If you’ve run an agency, you’ll know you’re trading time for money.
Even if you are charging $200/hour, you stop making money when you or your team stops working. Your earnings are limited to the finite amount of time that you have. That’s the first problem with the agency model. The business owns you because you essentially act like an employee, not the other way around.
The SaaS model, on the other hand, allows your customers to pay for products untethered to your time. Your revenue ceiling is irrespective of the time you spend working. This means you can scale your business without a direct increase in hours worked, offering you greater growth potential.
Up next, we’ll take a closer look at why adopting the SaaS model could be the right choice for your business.
Get Started with 14-Day FREE TrialSaaS – A Success Story
The SaaS business model became really popular in the early 2000s, evolving from the traditional software model where companies would buy software licenses and install them on their servers.
Salesforce, founded in 1999, is often credited with popularizing the SaaS model. It offered businesses a way to access software through the cloud, paying a subscription fee instead of making a large upfront investment. This shift allowed for more scalable, flexible, and cost-effective software solutions.
The concept of software being offered as a service rather than a product that needs to be installed and maintained on individual machines was revolutionary. This model provided several advantages:
- Cost Efficiency: Businesses could avoid large upfront costs and instead pay a predictable, monthly fee.
- Scalability: SaaS providers could serve multiple customers with the same software instance, making it easier to scale.
- Accessibility: Customers could access their software from anywhere with an internet connection, enhancing flexibility and remote work capabilities.
The SaaS model continued to evolve, with the introduction of cloud computing further propelling its adoption. Companies like Google, Microsoft, and Adobe transitioned many of their offerings to the SaaS model, validating its effectiveness and reliability.
Fast forward to today, and SaaS has become a force to be reckoned with. As of last year, revenue in the SaaS market reached $258.6 billion and is projected to increase to $282.2 billion this year.
Why Choose SaaS
Now that you’re up to date with the history of the SaaS business model, let’s take a closer look at some key aspects of the SaaS model that can truly transform how you do business.
Client Acquisition
Winning new business in an agency model can be quite a challenge. You need to sell high-ticket services, often requiring exceptional sales skills and extensive effort.The reality is, not everyone is a natural salesperson, and securing clients at a higher price point can be tough.
For instance, agency Customer Acquisition Costs (CAC) can range from $2000 to $5000 per client.
In contrast, the SaaS model allows you to offer products that typically range from $300 to $1000 per month, making them much easier to sell.
The lower price point, combined with the scalability of digital marketing and automation, significantly reduces CAC.
SaaS businesses typically see a CAC of $300 to $1000 per customer, reflecting more efficient and cost-effective customer acquisition.
Client Retention Cost
For agencies, fulfilling client work is usually a one-off project. This model is inherently labor-intensive and costly because each new project requires fresh deliverables. While agencies may offer ongoing services, these are still time-consuming and resource-heavy, contributing to high retention costs.
SaaS businesses benefit from the “build once, sell repeatedly” model.
After the initial development, the ongoing costs are lower, and customer support and onboarding are less time-intensive compared to custom project work. SaaS companies can achieve gross margins of 70-90%, compared to 30-50% for agencies, illustrating the efficiency of the SaaS model in terms of cost management.
Scaling Your Agency
Scaling an agency involves significant challenges. To grow, you need to hire more people, which means dealing with recruitment, training, and retention issues. Managing a large team can be demanding, and losing key employees can be disruptive and costly.
SaaS companies can scale more efficiently. With a lower labor-to-sales ratio, a SaaS business can achieve substantial revenue with a smaller team.
The recurring revenue model allows for predictable growth, and cloud-based solutions enable easy scaling.
Client Churn
Agencies often experience high client churn rates, sometimes upwards of 50%.
This means that even if you are constantly acquiring new clients, you may lose them just as quickly, leading to a cycle of instability and unpredictability. Losing a major client can be particularly damaging, especially if they represent a significant portion of your revenue.
SaaS companies typically enjoy much lower churn rates, around 13% yearly.
Get Started with 14-Day FREE TrialSaaS customers tend to stay longer because they rely on the software for their daily operations. When a SaaS customer leaves, they usually represent only a small fraction of your recurring revenue, making it easier to manage and recover from churn.
Lifetime Client Value
The Lifetime Customer Value (LTV) of agency clients is often low because the relationship is project-based. Once a project is completed, clients may not have any ongoing need for the agency’s services. This limits the potential revenue from each client. A typical LTV for an agency client might be $5000 to $20,000.
SaaS businesses benefit from ongoing subscription fees. Customers pay regularly, often monthly or annually, and this recurring revenue can accumulate to a significant amount over time. Additionally, SaaS companies can upsell and cross-sell additional features or services, further increasing LTV. A typical LTV for a SaaS customer can range from $30,000 to $100,000.
Selling Your Agency
Selling an agency can be challenging because much of the value is tied to the owner and key employees. If you are integral to the business, it becomes less attractive to potential buyers.
This dependency on individual talent and client relationships lowers the overall valuation, with multiples typically ranging from 1-3X of EBITDA ((Earnings Before Interest Tax and Depreciation).
With their recurring revenue and scalable business model, SaaS companies are generally more attractive to buyers.
They offer predictable revenue streams and are less dependent on any one individual. This makes them easier to sell and often at higher multiples, sometimes as high as 10-15X of EBITDA.
HighLevel – Your One-Way Ticket to SaaS Freedom!
While there are certainly many options out there, you need to have a winning product that actually excites users.
Enter HighLevel, a revolutionary CRM software that boasts all the key scalability factors we’ve gone over in this blog and much more.
HighLevel seamlessly integrates SaaS capabilities with agency functions, providing a comprehensive solution that maximizes efficiency and profitability.
Interested in learning more? Click this link for a free 14-day trial and discover how HighLevel can transform your business!
Get Started with 14-Day FREE Trial
