Is the subscription/SaaS business model uniquely powerful for building large, compounding companies compared to other models?

Matthew Prince · published Oct 16, 2023

Subscription/SaaS business models are uniquely powerful for building large iconic companies because they inherently compound

Compounding is the most powerful force available; SaaS revenue has a natural compounding effect, which is how Salesforce generated roughly $48M of shareholder value per day over a decade

48:49 Saas subscription model inherently compounds enabling outsized company value

Mike Salguero · published Apr 5, 2023

Subscription businesses are an unusually attractive, securitized-like investment because returns are spread over tens or hundreds of thousands of customers and the levers to improve the return profile are knowable

Risk is diversified across a large customer base and you know the operational levers, such as negotiating input costs, that improve returns

33:35 Subscription model diversifies risk across customers like a securitized investment

Paul Graham · published Sep 2001

Software is really a subscription business, and it is cleaner to charge subscription fees openly than to force repeated purchases of new versions.

Software development is an ongoing process, and subscriptions are the natural way to bill for web-based applications.

source Software development is inherently ongoing so subscription billing is more honest

Paul Graham · published Sep 2001

Web-based applications are an ideal revenue source for companies: recurring revenue, no flop-prone new models, no uncollectable bills, and no piracy.

The software evolves gradually so there need never be a new model, service can be switched off for non-payment, and copies cannot be pirated.

source Recurring web software revenue eliminates flop risk bad debt and piracy