#14 — SaaS: In a nutshell
January 30, 2024•3 min read
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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:
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Multiplicative growth: A 10% improvement in acquisition and conversion creates 21% overall growth, not 20%
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Highly leveraged improvements: With SaaS's high margins, even small improvements significantly impact enterprise value
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Pricing is your easiest lever: While acquisition, conversion, and churn require cross-functional efforts, pricing changes can be implemented quickly
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Growth plateaus are predictable: Your customer ceiling equals (acquisition × conversion) ÷ churn
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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.
Keep reading
#15 — Pricing SaaS
How to approach pricing and packaging a low-touch SaaS product.
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