SaaS Business Model Explained: Revenue, Costs, and Profit
The Core Model: Recurring Revenue
The magic of SaaS is recurring revenue. Instead of selling once, you earn continuously.
Example:
- Month 1: You get 10 customers paying $50/month = $500
- Month 2: You keep those 10 + get 10 more = $1,000
- Month 3: You keep 20 + get 10 more = $1,500
See how revenue compounds? You're not starting from zero each month.
This is called MRR (Monthly Recurring Revenue) — the most important number in SaaS.
Pricing Tiers (Good-Better-Best)
Most SaaS products offer 3 pricing tiers:
| Tier | Price | Target | Purpose |
|---|---|---|---|
| Free/Starter | $0-20/mo | Individuals | Get users in the door |
| Pro | $50-200/mo | Small teams | Where most revenue comes from |
| Enterprise | $500+/mo | Large companies | Big contracts, custom features |
The middle tier is usually where you want most customers. It's priced to be the "obvious choice."
The SaaS Money Math
Here's a simple breakdown:
- Revenue: Number of customers × Average price
- Costs: Servers, software, salaries, marketing
- Profit: Revenue - Costs
The beautiful part: Once you build the software, adding more customers costs almost nothing. This is called high margins — SaaS companies often keep 70-80% of revenue as gross profit.
Why SaaS Companies Are Valued So High
SaaS companies often sell for 5-15x their annual revenue. A $1M ARR company might sell for $5-15M. Why?
- Predictable revenue — Subscriptions are reliable
- High margins — Most revenue is profit
- Scalable — Can grow without proportional cost increase
- Sticky customers — People don't switch software often
The SaaS Lifecycle
- Build — Create the product (1-6 months)
- Launch — Get first users (1-3 months)
- Grow — Find product-market fit (6-18 months)
- Scale — Expand aggressively (ongoing)
- Exit (optional) — Sell the company or go public
Most founders aim to reach $10K MRR in year 1, $100K MRR by year 2-3.
Key Takeaways
- SaaS revenue compounds because customers keep paying
- MRR (Monthly Recurring Revenue) is your key metric
- 3-tier pricing (Free/Pro/Enterprise) is standard
- High margins mean most revenue is profit
- SaaS businesses are valued highly because of predictability