- Startup Spells 🪄
- Posts
- Why SaaS is the Best Business Model?
Why SaaS is the Best Business Model?
PLUS: How to 10x an acquisition
Startup Spells 🪄
November 01, 2024
Why SaaS is the Best Business Model?
Software as a Service (SaaS) is a subscription-based model for software delivery. It's like renting software instead of buying it outright.
SaaS is the best money model because the assumption is that most users underutilize the service. They use less of the service than they pay for.
This creates a sustainable revenue model that benefits companies while keeping individual costs low for users.
Real-World Examples
Netflix's Smart Model
Only a small percentage of Netflix subscribers stream more than 30 hours monthly.
It's mainly unemployed people or TV fanatics who stream a lot. Most users underuse Netflix.
They pay for Netflix, but they forget about it. They don't cancel even if they rarely use it because it's so easy to access.
The service stays profitable through this "pay and forget" approach.
Peloton's Dual Revenue Stream
Peloton sells exercise bikes, but they also offer a subscription for classes.
You pay for the bike ($1,445 for the cheapest bike) and then pay every month ($44) for access to their content. This model combines a big purchase with ongoing fees.
Peloton wants you to keep paying every month even if you don’t use the bike often.
Ideally, Peloton would give the content for free but it wouldn't get them a sustainable revenue stream.
Telecom Strategy
Jio is a mobile service provider in India. If you don't pay their monthly fee of 209 INR, your phone stops working. You can't even receive calls.
Jio forces you to keep the subscription active even if you're not using the service. They've made it so you can't choose a cheaper plan.
There is no reason for a phone to have active subscription model if you are just receiving incoming calls but this creates a locked-in revenue stream.
Email Service Providers
Tutanota is a secure email service provider.
I've paid $5 monthly fee to Tutanota for over a year despite rarely using it. I did the same thing with Midjourney by paying $35 monthly for 3 months. And I'm not yet rich.
This is true for many users who maintain subscriptions despite limited use.
A low price point encourages continued subscription even if you don't need it.
The Pay & Forget Model
SaaS thrives on the pay and forget model. You sign up because you want to try something new or need a service, and then you might not use it much. But because it's so easy to set up and forget, you keep paying.
The Psychology Behind SaaS Success
SaaS succeeds because:
Low Initial Cost: The subscription fees are often low, making it easy to sign up.
Convenience: No need to worry about software updates or maintenance.
Retention: Once you're in, it's easy to stay subscribed because canceling can be a hassle.
Recurring Revenue: Companies love this model because it ensures a steady income stream.
SaaS is highly effective because it banks on human behavior. People sign up, often forget, and keep paying. This makes it a powerful model for businesses to rely on for steady, predictable income.
Top Tweets of the day
1/
I’m reconsidering short form organic as the main driver of traffic. Here’s why:
My main reason for trying organic was to quickly test creatives and zero in on the right messaging. The end goal was to run PPC with the winner content and scale that way
However, I have found a… x.com/i/web/status/1…
— Mihai Fumarel (@father_mihai)
5:58 PM • Oct 20, 2024
I never thought mass posting would get penalized but since everyone knows the secret now, TikTok might ban it.
This is n=1 case but still something to keep an eye out for.
No loophole stays alive forever. But always remember, it is a cat-and-mouse game. When one door closes, another one opens up.
2/
This was obvious to a lot of people who were building in this space around 18 months ago (the minute the second good LLM appeared). But so much peer pressure to “not build a wrapper” that good ideas were declined purely because of how it would look to other engineers. The need to… x.com/i/web/status/1…
— Varun Mayya (@waitin4agi_)
7:19 AM • Oct 30, 2024
You either build a wrapper and lose social status but get rich.
Or you don't build one and gain social status but stay poor.
Funny thing is when you get rich, you automatically regain social status.
The biggest mistake you could do is what would your peers think.
3/
“ACB” or “Agency Cock Blocking” is a term i coined with @zach_yadegari
if you’ve just launched your app and are testing funnels with creators…
do NOT reach out to creators with agency emails - bloated prices, no access to creator, uncertain roi
— Kelechi Onyeama (@kelechisp)
7:01 PM • Oct 17, 2024
Always remember to go straight to the source. You save money by directly contacting the person who has the alpha.
The more layers further you are, the more expensive the thing will be. This is true for SaaS, Agency, Ecom, R&D, Manufacturing, and more. Elon Musk knew it which is he built rocket parts from scratch to make them for cheap instead of buying them.
Rabbit Holes
Find The Most Valuable Newsletter Subscribers Through Facebook Ads by Gunnar Holm
The Complete SaaS Landing Page Optimization Playbook by Scrapbook
How to 10x an acquisition by XO Capital
Until next time!
If you enjoyed this, please consider sharing it with a friend. If a friend sent you this, get the next newsletter by signing up here.
Read all the old case studies here.
And don't forget to follow me on X.
Reply