#14 — SaaS: In a nutshell

Why it matters: The SaaS model has fundamentally transformed software from a product to a financial instrument with predictable cash flow, making it one of the most attractive business models for founders and investors alike.§

By the numbers: SaaS businesses that improve acquisition and conversion by just 10% each can achieve 21% overall growth due to multiplicative effects.§

Two Critical Business Models That Define Everything

The model you choose will shape your entire company's DNA:§

Low-touch SaaS:§

• Self-service purchasing with minimal human interaction
• Pricing typically around $10 for B2C, $20-500 monthly for B2B
• Primary channels: website, email marketing, frictionless free trials
• Customer support designed to scale (documentation, product optimization)
• Key metric: Monthly Recurring Revenue (MRR)
• Examples: Basecamp, Atlassian products

High-touch SaaS:§

• Human-intensive sales process with specialized roles
• Primarily B2B with $6K-15K+ ACV for SMBs, six-figure deals for enterprise
• Sales team is the beating heart of the organization
• Higher support ticket volume expected
• Key metric: Annual Recurring Revenue (ARR)
• Example: Salesforce

The reality check: Attempting both models simultaneously almost always fails. One typically strangles the other because these models influence every aspect of company operations.§

Why Everyone Loves SaaS

Customers love it because:§

• It "just works" with nothing to install
• Professional maintenance eliminates common hardware failures
• Higher availability than most IT departments can achieve
• Appears less expensive upfront than traditional software

Developers love it because:§

• Control over execution environment eliminates configuration headaches
• Reduces support burden by 10x+ compared to installed software
• Continuous development and deployment

Businesses and investors love it because:§

• Recurring, predictable revenue enables planning
• Attractive cash flows allow trading future revenue for current growth capital
• Has created some of the fastest-growing software companies in history

The Fundamental SaaS Equation

The core formula that drives everything: Revenue = (Acquisition × Conversion × ARPU) ÷ Churn§

What this means for your business:§

1. Multiplicative growth: A 10% improvement in acquisition and conversion creates 21% overall growth, not 20%§

2. Highly leveraged improvements: With SaaS's high margins, even small improvements significantly impact enterprise value§

3. Pricing is your easiest lever: While acquisition, conversion, and churn require cross-functional efforts, pricing changes can be implemented quickly§

4. Growth plateaus are predictable: Your customer ceiling equals (acquisition × conversion) ÷ churn§

5. Capital-intensive growth: Marketing and sales costs are front-loaded while revenue comes later, creating cash flow challenges§

The Bottom Line

SaaS businesses financialize software by treating it as an instrument with predictable cash flow rather than a one-time product purchase. This creates both incredible opportunities and unique challenges for founders.§

Without continuous improvement in acquisition, conversion, or churn, growth will eventually stop. A SaaS business that stops growing before covering fixed costs will fail, even if they did everything else right.§