Comparing Different Business Models: Saas vs E-Commerce vs Subscription Commerce vs Digital Products

A lot of people say SaaS is the holy grail of business models. It’s digital, it’s subscription (recurring revenue), and it’s sexy.

Guess what, it’s also super hard to market & create.

Recently I listened to the Smart Passive Income Podcast with Pat Flynn and ConvertKit founder Nathan Barry and found it quite inspiring because I heard about the launch of ConvertKit. A couple years in to the business, he found himself only at about $1,000 MRR but once he found a few leverage points he was able to grow his business considerably.

That’s been the constant that I’ve been hearing from other SaaS entrepreneurs. SaaS is much harder to start, but once you find that elusive product market fit, you really start leveraging the power of subscription revenue.

(PS. Here’s one of my favorite videos on the topic of SaaS growth by Rob Walling).

Being that I’ve experimented myself with many different revenue models, I thought I’d compare and contrast the different models.

SaaS (software as a service)

Pros:

  • Scalable & predictable revenue due to subscription revenue.
  • Easy to grow when you reach product market fit.
  • No need to carry inventory.
  • Low upfront investment if you can code yourself.
  • B2B SaaS apps have less price sensitive customers compared to B2C products.

Cons:

  • Tough to reach product market fit.
  • Heavy competition in almost every niche.
  • Heavy upfront development costs if you can’t code the product yourself.
  • Non-coders have an uphill battle in creating a product (big knowledge gap in both technical & marketing).

Tips before you start a SaaS product

  • Find a product that is meant to be subscription because customers get more use from it every single month.
  • Find a product that has high switching costs for the customer (like hosting) reduces your monthly churn.
  • Pricing low and increasing price as time goes on is much easier than pricing high and then reducing price later on.
  • At the same time, the higher you can make your pricing, the better off you’ll be.
  • Non-developers should be wary about starting a business within this model unless you are partnered up with a good developer. Outsourced development can lead to tons of hassle and it’s a technical challenge for non-coders to really understand the dynamics behind creating a GOOD software product.

Physical E-commerce

The key to make this business model work is finding a product that has compelling unit economics. It’s hard when you’re selling a product under 30% margin, because you have to account for discounts, shipping, refunds, labor, etc. It’s ideal if you can find a price point between $50 per item to $100 per item with a 75%+ profit margin, and one where customers buy from you again and again (consumables).

Pros:

  • Easier to generate early sales because product market fit generally isn’t an issue (unless you’re creating a brand new product or product category).
  • Easily marketable with traditional sales channels like FB ads, Adwords, etc.
  • Low time investment upfront compared to other business models.
  • No technical hurdles to jump through — you can create a site with Shopify almost instantly.

Cons:

  • Having to manage inventory & do shipments is a pain in the ass.
  • Logistics can be outsourced, but be willing to pay and it’s not very economical until you hit critical mass because there’s usually minimums.
  • Products that don’t have good margins will face issues when you outsource logistics.
  • Hard to raise pricing — you must be competitive to other products in the market (for example, it’s much harder to sell a t-shirt for $50, when most tees are in the $15-$25 range).
  • Hard to make margin on a small investment. Branding / packaging usually requires an upfront fee.
  • Massive competition on many of the best types of products.

Tips before you start e-commerce:

  • Find a product with high margins. If you’re making less than 30% margin, you’re just making it harder on yourself.
  • This margin also helps make your ads profitable, otherwise you’re losing money.
  • Companies that foster repeat purchases are the ones that will succeed.

Subscription Physical E-Commerce (aka subscription boxes)

This is another business model where I’ve helped many clients succeed in. It takes the benefits of physical e-commerce and combines it with the recurring nature of subscription revenue. Currently it’s definitely one of the best business models (in my opinion) if you can find the right product. However, the only downside is that it may be somewhat of a fad, as it might not necessarily hold up to normal buying patterns in a few years. We saw the same thing with daily deal sites from back in the day, and now those companies are nearly all wiped out.

Pros

  • Known to have a great CAC to LTV ratio which makes it easier to grow the business. (cost of acquisition to lifetime value)
  • Recurring revenue makes it easier to forecast your sales.
  • Low time investment upfront.

Cons

  • Generally has higher churn than SaaS companies, although CAC is usually lower.
  • As with any physical goods, shipping / logistics is a pain.
  • With subscription boxes, you generally need to purchase a lot of inventory upfront in order to create good unit economics for yourself.
  • Competition is now heating up as “subscription boxes” have become a hot segment of the market.

Tips before you start subscription e-commerce:

  • It’s a great market to be in right now, but could end up being a fad similar to daily deal sites back in 2011.
  • Look for products that are natural to be sold as a subscription. If people don’t need new microphones every month, it might not be a good idea to sell a subscription microphone business.

Digital e-commerce (courses / one-time software / e-books)

This is where a lot of people start off, and it’s a great starting point.

Pros

  • No inventory.
  • Very little upfront cost except for your time.

Cons

  • High competition since anyone can make a digital product now.
  • Large time investment upfront to create a good course.
  • You have to be actually good at something to teach it.
  • Can be difficult to prove value of course.
  • Piracy.

Tips before you start your own course or one-time software:

  • Don’t ever use Udemy. Teachable is a much better solution.

Advertising Supported (YouTube Channel, Blog, Affiliate Income)

This is another business model that I’ve tried and had some success with. In the past I helped launch an entertainment blog called Amped Asia targeted at Asian American youth and scaled that to roughly 4 million pageviews. However, the business had issues with generating good content, and we ended up being super reliant on Facebook’s and Google’s respective algorithms for traffic. This led to its eventual downfall as a business model.

Pros

  • Can start small with low upfront investment.
  • Building an audience can lead to other revenue streams.

Cons

  • Must devote a lot of time to create a quality blog.
  • Advertising revenue is drying up.
  • Must have a huge audience to make money.

Services Based (Freelance)

Have been doing this a lot as well, but the problem is scaling up your business. You’re still employed by someone (your clients).

Pros

  • No upfront costs except for time.
  • Certain professions can earn a lot for their time.
  • Easily can hit 6-figures, but anything beyond that is harder.

Cons

  • Trading dollars for hours.
  • Hard to scale.
  • Still feel like you have a boss (your clients).
  • You have to have skills.

Conclusion

I wanted to keep this blog post as simple as possible to outline the different types of business models and the pros and cons of each. Other posts on my blog will be more long-format and essay-based, but I kinda like the bullet point formula.

What do you think? How is my content? I welcome any feedback.

Great Growth Hacker vs Average Digital Marketer

The buzzword “growth hacking” has been around for a while now, and in modern times it’s become a word used for general digital marketing.

But it didn’t used to be that way. In the early days the term was reserved for mostly blackhat or greyhat strategies — things like URL cloaking, fake redirects, mass fake accounts, automated bots, etc.

To me, though, if you haven’t experimented with these kinds of tactics, you can’t call yourself a growth hacker.

And if you’re not pushing the envelope with these kinds of strategies, you’re not a growth hacker.

But it’s not about just going on BlackHatWorld and testing out the different strategies. That’s what your run-of-the-mill entry level growth hacker is going to do.

The BEST growth hackers actually find new exploits they can use to drive massive amounts of traffic, while using data to discover how to drive as many conversions as possible from that traffic.

And not every growth hack has to be blackhat. There are plenty of opportunities that are both ethical and super effective.

To do this, you have to look at the current marketing ecosystem and recognize the what’s going on while staying on top of new trends to find arbitrage opportunities.

Here’s a white hat example — prior to Facebook’s algorithm change, it was extremely easy to get traffic from Facebook pages & to grow Facebook pages. It was the “shout for shout” technique popularized right now by Instagram accounts, but used across Facebook pages. Those posts back then got tons of engagement back a few years ago and Facebook pages could scale rapidly because of it.

That’s now been largely patched up by Facebook’s algorithm change, but in its heyday I channeled tens of thousands of cheap fans to my page. Back then, the news feed algorithm also favored page posts so building up your page brought me hundreds of thousands of visitors.

So how do you find these opportunities?

The thing with any growth hack is they work really well until they get too saturated. Instagram was easy as hell to grow on, and it still is, but it’s getting harder. Back in 2013, just running a bot could get you tens of thousands of real followers in less than a month. Nowadays a huge amount of the users that follow you back when you’re botting are bots themselves.

The best way to find new opportunities is to keep track of latest technologies and changes in various platforms.

For example, Facebook Live just launched, so naturally it’s getting an algorithm boost. That might not be the case a year down the line, but today it’s an easy channel to get free traffic. Instagram stories / Instagram Live is another example. A year ago it was things like Periscope or even Meerkat (oh how quickly those died).

After you’ve picked a platform, you need to learn the rules of the game to get you the highest results. Every platform can be gamed if done correctly. For example, a lot of growth hackers game Reddit by getting friends to upvote their content.

Once you figure out the rules of the platform, you need to figure out how to multiply your effectiveness. Generally this is done by using automation of some kind or in certain cases, VAs. Great growth hackers can code their own tools, but there’s also pre-made tools out there that can make it easier for you.

One funny growth hack I’ve read about recently is a guy using fake girl Tinder accounts to spread the word on their product (the girl’s profile would say they work at XXX company). That’s genius. But they needed a bot that would maintain all the accounts and swipe right on every guy — this is where your ingenuity comes in.

What should you start experimenting with in 2017 and what’s going to get too saturated?

Here’s where I predict opportunities will exist:

  • Facebook ads are still going very strong, although it will get harder and harder as bigger brands buy up all the inventory and create great ads.
  • Instagram, especially now with IG live will take over FB live or at least will match it.
  • Pinterest ads surprisingly aren’t too bad, and since it’s a platform that no one is talking about, there are arbitrage opportunities on there if you can find them.
  • YouTube will slowly be overtaken in the video space by Facebook. Recent changes to their algorithm have infuriated content creators, while Facebook has been sending massive reach to video.
  • Creating artificial virality. Try VYPER for your viral growth needs.
  • Email marketing will still be the strongest channel for revenue, as long as you’re not just blasting your list with sales / coupons and rely more on a content marketing strategy.

Here’s my predictions for what’s going to die out:

  • Snapchat will die in the next 2 years. Facebook has the advertising game down and Snapchat really can’t compete. Their demographic of kids also has very little buying power.
  • Twitter is most likely going to stay afloat, but the traffic will lessen over time. B2B businesses will still be able to get good traction, but any B2C companies should focus on other growth channels.

An unpublished piece of advice for entrepreneurs I wrote back in 2011

A few years back I wrote blog posts on my Tumblr blog, but I never published them (I think I was 21 at the time). I’m republishing here on my new blog, nearly 5 years later. Back then I was still in the early stages of building PhotoWhoa, an e-commerce site for photographers which I’ve now sold. Looking back at this piece I realize my advice wasn’t that great, my writing wasn’t that great (it still isn’t), but for memory’s sake I’m posting it up here anyways.


A lot of entrepreneurs cite the lack of funds as the reason why they can’t start their business. Unfortunately, that’s because these entrepreneurs are really just wantrepreneurs.

A ton of huge Fortune 500 companies are bootstrapped (meaning they took no investment, at least in the early stages). Microsoft comes to mind. Facebook was bootstrapped early-on (with Eduardo Saverin’s $1,000) before getting funding.

My co-founder Eric and I, started PhotoWhoa with exactly $250 each, and it has grown in 5 months into a business that does tens of thousands of dollars in revenue. Nothing great, but it’s off to a good start in its first year and its growing.

The problem is that you’re not looking for the right business to start.

While it’s great to think big, sometimes you need to just get started. For a first-time entrepreneur, it’s highly unlikely that you’ll be able to make the next Facebook. BUT it’s not unlikely that you can make your first dollar in profit.

My advice is to start something that will either instantly make money or instantly fail (by instantly, I mean within a few months).

Everyone wants to make the next Facebook, Instagram, Twitter, Pinterest, or [name viral app], but very few of these people succeed. That’s because these sites don’t make any revenue or profit, and they continue by gobbling up tons of investor money. Of course, at some point, these sites make money, buttloads of money, but in the early years, almost none of them do.

Forget viral. Focus on making a business that makes money in a straightforward way. To make it even simpler: procure money directly from your users.

But you might say: “You need money to create a product!”

No you don’t!

With PhotoWhoa we found a formula for either instant cash or instant failure. It’s a daily deals site for photographers. It’ll either sell deals or it won’t, and if it doesn’t then we can move on quickly to a new product. Turns out, people absolutely do want deals on photography products.

We’re just two guys. We haven’t made any products. We decided to sell other people’s products.

But even if you can’t replicate our model, there are tons of other ways you can sell something without spending money. A service or consulting business is a good example. Forget about all the people that tell you service businesses don’t scale. It’s true, they don’t scale that well, but worry about that tomorrow, and make your first dollar today.

A good example of a service business success story is College Hunks Hauling Junk, which sells a junk removal service. The two guys started off just selling their own bodies (helping other people remove their junk) and scaled their company into a multi-million dollar business, hiring college hunks all over the country.

It’s true that my site PhotoWhoa might just be a lifestyle business. We were rejected by YC and didn’t raise any funding. So I admit that maybe I don’t have a 100 million dollar business on my hands. At the same time, I definitely have a potential 10 million dollar company, and I’m happy with that.

The YC Rejection Post-Mortem I Never Posted

In 2012, Eric Yang and I applied for Y Combinator for PhotoWhoa, a daily deals site for photographers, and got rejected, despite having done about $35,000 in revenue in our latest month and having several direct referrals into the YC program (thanks a lot Joshua Baer (OtherInbox) and Lloyd Armbrust (CEO at OwnLocal) for helping to make intros).

Getting rejected was very painful. In fact it was one of the most painful moments in our careers up to that point because everything else was going so smoothly. We didn’t expect to be making so much money so quick, yet YC saw through our business model and ended up rejecting us. Note that this was also back in 2012, when the caliber of YC applicants was a lot lower than it is today. Nowadays it’s pretty common for companies that have $35,000 monthly revenue or higher apply to Y Combinator.

At the time I wrote up this blog post, but never decided to publish it because I didn’t want to be reminded that I had failed. Reading through it I realize how defensive I sounded at the time. YC ended up being right. Daily deals wasn’t as hot anymore, but PhotoWhoa still was a nice little lifestyle business for me and gave me enough money to survive and hire an employee for a couple years. It never became a huge success, but I did learn a lot from it.

A year after our rejection, Eric went on to become a general manager at Topaz Labs, a company he co-founded with his father, while I kept on working at PhotoWhoa before it was strategically acquired by a company running several deals websites. After that I moved to Los Angeles to pursue new ideas.

For a little nostalgia I decided to post it, 4 years later.


It’s a few weeks after our rejection to Y Combinator’s Summer 2012 class, but I just wanted to jot some thoughts down.

After we got the rejection e-mail, I felt like shit, probably for the rest of the night and the weekend. After the interview, my co-founder Eric and I both thought that we had a great chance to get in. After five months of hard work, we had started grossing over $30,000 in monthly revenue, something that Eric and I were both very proud about.

When we got into the interview room we met our interviewers, Sam Altman, Garry Tan, and Paul Bucheit. It turns out, Sam Altman and Garry Tan were both photographers, so we thought, wow, we lucked out. They must understand how f*cking huge this market is. Paul Bucheit looked like he didn’t care, but whatever, Garry Tan and Sam Altman seemed enthused about what we were doing.

The ten minutes did go by pretty quick. I remember them asking how big our market was (photography). “It’s 68.4 Billion dollars globally in 2011 and growing,” I replied to them confidently. A lot of people don’t realize that photography is such a huge market, but it is, and there is actually research to back it up.

There weren’t really any hard questions actually. They asked almost the exact same stuff that we prepared for. How big of an idea is this? How many paying customers do you have? How many people are repeat customers? How many people are signed up? There wasn’t anything that really threw us for a curveball.

Again, coming out of the interview, I felt like we had a solid shot.

But in the end, Garry Tan gave us an e-mail telling us that they didn’t think the market was big enough for our particular business and that they didn’t think startup investors would invest in this product. It’s understandable, I guess. As a daily deals site, investors in the valley are just not that interested, especially right now during Groupon’s apocalypse. Never mind the fact though that we don’t really operate like a daily deals site since our products are sold internationally, not locally.

They probably also had concerns about the fact that we sold mostly digital products and peripherals instead of cameras and lenses. True, cameras and lenses comprise about 55% of the market, but the other 45% of a 68.4 billion dollar market is nothing to scoff at either.

YC always says they invest in the founders, not the product, so I’m wondering if they also had doubts about us as a team. Did we not appear passionate enough? Smart enough? We’ll probably never know.

After reflecting upon our rejection, we had some great take-aways from the experience. We are ramen-profitable after only 5 months, so we are pretty damn confident about our ability to make this into a multi-million dollar business. And truthfully, Garry Tan made a good point about the fact that we might not be what Silicon Valley investors are looking for, and as a result, not what Y Combinator is looking for.

But whether we’re the next AirBnB or not, it doesn’t matter. All we know is that we have a product that people want. People are paying us money. We’re making profit.

And while Silicon Valley might never be thrilled about us, there are lots of people here in Austin who are interested in businesses like ours. After our rejection we decided to keep our base of operations in Austin for a time and talk to great people like Josh Baer and others who are dying to help us succeed.

And who knows, staying here might be the best choice for our company.