How to build a $1M vertical SaaS business (step-by-step guide)

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 SAS he's got the vertical SAS Bible and uh he spills all his secrets on the step-by-step way to create a vertical SAS this is a guy Luke sfinos who's got a vertical sass business that prints Millions himself uh he's a vertical SAS advisor to Atomic which builds billion dollar businesses like him and hers and uh this might not be the

most exciting podcast I've ever done might actually be a little bit boring and that's the point uh vertical SAS is boring but uh that's why there's so much opportunity and we do use AI to come up with some some fun ideas so watch the watch the whole thing and and take some notes enjoy [Music] all right I got my man Luke to come on and teach us about vertical SAS vertical software and I know it sounds boring but if you stick to the end of this you're you're going to come out with a lot of

knowledge he's gonna he's GNA teach us the vertical SAS Bible and and uh 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 SAS yeah let's do that let's start with why vertical SAS so I think you know my thesis on this is is relatively simple and straightforward and you know vertical SAS isn't something that's new um you know if you look back all the way to when first PE 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 they're Market constrain you're only going

after one market and you know for a VC there's just not a lot of 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 uh you know grave sites so I'm I've looked really I've spent the last decade building you know a vertical SAS business in trade schools which is probably one of the most like 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 in most cases but uh you can build great businesses in these these settings so I'm I'm obviously bullish on it I've dedicated my career to it and that's

what I do cool yeah and 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 SAS businesses had to think about wedges which is like a wedge product which is something I really would love for you to get into um how to think about picking a market for your vertical SAS and maybe i' I'd also just love you to go through pricing like how do

you think about pricing your vertical SAS so where do you want to start yeah so let's I let's start on um how to dive in and actually start one of these things and so I think it's much more of a I think vertical SAS is much more of a science than an art I think people believe starting a software business is this artistic thing where you gotta 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 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 gonna um I'm gonna 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 my quote unquote Bible here so let me let me pull this up all right so so the first thing that you're going to see here is uh you're and again back to science so I'm a big believer in picking a industry and not a 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

um and there's certain characteristics that make an industry a really good opportunity for vertical SAS right so I have this check list we'll go through all the checklists 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 um and I map them out on a couple key things the first one is how how big they are right so what do the companies in those end Industries actually do from a revenue

standpoint so you can see the biggest industry in the US right now is is General Medical and Surgical Hospitals they're doing nearly a trillion in revenue and there's 200 companies so the first thing I like to look at is revenue but the second thing that's that's very important is how many companies are in that industry and why this is important well you can see in in Surgical Hospitals there's only 2500 companies in that space so that means it's incredibly enterpris driven right selling into the Enterprise is incredibly difficult you have to have a ton of

of of product in massive features sets to actually get something in there so I hate topheavy 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 in how the industry is actually broken down is is hyper hyper critical 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 um a solid amount of operation

ating revenue and then the better the segmentation uh 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 hundred million doar a year in revenue and then business Enterprise so over a hundred million do why that's important is because as a software company it's so much easier to get into MBS they require less you can get in with a smaller

feature set or maybe even one feature and then you can add to the capability kind of grow up a little bit you know uh take the punches and and develop kind of broader feature sets that can then go serve a mid-market and then an Enterprise so the first two things I have to look for when I'm 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 built hundred million plus businesses I've compiled them into 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 sheet the idea bank is your startup shortcut just click below to get access your next cash flowing business is waiting for you questions there does that make sense yeah go

back to that for a second when you when you scroll on this list what is one or two industries that you're like whoa this there's something here and I need to dig in and why yeah so I've broken these down um 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 SAS business is machine shops so um why is machine shops interesting well going back to that list it's 26 2 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 um out of this is basically a score so I'm taking all thousand Industries and you know this is up at the top 70 763 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 midm markets to go after 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 uh so

this looks like a perfect place uh to build a vertical SAS 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 um 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 it bit 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 uh a step ahead of someone who hasn't but and there's a correlation with successful outcomes and actually actually having the industry expertise but it's not a

requisite at all so you know we've built one of the biggest vertical SAS 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 listen 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 um and there's opportunity in boring right and I don't look at vertical software as boring because

I like I think it's incredible problem set it's 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 um something from toast S1 so toast is a publicly traded vertical SAS 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 uh of the businesses within the industry that you're you're going to serve so in toast S1 they literally have visualization of every aspect of the restaurant the back office the kitchen the bank the delivery piece right uh the actual restaurant itself the bar um 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 um and I did this at corsky 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 a real car uh 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 this know 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 is there where is the software opportunity and how big is that software opportunity i' 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

unb 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 then dating apps came out people use Craigslist for uh 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 endend operations of any industry that you're intrigued about you want to go after I mean that's the nature of of vertical software so it's there's a you know

I have over a thousand Industries in here right pharmacies uh restaurants Banks chiropractors gas stations you know uh IT services right home Home Centers Home Health Care is a really interesting one furniture stores is a really interesting one churches um the there's so many Industries I have a thousand the Better Business Bureau has over 5,000 um and so it's the science of and we're 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 um 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 um beyond that piece I'll I'll jump back to the the scorecard here so the the first piece is um outside of now that I've mapped out that particular uh you know end to end operation something that's really important to do is get your hands on as many pnls as possible so you want to look at as many pnls as you can from as many

businesses in set industry as possible so an easy place to start is looking at like publicly traded companies within that space and looking at their pnls um another hack that I love is I talk to as many Bankers within that industry as possible um Bankers are an incredible Source uh because they buy and sell companies all day and they typically are industry focused and so you when you get your hands on a bunch of pnls you actually start to understand where are these companies spending money um and so like one of my core beliefs in

software is you have to build software that either increases Revenue decrease costs or uh prevents customer turn and then depending on the industry a fourth one would be maintains compliance so some Industries highly regulated that becomes like a need to have and not a nice to have some you know Industries don't care about it but every single business in every single industry the CEO is trying to 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 pnls like where is the money going um 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 um it's one thing what what they're saying it's doing it's another what it's actually doing right um 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 um that support you know the challenging pieces on that p&l makes sense follow the money that's the 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 I like to spend a lot of time looking at um the competition and what 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 what are the existing software Solutions looking like in this market there's typically a couple things that happen when you go deep dive on one industry there's either massive like Legacy providers that are trying to do and and 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 um

so that 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 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 um uh you know a source of Truth or source of record or Erp that's built for any type of business um they're stitching together you know slack and and Gmail or Zoho or or something uh and that's

I like those opportunities because it's super fragmented and and they're dying for an all-in-one you typically see one or the other uh 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 I it's 2024 I know you're going to be like Luke you're you're out of your mind I don't believe you um we still see at trade schools a bunch of paper processes in some of these indust 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 toz you have to look at each of these buckets and understand like what are they actually doing in each of these key areas right um 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 um and this is right for a vertical component or all their compliance is like

outsourced right to some Consulting shop um 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 you know 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 boring

marketing.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 I 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 boring marketing.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 boring marketing.com yeah you know I I like um I like AI for uh the search component you know like we'll use we'll use chat GPT to just try to do a lot of the desk 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 uh let's try it out just for fun let's try it let's try it let's see what it looks like okay I'm gonna I'm gonna share my screen real quick okay so what what do

you think I should prompt Cloe uh maybe in your space um what do you think I should ask let's do um let's why don't we try the Machine Shop example since let's do it we're gon shops yeah so first question I'd ask it is like tell me about the market size and the you know in the United States for machine shops um 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 this is perfect right this is the for this is what

we had 40 billion annually 25,000 machine shops employees 300,000 people growing one to three% uh industry is largely fragmented I actually this is amazing I love it uh with many small mediumsized businesses how are there also a few larger players that are con with uh some consolidation trends no real geographic distribution okay so that's beautiful so that's a perfect place to start right so next thing I would go into is um let's pull up the scorecard uh walk me through uh you know what a machine Shop's operation looks like end to end walk me through

what a machine shop operation would look like n to n oh man I love it this is so great Chang the world crazy I actually didn't expect it to be this good to be to be frank it's it's good so what 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 uh 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 uh invoice and

followup maintenance and cleanup so this is beautiful so the next thing I would ask it is like tell me uh 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 or is that just complicating it it or what do you think um yeah maybe you just say like uh well you're saying what software Solutions are prevalent

right so is that you think be more clear yeah let's let's let it rip because you know you could do you can also say like in this list and you know how many of these how 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 uh design like CAD software right design software um manufacturing software machine monitoring software quality assurance and management shopware 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 that's isn't aren't those the ones that you want to disrupt yeah so there's there's two areas one is is Legacy pieces right um yeah the other 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 um we should try why not I mean we're not let's just try it let's just say let's just use it like a real person so we're gonna say I'm trying to come up with a vertical sass with my friend Luke um and we actually for machine jobs my friend Luke and we we have a framework so the first is um 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 so the other thing I like to look at is a like AI opportunity and payments opportunity so which which areas are um which areas are machine shops not leveraging AI so I always look at AI opportunity fintech opportunity I just wrot something on the payments piece that's so important um third I'd say is uh please identify uh

areas where machine shops are are using a myriad of horizontal Solutions horizontal software Solutions this is an excellent approach identifying opportunities for vertical size whoa you know it's you know it's getting real when they do this this like this over here on the right where SS writing I love this so much so um for for people listening so on the right hand side there's an analysis machine shop software opportunities analysis area still using pen and paper literally just listed out job tracking and scheduling many smaller shop deals whiteboards and paper schedules tooling and inventory often

tracked manual and log books machine maintenance log frequently kept in binder 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 just show up at machine shops 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 that does that work like people will do that yeah you'd be shocked yeah yeah cool especially in like blue collar industries like you just say hey I'm trying to build a software company for machine shops and you know I just want to make sure that uh 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 manag management AI could optimize machine uses to reduce energy consumption you get the idea here uh Luke what's your uh reaction to the areas not leveraging AI section I think um I think there's I would doubt that any of any aspect of machine shops today are probably utilizing AI especially in SMB and midm 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 I and by the way there's probably an opportunity to just like design this using like vzer 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 Cobin get 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 I it's on the money it's on the money I think the so this is incredible so AI is is a incredibly helpful kind of assistant for anybody listening to go build a vertical SAS I think start out with those Frameworks around Market size segmentation right and then this can be a totally it's it's your own research assistant right I the only thing I'd say is do not there's no news in the building right so um make sure you go out and spend time validating and ensuring that what

we're seeing online is is the reality in person 100% 100% I'm GNA ask it one last question question which I don't think it's going to I don't think it's going to work but I'm 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 some idea does on how I can actually validate the ideas look it even wrote you a a machine shop SAS validation plan it's pretty cool this is insane it's so crazy yeah cool all right um I think the next thing that I I would do so 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 endend operation we've um we basically have a couple different areas where

we understand you know there's product opportunity software product opportunity um the next piece that I think is hypercritical is you have to really understand the go to market and be comfortable with to 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 the you can have the a great product but a great product without users is a shitty product right you know that better than

anybody Greg um 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 SAS companies that have scaled in that particular space 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 um but tell me about how you know they got their first 10 customers firsts

100 customers firsts thousand customers I think one of the things that Founders need to be cautious of in vertical SAS is a is go toar market is really really difficult in a lot of these industries and what I mean by that is um a lot of them to date have required pretty heavy outside sales models so they're not your typical like product Le motion where I can you know drop a product uh on product hun or via email and and get users like a lot of these are kind of country Clubby you know sit down

shake hands build relationships typ 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 Le or marketing Le customer acquisition because it's just faster right if you look at sales Le publicly traded companies all of their average contract values are massive like the only way

to build 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 L motion is if you have like pretty substantial acvs uh and ACV being average contract value right so like um if you want to grow fast you want to lean you want to find Industries where you can acquire customers via product Le or marketing Le approaches how important is building media being on social like are are are the Machine Shop people of the world on

on social like what's your what's your take you know look I don't know about machine shops um I think that's one of the key things on a scorecard to dig into and figure out I mean people listening to your 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 worked doesn't mean you can you

can add in your own flare and and make a few bets that you think can can uh 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 uh 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 1 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 are like it's like inside jokes like you hire you hire someone who works in a machine shop in like De Moine Iowa and you're like hey like the dad joke of the day yeah pretty much yeah and then you have all these people Advocates and it's like oh by the way I'm like I sell this software and then you know you you start building up multiple pieces of software and before

you know it you know the lifeblood of your of your uh software is this newsletter yeah so that that's why Greg makes the big bucks here because he comes up with the creative approaches I love I mean I love it I'm gonna do that for trade schools you should you honestly should uh Nob brainer Okay so go you know what else have you know where where we at on the scorecard so we've talked go to market was the the next one I think um 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 we talked about opportunities and product I think it's probably good Greg talk a little bit about wedge products yes um 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 SAS if you found a good opportunity like the end all Beall 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 if 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 use at my business was you find an area where there's 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 gets 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 um 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 I write about these in in you know my vertical SAS newsletter but a beautiful case study on this is a company called roofer dcom rr.com they're building roofing uh they're software for roofing companies well roofing companies are the this beautifully massive Market huge mix of smbs midmarket Enterprise really bought like longtail lot of small businesses so beautiful thing it would have checked all of our boxes we came up with great what rofer did is

they didn't say hey we're going to build allinone 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 at your house and is 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 um so what these guys did is they created a proposal tool that literally just used 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 um 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 I

when we get out there physically but should be in the realm they're able to book book it well when they book it roof.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 um via digital which is like unheard of in Home Services Industries like it's always heavy sales Le like inside sales calling calling calling they got

in with that product it 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 lify life cycle of roofing companies I bet you next they're

going to build like the Erp right like they'll they'll 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 ledge customer acquisition or marketing Le customer acquisition approach so you know what's easier Greg than acquiring uh um 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 we want to move off of ours and now I'm willing to pay like a SAS 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 uh you know CRM and I'm sure the next step for them is like Allin 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 rofer is the hero um because they you know they helped close that business which then in you know number two increases the trust around the customer and 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 SAS is if you can build a wedge product um 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 vert your vertical s your vertical SAS 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 um I'm using rough numbers it's like gen generally accurate I think but there's like a million restaurants in the us and we're going to charge you know 10 bucks a month uh 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 uh so our 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 gonna actually Implement payments and we're going to take a piece of every single transaction that flows through those restaurants well the 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 right like very very big difference so it's 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 corsky 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 late 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 now like it's it's it's a it's an FID 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 I have to ask one one more piece to the scorecard uh 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 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 and which is crazy it should probably like be one of the most thought about things in software um 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 um and then I can look at actually coming up with some sort of pricing model so let I'll give you a concrete example so we came up with a retention tool um 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 their Trucking you know school um 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 um who are like trending in the wrong direction and 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 a is 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 if we able to build a solution that like saved five students right who were halfway through the program and they were each paying $20,000 to go 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 dollar 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% yeah I I probably try to start at 50% and then I like listen to the market feedback and I adjust either up or down based on that there you go I also only I only build products that increase Revenue decrease costs uh prevent customer turn or or uh or help with compliance like because those are the things that I can have clear Roi on if I'm not doing that like I'm not I'm not gonna be able to sell it it's not what people

care sure Luke uh this has been a master class I'm about to like hack on a couple vertical SAS ideas this weekend or markets and ideas this weekend I appreciate you coming on where could people get to know you your writings learn more about vertical SAS yeah absolutely so I have a newsletter it's uh it's just luk aos.com um It's s o p i n oos is how you spelled my last name it's called the linear newsletter it's on substack I I basically it's a free newsletter we we uh we it's all about vertical SAS

it's all I talk about it's all I write about um so you can go subscribe there and then I just dropped the vertical s Bible which is vertical SAS bible.com that's a paid resource um 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 um it's it's a bunch of good like case studies and how-tos and Frameworks on how to go build one of these things so tot that's where you can find me and

then on Twitter Twitter Luke sfinos and you don't want a 100,000 people you know competing in in vertical SAS like we're keeping it small this is uh you know we we're keeping it a little small I appreciate it thanks for coming on um and uh I'll see you around see you around Miami awesome Greg thanks for having me man appreciate you later [Music]