Comparing Different Business Models
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)
- 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.
- 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.
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).
- 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.
- 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.
- 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.
- 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.
- No inventory.
- Very little upfront cost except for your time.
- 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.
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.
- Can start small with low upfront investment.
- Building an audience can lead to other revenue streams.
- 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).
- 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.
- Trading dollars for hours.
- Hard to scale.
- Still feel like you have a boss (your clients).
- You have to have skills.
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.