The Pros and Cons Of The SaaS Business Model

There’s a lot to love about the SaaS business model — and not much to not love. And while SaaS businesses are often valued at a higher earnings multiple than other online business models, I think they are still an incredible deal.

In this post, I’m going to break down the top reasons why SaaS businesses are a standout investment.

Pros of the SaaS Business Model

1. Recurring Revenue
   The power of predictable, recurring revenue is what sets SaaS apart from other business models. With subscription payments rolling in like clockwork, you can forecast revenue with a high degree of confidence and focus on scaling the business rather than chasing down new customers every month. The global SaaS market is projected to hit $317.55 billion by the end of 2024, up from $273.55 billion in 2023. This isn’t just a trend; it’s a shift in how businesses operate, with subscription models becoming the norm across industries.

2. Sticky Revenue
   Once a SaaS product becomes embedded in a customer's workflow, it’s tough to replace. This stickiness results in an average annual revenue retention rate of around 102% for private SaaS companies​ (Yes that is 102%). That means customers not only stick around but are also likely to spend more over time—whether through upsells, new features, or increased usage. Compare that to ecommerce businesses where customer loyalty can be fickle, and you’ll see why SaaS commands those higher multiples.

3. Scalability
   SaaS businesses can scale like few others can. Adding a new customer doesn’t require more warehouses or shipping costs—it’s a matter of onboarding them onto the existing platform. Scaling can be done without significant additional costs, which means margins expand as the customer base grows. This is a dream scenario for any investor looking for sustainable growth.

4. Global Reach (for customers & talent)
   SaaS businesses are borderless by nature. As long as your customers have an internet connection, they can use your software. This global reach not only mitigates risk by diversifying the customer base but also opens up untapped markets without the need for local physical infrastructure.

   Your reach isn’t limited to just customers. Your talent pool for employees/contractors is global aswell allowing you access to high skill, low cost, talen.

5. Ease of Upselling and Price Increases
   A huge advantage of the SaaS model is the ability to effortlessly increase customer value through upsells and price adjustments. In 2023, 61% of SaaS companies are adopting some form of usage-based pricing​. This flexibility allows businesses to monetize more effectively based on customer behavior. Imagine acquiring a SaaS business, keeping the product as-is, and simply implementing a slight price increase. For many businesses, this alone could drive significant revenue growth. It’s not uncommon for SaaS companies to double or even triple their revenue with minimal additional investment, simply by leveraging the existing customer base more effectively.

Overall, the SaaS model offers unique advantages that justify its premium multiples. Whether you’re looking at recurring revenue, customer retention, scalability, or ease of upselling, SaaS businesses tick all the right boxes. It’s no wonder they’re considered some of the most valuable assets in the online business world.

Cons Of The SaaS Business Model

Alright, so here I am going to be a little cheeky. I don’t see many cons. I asked chat gpt what the cons were and I’ll list them below with my ‘contra take’ on why they’re not really a con.

High Competition and Low Barriers to Entry
The SaaS industry is highly competitive, with many businesses offering similar products and services. The relatively low barriers to entry mean that new competitors can emerge quickly, driving down prices and margins.

Contra take: competition is high in any online business, but i would say there is less competition among SaaS as the product requires more development than physical/digital product ecom, digital service or content business.

Complex Data Management
SaaS companies often collect large amounts of data from various sources, requiring sophisticated data management systems. The need for real-time analytics and comprehensive reporting can be resource-intensive.

Contra take: could be easily hired out to someone (for a globally low cost). Storing sensitive info like financial / health data may be more complex (I don’t know much about it), but there are plenty of SaaS businesses without sensitive data.

Security Concerns
Hosting sensitive customer data in the cloud comes with inherent risks. Data breaches or failures in compliance can have severe repercussions, including legal penalties and loss of customer trust.

Contra take: there are services that manage this and insurance for issues. Relatively a low cost of doing business.

Dependence on Uptime and Availability
SaaS businesses are highly dependent on the availability and reliability of their services. Downtime or performance issues can result in immediate customer dissatisfaction and potential loss of business.

Contra take: fractional server administrator or managed hosting through a host like Pressidium are key and really not expensive. I recommend Pressidium for any non-technical online business owners that don’t want to deal with tech issues.

Capital Requirements for Development
Developing a SaaS product requires significant upfront investment in technology and talent. It can take years to achieve profitability, especially if the company needs to iterate extensively based on customer feedback.

Contra take: that’s why you buy an established and profitable SaaS business. Subscribe to the newsletter!