Tech-Enabled Services Versus SaaS Business Model: Key Metrics

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For organizations focused on social impact, the choice between tech-enabled services and the SaaS business model is vital for strategic decision-making. It helps you: • understand which investors to target and how to talk to them • identify key levers to optimize your model • make informed decisions about resource allocation that enhance your financial potential

Tech-enabled services integrate technology into traditional service delivery models to enhance efficiency and effectiveness. These services address the common problem of inefficient service delivery by providing scalable solutions that improve engagement with stakeholders. In contrast, SaaS (Software as a Service) business models deliver software applications over the internet, allowing users to access tools without needing to install or maintain them locally. This model solves the problem of inefficient software deployment and maintenance. While the definitions above are a good starting point, they can lack concreteness. That’s where this article comes in.

One solution to addressing this ambiguity is to evaluate each model based on a framework. It can include the core areas tech-enabled services or SaaS consistently and sharply diverge. Here are three: (1) Margin (2) Revenue Predictability (3) Marginal costs to serve and acquire We’ll define each in turn and explain how it differs for both models.

Margin is a critical metric that tells you how much money the business is actually making after subtracting costs. Investors look for healthy margins as indicators of financial health and sustainability. Two types of margin are most noteworthy here: • Gross margin measures the percentage of revenue that exceeds the cost of goods sold (COGS) • Net margin reflects overall profitability after all expenses, such as operating costs (think rent, marketing expenses) and taxes have been deducted The main difference Tech-enabled services, compared to SaaS business models, typically have much lower margins because they still rely on labor to execute key services. Gross margin can range from 25% to 65%, while net margin can be as much as 30% of the gross. In contrast, a SaaS business model fares much better here, and is a major reason they underlie some of the most highly valued companies in the world. Gross margin can range from 70-90%, while net ranges from 10% to 30%.

Revenue predictability refers to the ability to forecast future income streams. A predictable revenue stream reduces uncertainty and allows investors to make informed decisions regarding resource allocation and growth potential. While there are many ways to measure predictability, a common one is Monthly Recurring Revenue (MRR), which measures the predictable and recurring income generated by a business from its customers on a monthly basis. These include recurring subscription fees or other recurring charges and exclude one-time payments. The standard deviation of MRR is particularly important as it highlights revenue predictability on a monthly basis, by looking at how much MRR fluctuates around its average (mean) value. • A high standard deviation suggests that the MRR is highly variable, meaning that revenue can significantly deviate from the average, signaling volatility. • In contrast, a low standard deviation indicates that MRR remains relatively stable and close to the mean, indicating predictability. The main difference Tech-enabled services typically experience greater variability in Monthly Recurring Revenue (MRR) compared to SaaS companies, largely due to factors such as dependence on key personnel for sales and personalized service, the complexity of their offerings, and lower customer switching costs. Based on a limited sample, here’s my best estimate of the standard deviation of MRR: • Tech-enabled services: 3%-35% of average MRR • SaaS: 1%-8% of average MRR Revenue predictability is a key factor behind the high valuations of SaaS companies, often reaching multiples of annual revenue, as investors trust that these recurring revenue streams will remain stable and consistent over the long term.

Marginal cost to serve and acquire is essential for understanding scalability without excessive costs or delay. These costs can include both financial and time costs to serve or acquire one additional customer. Investors care about this metric because it indicates how quickly and how big the company can grow before it hits a ceiling. Let’s explore three sub-metrics that make up this marginal cost indicator. (a) Cost to serve (including onboarding) • For tech-enabled services, costs scale linearly, meaning that as more customers are added, expenses increase at a consistent rate. This occurs because the capacity to serve customers—such as onboarding, customer support, and overall satisfaction—largely depends on fixed costs, particularly human labor, which is required to effectively help each additional customer. • For SaaS business models, the marginal cost of serving additional customers tends to approach zero, as the software can be distributed to new users with minimal incremental expenses after the initial development and infrastructure costs are covered. (b) Cost to acquire • For tech-enabled services, customer acquisition costs are generally lower than those in SaaS companies. Why? They often use relationship-driven sales and personalized service, which reduces the need for costly marketing strategies. But this reliance on key individuals and customization leads to bottlenecks, risking dependence on specific personnel. • A SaaS business model, in contrast, tends to have a higher portion of its revenue on acquisition costs, especially due to scalable and aggressive marketing expenses. Special case Acquisition costs can go down for some SaaS companies that use a “product-led growth” model, where acquisition is baked into the usage and experience of the product. A prime example is Slack, which integrated the ability to invite members to join freemium discussion channels as a key feature. After reaching a limit on free messages, these groups often feel compelled to upgrade to retain access to their chats and functionality. (c) Innovation speed The faster you can innovate, the faster you can reduce cost to serve and acquire, as well as remain competitive. • Tech-enabled services experience slower innovation cycles due to the need for staff training or adjustments in operational procedures, due to its reliance on human labor. • A SaaS business model, in contrast, can easily deploy new updates and track detailed analytics, such as user behavior.

By closely monitoring these metrics, social impact leaders can gain valuable insights into their organization's performance as a tech-enabled service. These indicators not only highlight strengths but also reveal areas for improvement, ultimately guiding strategic decisions that drive growth and enhance social impact.

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