Marc Benioff, Drew Houston, and Tom Siebel are all billionaires because of one thing.
They all built a SaaS.
If you don’t know what it is, SaaS businesses are essentially software accessible on the internet that you can use by paying a monthly subscription.
But how has this very simple subscription-based software model turned so many people into billionaires…?
To me, there are four main reasons why the most valuable business you can build is a SaaS company.
And by the end of this article, you’ll understand exactly why this business model can turn anyone into a billionaire.
The business model you didn't know about
The SaaS business model is, by far, the best
Since SaaS businesses are based on user subscriptions, every month or every year, people pay a recurring price to access the product.
Here’s an example:
On one side, you have a SaaS product that costs $100 monthly.
On the other, you have a solopreneur that sells an online course at $500.
If a client uses the SaaS tool for 2 years, they’ll pay a total of $2,400 to use the product, and they’ll be much more like to recommend it to others during 24 months.
For the course, since it’s a one-time purchase, word of mouth will be a lot less effective, and people will only pay $500 once.
Plus, with SaaS businesses, payments are upfront - meaning that clients pay the money first, and then they’ll access the products or services.
This model allows SaaS companies to have very low cash flow issues… unlike agencies.
Let me explain: a friend of mine scaled his agency very fast.
His business model is simple: he gets a retainer first and then gets paid based on the results. One day he closed a really big client that required him to hire many more people.
Eventually, that customer was late on payment, and my friend did not have enough cash in the bank to pay his employees, which almost killed his agency.
When we know that 9 out of 10 agencies fail, that kind of situation happens way more than we think.
That’s why from a financial standpoint, it’s extremely reassuring for a business to have recurring revenue.
As you grow your company and have more and more fixed costs, dealing with huge revenue swings from one month to another can actually kill your business.
Finally, when you build a SaaS, you have super high gross margins.
Let me give you an example:
If you build a smartphone, your fixed costs will be (per phone):
$200 for material costs, $50 for manufacturing, $10 for storage, and $20 for shipping. Which represents a total of $280.
If you sell it at $500, you have a return of $220, which represents a gross margin of 44%, and that doesn’t even include returns, refunds, and deficient phones.
VS if you build a SaaS, your infrastructure costs will be almost the same whether you have 100 users or 1000.
It can obviously increase eventually, but it’s not proportional like with hardware products.
If your subscription fee is $60 per user per month, you’ll have a return of $1k and a gross margin of 17% with 100 users.
And you’ll have a return of $55k with a gross margin of 92% for 1000 users.
While with hardware, your growth margin will stay the same whether you have 100 users or 1k users.
The industry standards say that the gross margin of a SaaS is between 60% and 80%, while for other business models, it’s between 5% and 30%.
SaaS businesses are extremely scalable
The scalability of SaaS comes from the compound effect, which is the impact of consistent small actions over time.
Since people are paying a subscription, you have more and more users each month who can recommend your product which compounds over time.
Let me explain:
You’re selling a SaaS product for $100 per month.
You’re gaining 20 customers per month. And each month, you get 20% additional customers from word of mouth.
As you can see, your growth becomes exponential and compounded over time.
At the end of 1 year, your MRR will be $46.5k OR $558k in ARR.
For an agency or an online course, even if people talk about you around them, you won’t benefit as much from the compound effect since you’re not based on the subscription model.
SaaS businesses operate in a global market
Let me give you an example: lemlist is a SaaS product used in more than 100 countries.
The majority of our team is remote, and we only have an office in Paris for around 25% of the team.
When we expanded our tool to new countries, we paid $0.
VS if a retail store wanted to expand its activities abroad, it would have to pay for rent, inventory, staff, market research, etc. Which represents a lot of money.
And this contributes a lot, too, to SaaS having way higher gross margins.
And the SaaS market is increasing exponentially each year because of high adoption.
High adoption means that the market is getting more and more mature each year and, therefore, more valuable to investors.
That’s why SaaS valuations are usually extremely attractive.
If you want to know more about SaaS valuation, I created a video about it here:
SaaS have a high exit attractiveness
This is due to super high margins and recurring revenue.
On this graph that details the Compound annual growth rate of SaaS VS traditional software, you can really picture the impact of the SaaS business model.
CAGR represents the annual growth rate of the revenue of an investment (here, a company) between two given years.
Let’s take an example:
On one side, you have a SaaS that has a compound annual growth rate of 20%, and on the other, you have a traditional business with a CAGR of 5%.
After 5 years, with the same starting investment of $1000, you end up either with $1.3k if you invest in a traditional business OR with $2.5k if you invest in SaaS.
As you saw here, this business model can make investors more money faster, so they are more likely to invest a lot of money in SaaS businesses.
What did you learn today?
- The SaaS business model is very safe for a founder
- SaaS is the best business to scale fast and make a lot of profit.
- The valuations of SaaS businesses are some of the highest in the industry
- In the end, it’s a great business model to pick if you want to start a company (and make a lot of money)
Peace love, and profit! 💰