For those of you interested in moving to the SaaS business model, meet the SaaS Fish Model. The SaaS Fish Model is a visual depiction of the transition to SaaS (or any other subscription business model). Thomas Lah and J.B. Wood developed the Fish Model in their book Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business. It’s also referenced in Zuora CEO Tien Tzuo’s book Subscribed: Why the Subscription Model Will Be Your Company’s Future–and What to Do About It.
You can find the Fish Model here in an article by J.B. Wood (scroll down to point #3).
Interpreting the SaaS Fish Model
Moving to a SaaS business model initially decreases revenues and increases expenses. Why is this?
Often in other business models, revenue is recognized all at once from a one-time sale. In SaaS, however, revenue is recognized in smaller increments (e.g., monthly amounts) over the life of a contract. Expenses increase as the company invests in its SaaS offering (e.g., software development, hosting, customer success teams, etc.).
In the long run, the situation reverses. Revenues increase as customers can be easily added at scale, and the lifetime value of ongoing subscription customers is higher than one-transaction customers. Expenses decrease once the main SaaS infrastructure is completed, and it can be cheaply scaled.
On a graph, the interplay of revenues and expenses looks like a fish.
SaaS Fish Model Takeaway
A transition to SaaS can be a hard sell if you are currently profitable. Why would anyone want revenues to go down and expenses to go up? The reason is because a well-executed move to SaaS can increase long-term revenues, margins, and the resulting valuation (see Adobe as an example).
The Fish Model helps people see how short-term pain results in long-term gain.