I have several recruiter clients who work with sexy, high-growth start-ups.

Both the recruitment business owner and their teams enjoy their interactions with a forward-thinking CEO. As well as their involvement with an early-stage business with a clear growth agenda, an innovative product and informal culture.

They not only believe that they will ride on the coattails of the business to recruitment success, but they will also be a part of it!

However, something worried me about one particular client.

She had modelled her business entirely on that of her clients.

Instead of recruitment consultants, she hired sales development representatives (SDRs) and customer success managers.

She had spent money freely on automated marketing and advertising designed to catch a few fish with a very large net – effectively relying on a spray and pray approach, rather than focusing on a niche or referrals.

But, what really worried me was the grasp of her own profitability (or lack of it).

In her ambitious growth plan, she piled new recruitment staff into her business.

When I worked through a proper budget model with her, I showed her that her growth plan was unsustainable, at least without external investment.

What had happened here?

My client was so closely involved in the attractive start-up culture of her SaaS clients, that she had failed to understand the fundamental difference between their business model and hers.

SaaS companies need to raise vast sums of money to make a substantial investment in their technology platform from the outset. To do that, they need seed funding.

After this, they set about acquiring their first tranche of customers. An investor might only need to see ten ecstatic advocates to put money into the growth of the business.

At this point, the SaaS company will look to grow rapidly via marketing and sales which are highly automated.

They won’t be looking for profitability, their value is all based on potential.

In fact, many of the biggest household names have never come anywhere near turning a profit.

And that includes Airbnb, Dropbox, Peloton and Uber.

Instead, they use other metrics like annual recurring revenue (ARR) to prove the potential of the business.

Ideally, they gain customers from referrals and the cost of delivery becomes negligible because the platform is already built.

In time the user interface may need to be enhanced or more servers bolted on but the big investment has already been made.

And, this is where the similarity between my client (recruitment business) and her clients’ business ends.

It DOES NOT get cheaper and cheaper to provide a recruitment service to more clients (unless you are providing a wholly automated service, of course).

In my recent blog, I provide the data on the eye-watering percentage of gross profit that many recruitment business owners are now paying directly to their staff, take a read here.

By contrast, the SaaS model can deliver the same service by multiplying the number of customers.

Think about how many businesses you are subscribed to as a consumer, I bet you have minimal person-to-person interaction. In many cases, you have become the sales force as you’ve been incentivised to refer other customers.

Most recruitment agencies are people-heavy businesses – delivery of service is expensive and carries a significant amount of unpredictability.

Most recruitment start-ups don’t raise millions in venture capital, instead, they need to generate cash to pay the bulls from day one.

So was there any good news for my client?

Yes!

The more effectively you use the data you have, the more efficient delivery.

The more targeted and effective your sales and marketing is, the greater the net profit you can make.

If (never say never) you can persuade your clients and candidates to use automated services, then your cost of delivery, ultimately, will go down.

What about my client’s job roles? We changed them.

The best market intel (and therefore business development information) comes via the people who want to sell AND speak to candidates all the time.

The best customer success comes from consultants who maintain contact with the clients and candidates they have placed.

My advice?

If you own or manage a recruitment business, you must understand that a recruitment consultancy, at least in its traditional form, is a fundamentally different operating model from a SaaS organisation.

You can grow a great recruitment business by identifying and working with high-growth businesses (see my last blog on developing accounts).

But you are not the same.