The SaaS Triangle of Despair
Software as a Service has a unique economic model that can make or break your business. You'd best understand it.
This post is an adaptation of the first section of The Guide to SaaS Metrics. Free and ungated, it’s our newest resource for anyone looking to master their understanding of the metrics that define and drive SaaS businesses.
In traditional business models, products are developed, manufactured, marketed, and sold to ensure profitability for each sale. Imagine you're selling a car for $30,000. The moment that sale is made, you know if you've covered your costs—production, transportation, marketing, and even the salesperson's commission. It's a straightforward transaction. It’s either profitable or not.
But in SaaS, when you acquire a new customer, you're stepping into a zone of initial unprofitability. Upfront costs to acquire that customer—marketing spend, sales team efforts, and onboarding processes—typically exceed the revenue from their first payment. This is where the Triangle of Despair begins to take shape.
This dynamic almost guarantees that a SaaS business will be unprofitable from the outset. It’s like taking a financial belly flop before you can swim in the profit pool. What’s more, the rapid growth we all crave often exacerbates those initial financial setbacks. As you acquire new customers at an accelerated pace, the associated acquisition costs quickly pile up, putting a strain on cash flow. Fantastic. 😅
However, the magic of the SaaS model is that it aligns customer spending with realized value. Compared to a traditional business model, customers pay less to start but keep paying on a fixed schedule as they continue to use the product. Many will be willing to pay more as they realize more value from the product and expand their usage (expansion), creating a fair value exchange.
This recurring revenue model offers a path to higher long-term profitability. Once initial acquisition costs are recovered (CAC), retained customers can be significantly more profitable (LTV). The potential for higher future returns allows the business to invest more in acquiring customers upfront, knowing they’ll be able to reinvest incoming profits into driving growth and increasing market share. That sounds better. 😄
A SaaS business must effectively manage all these dynamics to escape the Triangle of Despair. Earnings are a poor indicator of their profit potential in this pursuit of growth. Instead, we need specific metrics to help investors and operators truly understand the viability of a SaaS business.
We wrote The Guide to SaaS Metrics to help. From CAC to LTV and everything in between, it covers all the metrics you need to measure a SaaS business.
And it’s 100% free.
Take a look and let us know what you think.
In fact, you're referring to a subscription business model. That means that your theory also applies to on-premise product with a subscription business model.-