ELI5 - The SaaS business model
Episode 54
Hello friends, welcome to Episode 54 of Good Buy. Today’s theme is:
A TLDR of the SaaS biz model - all in less than 250 words
Let’s dive in
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Friends,
The SaaS business model is a dance between CAC and LTV.
There’s upfront investment needed to acquire customers. This is your CAC (customer acquisition cost)
The CAC is recuperated by the revenue generated by customer (lifetime value or LTV) over a period of time (usually 12 months).
Once that breakeven point is crossed, the business becomes profitable.
This profitability is reached because of the low marginal cost of SaaS. (The cost required to produce another unit of the product. SaaS products operate at ~80% margins).
Let’s assume you acquire 1 customer for $6k. And your ARPU (avg revenue per user) per month = $500
This is what your graph will look like -
Each month your 6k cost reduces by 500 and by month 12, you break-even.
At which point, your 80% margins begin to kick in. Coupled with your high LTV, your business becomes cash-flow positive.
Which you can then invest into acquiring more customers and the cycle repeats itself.
Download this essay to read on the go if that’s your jam
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