner and you're like, Greg, how do I get the one million people who work in machine shops and onto like a newsletter? What I would do is I would do like a daily funny machine shop meme email where you just start like, it's like inside jokes.

You hire someone who works in a machine shop in like Des Moines, Iowa, and you're like, hey, you're like the dad joke other day. Yeah, pretty much. Yeah. And then you have all these people who are your advocates. And it's like, oh, by the way, I'm like, I sell this software. And then, you know, you start building out multiple pieces of software. And before you know it, you know, the lifeblood of your software is this newsletter.

Yeah. So that's why Greg makes the big boss. here because he comes up with the creative approaches. I mean, I love it. I'm going to do that for trade schools. You should. You honestly should. No brainer. Okay, so, you know, what else have, you know, where are we at on the scorecard? So we've talked, go to market was the next one. I think kind of, and I'm, we're jumping around a little bit, but I think that's okay. So going back real quick to the product piece, I think we talked about opportunities and product. I think it's probably good. Greg, talk a little bit about wedge products. Yes. So everybody has a different

name for them. I call them wedge products. What a wedge product is, is I define it as it's your get in the door product. So in vertical SaaS, if you found a good opportunity, like the end all be all is to be the one stop shop, like the all in one solution, the source of record, the thing that they use for everything A to Z, right? but nobody starts there. Nobody ever starts there. And so if you have, you're like,

I'm going to build the one stop shop for machine shops. Investors are going to look at you and be like, well, you're out of your mind because it's going to take 10 years and, you know, hundreds of millions of dollars and, and you're going to go and, you know,

they do so many things. You're going to go an inch deep and you're not going to do any of them well, right? So the typical approach and like the approach I used at my business was you find an area, where it's on paper, there's like really shitty competition,

but it's really important to the customer, right? And it's being done very poorly today. And you're able to come up with something creative that is something that is easy to get in the door with. They can implement it and deploy it quickly. Like it's not a 12-month implementation. And it's your reputation prover. Like nine out of 10 folks,

fail on their wedge product. And it's because, in my view, it's because they don't like really think about it. So let me give you an example of like a beautiful case study on wedge products. And I write about these in, in, you know, my vertical SaaS newsletter. But a beautiful case study on this is a company called roofer.com, R-O-O-F-R-O-F-R-R-F-R.

They're building software for roofing companies. Well, roofing companies are this beautifully massive market, huge mix of SMBs, mid-market. enterprise really bought like long tail, a lot of small businesses. So beautiful thing, it would have checked all of our boxes. We came up with great. What Roofer did is they didn't say,

hey, we're going to build all in one software for roofing and they went to market with that. They said, we're going to build a proposal tool, right? That enables, um, proposals are really important. Like you go on Google and you, you want to get a proposal like, well, what was happening is you, you call some number and some like random guy shows up of your house and was like, hey, I'm here to, like, give you the proposal on your roof. And it's all awkward. And he's got his clipboard and he tells you, okay, it's going to be $1,000 after he, like,

climbs up on your roof. So what these guys did is they created a proposal tool that literally just use Google Maps to, like, look at the roof. And it wasn't perfect, right? And, but it enabled the roofing company to on the back end say, hey, here's my pricing, like, here's what it should be, this is what it should look like. And then customer was able to get a real-time quote. They could, they could, you know, obviously with a star that says like subject to change when we get out there physically, but should be in the realm. They're able to book it. Well, when they book it, roofer.com got paid. So it was a free wedge product. Right. So they were able to, they were like the first company I've ever heard of that acquired roofing companies via marketing.

Like they did Instagram ads and Facebook ads and blah, blah, blah. And they were able to acquire them via digital, which is like unheard of in home services industries. Like it's always heavy sales led, like inside sales, calling, calling, calling, calling. They got in with that product. It's spread like wildfire among roofing companies because it's like this free tool. Yeah, I don't care if you, you know, take a percent of the booking because it's going to be on top of what I'm getting. So no money out of my pocket. You create this cool digital. experience for the customer, like, I don't have to send somebody out until they pay me. Awesome. So then they go and they launch a CRM, right? And so now they're moving down the entire

lifecycle of roofing companies. I bet you next they're going to build like the ERP, right? Like they'll get to the all in one. They didn't start with the all in one. But they built this wedge product that enabled them to, it was a reputation prover. It was easy to implement, right? and it was easy to get in the door. It was a marketing led customer acquisition, a marketing led customer acquisition approach. So you know what's easier, Greg, than acquiring a net new customer, acquiring an existing customer, right? So it's so much easier for me to sell something to somebody that already uses my product than it is for me to sell someone who's never used anything. So they're like, yeah, those guys had a great proposal tool.

Like, let me look at their CRM. Maybe we want to move off of ours. And now I'm willing to pay like a SaaS-based kind of monthly fee for that CRM as opposed to this transaction kind of business model on the wedge product. That was like a beautiful and I'm, you know, if you ever have the founders on, I'm sure I got some of that wrong. That's like what I've heard through the ether, but that's like the perfect wedge into software, you know, CRM. And I'm sure the next step for them is like all in one. I like it for a few reasons. One, it's follow the money. Because it's like a proposal, you get it out there and then you close the business. And then all of a sudden, Roofer is the hero. Because they, you know, they helped close that business, which then, you know, number two, increases the trust around the customer and the business.

So I think if you're trying to create, it sounds like if you're trying to create a wedge product, think about how you could, like, what is the wedge product that could create the most amount of trust. Absolutely. The other thing I'd add to it, too, that's really important in vertical SaaS is if you can build a wedge product before or after the transaction, you can eventually own the transaction. And so let's talk about that for a second. Like, adding payments into your vertical SaaS solution is the way to, like, build massive,

massive companies in in vertical software. And so every single big industry specific software company owns the transaction. All right. So let's unpack that a little bit. Let's say toast, remember we've talked about toast restaurant software, right? If they go out and they say, hey, investors, we're going to build an all in one software for restaurants. There's, I'm using rough numbers. It's like generally accurate, I think. But there's like a million restaurants in the U.S., and we're going to charge, you know, 10 bucks a month. And so now you do the math on that. What's a million times 10 bucks?

Not a lot. It's 10 million. All right. So our software market size is 120 million. Right? So like VC is going to look at that and be like, that's not big enough at all. If you're bootstrapping, absolutely big enough, right? But now what happened with toast is they said, wait.

We're going to actually implement payments, and we're going to take a piece of every single transaction that flows through those restaurants. Well, those million restaurants do one trillion in revenue. And so now our market size went from 120 million to like, you know, whatever, a couple percentage points, one, you know, 1%, 2%, depending on their take rate, probably a little lower than that, of a trillion dollars. Like very, very big difference. And so it's one, it's all these VsAS companies can scale insanely quickly by adding payments. And so if you can build a wedge product before or after the transaction and hopefully before and after the transaction, you eventually can capture the transaction. And I see like we implemented payments at Korski before they were using PayPal. Like trade schools were literally processing payments through PayPal.

So, okay, I already have all the students. They use my app every single day. they use it to clock in and clock out of class. They use it to track their skills. Like it's obviously they would way rather the student pay through our solution where we already have all the accounts made. We know their schedules. You know,

we know everything about them versus I got to go create an account in PayPal. And now I got to like export all the transaction records into like my Excel sheet and figure out who's laid on their payment and who's, you know, who's not. And how does that look on like a. school by school or program by program and out like it's it's it's it's an effid nightmare so vertical specific payments is like a beautiful beautiful opportunity and it's typically not a wedge it can be but if you can map into that you can build a really big business i like it we're running out of time but i have to ask one one more piece to the scorecard um because i know people are in the comment section are

going to be like, you got to ask this. Pricing. How do you think of, Dick, do you have a framework for thinking about how you price these things? Yeah. So, you know, pricing, I think, is like the least thought about thing in software, which is crazy. It should probably like be one of the most thought about things in software. My approach is pretty, pretty basic, but I think it works. So my approach is I understand how much does the thing cost that I'm solving, right? And once I figure out how much the thing costs, I shouldn't say cost, how much are they paying for the thing that I'm solving today? Right. And then I can look at actually coming up with some sort of pricing model. So I'll give you a concrete example. So we came up with a retention tool. We kept hearing from all of our end customers that

like student retention was a problem. Like all their, they had a bunch of students that were dropping out of, you know, their trucking, you know, school. And so we said, okay, we're going to build a tool that, like, analyzes all of their academic data and their attendance and, and basically floats up a risk score that tells you which students are at risk in real time. And then we're going to automatically text those students who are, like, trending in the wrong direction and try to motivate them via text, you know, with resources and ways to get back on track, right?

So then we said, okay, well, how much is it tuition for a school? Well, it's $20,000. All right. If we assume, well, what's the school's retention rate? Well, right now it's like 70%. Okay. So what we found out was like, they were losing millions of millions of dollars every year on this problem. And so if we're able to build a solution that like saved five students, right, who are halfway through the program and they're each paying $20,000 to go to this program, like that was. serious. And so now I'm able to price my product way high because I say, I can, you know, look, we're forecasting that we're going to save you X amount of students. That translates to Y. And so this is what we're going to do for you. And then this is how much our product costs. Over time, I was able to like look at all the customers that use this and say, hey, our average

lift is 3%. Based on your business and the inputs you gave me, that equals to X dollars of ROI. Therefore, I'm charging you less than the ROI, like half of it. which is this. So I try to look at things like from first principles in that sense, which is break down the money. How much money am I making you? And then could you give me a portion of that money basically is what you're saying? So that it's anywhere, what is it, anywhere between 20 to 50 percent? Yeah, I probably try to start at 50 percent and then I like listen to the market feedback and I adjust either up or down based on that. There you go. I only build products that increase revenue, decrease costs, prevent customer churn or

help with compliance. Because those are the things that I can have clear ROI on. If I'm not doing that, I'm not going to be able to sell it. It's not what people care about. Luke, this has been a master class. I'm about to hack on a couple vertical SaaS ideas this weekend or markets and ideas this again. I appreciate you coming on. Where could people get to know you, your writings, learn more about vertical SaaS? Yeah, absolutely. So I have a newsletter. It's just

luke safinos.com. It's S-O-P-H-I-N-O-S is how you spell my last name. It's called the linear newsletter. It's on substack. I basically, it's a free newsletter. It's all about vertical SaaS. It's all I talk about. It's all I write about. So, You can go subscribe there. And then I just dropped the VerticalSass Bible, which is Verticalsassbibbill. That's a paid resource. Only reason it's a paid resource is because it's literally like the last 10 years of my writing distilled into a thousand pages and I have a thousand industries in there.

And it's a bunch of good like case studies and how tos and frameworks on how to go build one of these things. So that's where you can find me. And then on Twitter, Twitter at Luke Saffino's. And you don't want 100. thousand people, you know, competing in vertical SaaS. Like, we're keeping it small. This is, you know, we're keeping it little small. I appreciate it. Thanks for coming on. And I'll see you around. See you around Miami. Awesome, Greg. Thanks for having me, man. Appreciate you. Later.