The Journey to a Profitable SaaS Business Model

The Journey to a Profitable SaaS Business Model

TSIA Research Journeys are our initiative to solve today's top problems plaguing the tech industry. Join us as we launch discovery research, develop practical theories, and deliver industry-validated, board-ready insights designed to guide and empower every tech company.

Until recently, growth was the primary metric that investors focused on when evaluating the potential of SaaS companies. Now, companies are required to demonstrate not just rapid expansion but also a clear path to becoming a profitable and viable entity. Gone are the days when growth alone could overshadow unprofitability.

This is thanks in no small part to the fact that investors have become more discerning, recognizing the importance of a solid financial foundation for long-term success in the SaaS industry. The focus has shifted from short-term gains to sustainable SaaS business models capable of weathering economic fluctuations.

This new emphasis on profitability has prompted companies to reevaluate their strategies and operations. SaaS companies must adapt to this new reality, showcasing their ability to not only achieve growth but also generate profits. Failure to address this challenge may result in diminishing prospects and potential acquisition by competitors. By embracing profitability as a core objective, SaaS companies can position themselves for long-term success and secure the necessary support from investors in a changing landscape.

The question is: How can SaaS companies—and tech companies pivoting to a SaaS model—pave a path forward to profitable growth?

In our first-ever Research Journey: The Year of Profitable SaaS, we will work to answer this very question. In this journey, we will reveal the risks of not tackling this challenge and introduce our research methodologies. With our findings, we can empower every technology services company with the insights they need to thrive in a dynamic and competitive market. But we can’t do it without you.

So jump in with us as we:

  • Define the Problem: By clearly identifying the business challenge, we can start tackling it.
  • Launch Discovery: With polls, surveys, and interviews, here’s where we dig deep into the facts and contributing factors.
  • Develop the Theory: With data in hand, our researchers and analysts can start developing and/or enhancing frameworks.
  • Guide the Industry: Correlations to financial results lead to conclusions that will help your organization get on the road to profitable SaaS.

By participating in our Research Journeys, you become part of a vibrant community that seeks to push the boundaries of what's possible in the tech industry. Together, we can navigate the challenges that SaaS companies face as they work toward profitability, uncover hidden opportunities, and pave the way for success.

This blog will be continually updated with our findings as we work through each step of this research journey. By subscribing to this journey, you can stay up to date on each step of the journey, participate in finding solutions, and view our results as we work towards what it takes to achieve SaaS profitability.

Define the Problem: Why Are SaaS Companies Unprofitable?

The SaaS industry has witnessed remarkable growth and innovation in recent years, revolutionizing the way businesses and consumers access software solutions. However, despite this rapid expansion, a significant number of SaaS companies find themselves in a peculiar situation: unprofitability.

The Profitability Predicament: Unpacking the Challenges Faced by SaaS Companies

There are several reasons behind the prevalent lack of profitability among SaaS companies:

  • High Initial Costs and Investments: Building and scaling a SaaS company often involves substantial upfront investments. Significant costs are incurred from developing software to setting up infrastructure and hiring talent before any meaningful revenue is generated. The initial investment required to create a robust product and acquire customers can seriously strain the financial resources of SaaS companies, often leading to extended periods of negative cash flow.
  • Intense Competition and Pricing Pressures: The SaaS market is highly competitive, with numerous players vying for market share within specific niches. As a result, companies engage in price wars and aggressive customer acquisition strategies, often leading to lower profit margins. With customers demanding more value at lower prices, SaaS companies face significant pressure to offer competitive pricing, which further hampers their profitability.
  • Customer Acquisition and Retention Costs: Acquiring and retaining customers is an ongoing challenge for SaaS companies. Marketing expenses, sales teams, and customer support infrastructure all contribute to a company’s overall customer acquisition cost (CAC). Additionally, the subscription-based nature of SaaS necessitates ongoing efforts to retain customers and reduce churn. The costs associated with customer acquisition and retention can strain a SaaS company's financials, particularly during the initial stages of growth.
  • Scalability and Infrastructure Costs: SaaS companies must invest in scalable infrastructure and robust systems to handle an increase in user demand and ensure a seamless customer experience. As user bases grow, so do infrastructure costs, including servers, data storage, and bandwidth. Balancing the need for scalability with the associated costs can be challenging, particularly when revenue growth does not align proportionately with infrastructure expenses.
  • Heavy Product Development and Maintenance Expenses: SaaS companies face ongoing investment requirements in product development and maintenance. Continuous innovation and feature enhancements are crucial for staying competitive in the market. However, these investments can strain financial resources, especially for startups or companies operating in highly dynamic industries where staying ahead of the curve is imperative.

Profitable SaaS: The Need for Change

While unprofitability may be commonplace in the SaaS industry, it is essential for companies to shift their focus and strive for sustainable profitability. Here's why:

  • Long-Term Viability: Profitability is a key metric that determines a company's long-term sustainability. Without generating profits, SaaS companies may struggle to attract investors, secure funding, or reinvest in research and development. A focus on profitability is crucial for ensuring continuity, fostering innovation, and weathering market fluctuations.
  • Enhanced Financial Stability: Profitability allows SaaS companies to build a solid financial foundation. It provides the means to invest in human capital, infrastructure, and marketing initiatives, enabling growth and competitive advantage. When profitable, companies can fund expansion plans, explore new markets, and create a cushion against economic uncertainties.
  • Investor Confidence and Valuations: Investors are increasingly scrutinizing the profitability of SaaS companies. Demonstrating a clear path to profitability is vital for attracting funding, securing favorable valuations, and cultivating investor confidence. Profitability aligns the interests of stakeholders and paves the way for long-term partnerships and sustained growth.
  • Sustainable Growth and Innovation: Profitability serves as a catalyst for sustained growth and innovation within the SaaS industry. It allows companies to invest in research and development, acquire talent, and explore new product offerings. By generating profits, SaaS companies can not only satisfy their existing customer base but also expand into new markets and deliver cutting-edge solutions.

Unveiling the Research Methodology: A Deep Dive into TSIA's Quantifiable Approach

TSIA is on a Research Journey to uncover crucial insights into the financial models of SaaS companies. Through extensive surveys and analysis, we aim to provide actionable knowledge to enhance financial performance in the industry. We will collect data through polls and surveys and then create content such as webinars, podcasts, and reports to share our findings with you along the way.

To identify factors contributing to profitable SaaS business models TSIA will perform a thorough analysis of data from surveys and benchmark instruments. This correlation analysis aims to uncover the relationship between specific practices and their impact on financial performance. By examining a broad range of data points, we aim to provide actionable insights into the practices that drive profitability, helping SaaS companies optimize operations, increase revenue, and improve financial health.

Additionally, we'll present case studies showcasing successful SaaS companies and the strategies they employ to achieve profitability. These real-world examples delve into the practices and initiatives implemented by profitable SaaS companies, offering tangible illustrations of how specific actions contribute to sustained financial success.

Through our deep research, TSIA equips organizations with actionable knowledge to enhance their financial performance. By understanding non-billable service expenses, identifying profitability-driving practices, and drawing inspiration from successful examples, SaaS companies will be able to forge a path toward sustainable growth and long-term profitability.

Profitability is a crucial factor in the long-term success and sustainability of SaaS companies. Failing to achieve profitability can jeopardize a company's ability to sustain operations, invest in innovation, secure funding, retain customers, and compete effectively. SaaS companies must proactively manage their financial health to ensure a clear path to profitability while balancing growth and customer satisfaction. But it will take work to get there.

Now that we've defined this problem facing the industry, join us on this Research Journey as we discover how to solve it, together.

Timeline of This Research Journey

Define the Problem

By clearly identifying the business challenge, we can start tackling it.March 2023

Read the Blog (Above): Why are SaaS Companies Unprofitable?

Until recently, growth was the primary metric that investors focused on when evaluating the potential of SaaS companies. Now, companies are required to demonstrate not just rapid expansion but also a clear path to becoming a profitable and viable entity. Gone are the days when growth alone could overshadow profitability.

The question is: How can SaaS companies—and tech companies pivoting to a SaaS model—pave a path forward to profitable growth?

Launch Discovery

With quick polls, interviews, and more, here’s where we dig deep into the facts and contributing factors.
May-June 2023

Read the Insights: 2023 Profitable SaaS Quick Poll

A significant portion of software-as-a-service (SaaS) businesses are still struggling to achieve profitability. The 2023 Profitable SaaS quick poll found that 58% of SaaS businesses have a profitable operating income, while 42% do not. Among the key elements that can affect profitability, technical support, professional services, and customer success may be contributing to lower operating margins as well as high sales and marketing expenses. Read the full report at the link above.

View the Webinar: The Year of Profitable SaaS

SaaS companies are under considerable pressure to improve their financial position. Fortunately, the TSIA research team is on a mission to help technology companies of all sizes optimize their SaaS business models toward greater profit.

In this webinar, TSIA Executive Director Thomas Lah shares:

  • Three examples of successful business models for companies providing SaaS offers
  • The three strategies that can improve the financial position of SaaS business models
  • Recent industry poll insights concerning how monetizing service activities can improve SaaS providers’ overall profitability

This event includes an interactive Q&A where attendees can ask Thomas about how to improve the profitability of their SaaS business.

Listen to the Podcast: Being a SaaS CEO in 2023

Publish Date: January 2, 2023

Thomas has an open and honest conversation with Wendi Sturgis, CEO of Cleverbridge, on her career path, the state of the tech industry today, the levers of profitability, and what it takes to be a CEO.

The Journey Continues: Take the SaaS Funding Framework Survey

We're currently conducting a 15-question industry survey, focusing on the financial models of SaaS companies. This survey aims to gather data emphasizing the importance of understanding non-billable service expenses—an essential factor for optimizing profitability and making informed cost management decisions.

By analyzing the collected data, you’ll gain valuable insights into the financial intricacies of running a SaaS business. After this survey closes, we’ll analyze the results and publish our findings.

Subscribe to this Research Journey today to stay up-to-date on where we are, where we’ve been, and where we’re going as we continue to uncover valuable insights that will shape the future of SaaS financial models.

Together, we can all make the tech services industry a better place—for everyone!

Survey now closed, stay tuned for results!

Check Out an Industry Story: Being a SaaS CEO in 2023

In 2023, the “grow at all costs” model that accompanied SaaS companies for many years may not be viable anymore. Being profitable is more and more crucial. Wendi Sturgis, CEO of Cleverbridge, shared some of her insights on the subject with TSIA.

In a recent podcast, Thomas Lah, executive director and executive vice president of TSIA, and Wendi Sturgis discussed how companies should approach budgeting and investments to maximize growth and productivity. They underlined the importance of creating a sense of shared ownership among company executives across all departments. This can be achieved by involving executives working together to prioritize company investments.

Sturgis explained that her company had created a "bottoms up budget" and had "investment cases" that they were considering. "Everybody put your good ideas on the table and let's really, as a company, determine what are the top ones that make the queue." She added that this is a better approach than trying to optimize individual departmental budgets. By involving executives and directors in this process, they are more likely to feel invested in the company's success and take an active role in driving growth and productivity.

Lah added that leadership teams need to react to the realities of the current economic environment. Companies should prioritize a handful of investments. Those investments should be focused on reducing complexity for customers. By doing so, companies can create a more streamlined and efficient model for securing and growing customers, which is becoming a critical attribute for success in the tech industry.

Focus on Retention

More than ever, SaaS companies should focus on customer retention and upselling, rather than customer acquisition. As Sturgis noted, while a software company may spend 50% to 70% of annual revenue on customer acquisition and marketing, they may spend very little on retention and uplift marketing. Focusing on retention means keeping current clients happy and looking for opportunities to expand the relationship, such as through upgrades, cross-selling, and other strategies. Additionally, companies should explore the use of artificial intelligence to become more efficient and focus on sales motions.

Sturgis and Lah both agreed on the importance of a data-driven approach to sales and for a
CRO. That position needs somebody with rounded business acumen, analytical skills, and a
process-driven mindset. "They are thinking in much broader ways than a typical sales executive and I think that is the future profile of CROs ," explained Lah. That role has got to be in play because you need somebody focused on how to cost-effectively drive. Sturgis underlined the importance of data: "We built this unbelievable customer insights team and what they could help us do on this presales with the ROI stories, but also proving the value and the upselling of all the products."

The current market changes in companies' valuations may also create new trends in the tech industry. Sturgis explained that now employees are looking for an environment that supports their development, whether it's flexibility, their managers, or their ability to grow. Prioritizing employee perspectives will create a more productive and motivated workforce. In the current market, companies must prioritize investments to maximize growth and productivity, while also focusing on customer retention and employee needs. By taking a data driven approach and involving executives and directors in the budgeting process, they can create a more efficient, responsive, and successful operation.

To get more insights, listen to the full episode: Being a SaaS CEO in 2023.

Develop the Theory

With data in hand, our researchers and analysts can start developing frameworks.

July 2023

Read the Report: The 10-10-10 Rule for SaaS CFOs

This paper will provide the following insights regarding the state of SaaS profitability:

  • Review of the traditional success metrics of SaaS companies
  • Current state of SaaS financial models
  • The optimized SaaS financial model
  • Pressures on technology margins
  • Missing service revenues
  • The 10-10-10 Rule for SaaS CFOs

Listen to the Podcast: Profitability, Thoughts from a SaaS CEO

Founding a successful SaaS company has never been easy, but as of 2022, it got much harder. Valuations took a hit, investment dollars became scarce, and for the first time ever, SaaS companies actually started laying off employees.

In this episode of TECHtonic, Thomas is joined by Phil Alves, SaaS entrepreneur, CEO of DevSquad, and host of SaaS Origin Stories, a podcast where he interviews SaaS founders. In this fantastic conversation on the current state of SaaS, they discuss:

  • How the current economic environment is impacting SaaS companies
  • The best approach to starting a SaaS company
  • How AI plays into SaaS valuations
  • Whether AI will soon start to replace technical staff

Insights from TSIA’s 2023 The State of Profitable SaaS Quick Poll: Charting the Future, A Deep Dive into SaaS Profitability

Technology companies are in a state of flux right now, with many experiencing increased pressure to improve the profitability of their business models. The 2023 State of Profitable SaaS quick poll was conducted to provide a snapshot of where SaaS companies currently stand, where they are monitoring expenses, and where they see the highest potential for growth. Click the link to read the full results.

Guide the Industry

Correlations to financial results lead to conclusions. We’re ready to present our findings!
September 2023

Read the Report: The REAL State of Profitable SaaS

This paper provides a summary of what we learned on this Research Journey. Specifically, this paper will provide the following insights:

  • What is the overall maturity level of profitable SaaS?
  • What plays are management teams frequently running to improve the profitability of their SaaS business model?
  • What proven plays to improve SaaS profitability are not being run as often?
  • What are the most common questions leadership teams have about improving their SaaS business model?
  • Where do executive teams see the greatest potential to improve profitability moving forward?

What's Next? Join Us at TSIA World Envision

Companies that work together profit more. Come to ENVISION to discover ideas, tools, and techniques to inspire a more cohesive, growth-oriented organization. ENVISION presents ideas and inspiration for building a silo-busting culture that will improve efficiency for your organization and impact the growth of annual recurring revenue. This is a can’t-miss event for global tech teams to collaborate and innovate to create unified, thriving organizations.

Find out more and register to attend today!

Want our latest trends and blog insights delivered straight to your inbox?

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
By supplying my contact information, I authorize TSIA to contact me. Learn more or opt out.