This is an English adaptation of a FoodBud historical article originally published on September 14, 2022.
SaaS looks attractive, but profitability is hard. In 2022, as the economy slowed and financing cooled, many SaaS companies came under pressure from sustained losses. Even listed SaaS companies were cutting headcount and trying to improve efficiency.
This article uses a simplified financial unit model to examine how core SaaS metrics affect profitability: NDR, CAC, customer retention cost, R&D allocation, LTV, and related ratios.
Several mid-2022 interim reports showed the same pattern: revenue may still have been growing, but profitability was fragile.
Youzan, 8083.HK, period ended June 30
Youzan remained a leader in e-commerce SaaS, but SaaS revenue, gross margin, and profit were all declining.
Ming Yuan Cloud, 0909.HK, period ended June 30
Ming Yuan Cloud, a real-estate SaaS and ERP leader, had SaaS revenue exceeding 70% of total revenue and still growing above 20%, while ERP revenue declined. Its loss narrowed sharply, but the loss rate remained high.
Kingdee, 0268.HK, period ended June 30
Kingdee had largely transformed from traditional software into a SaaS company, with subscription revenue approaching 80%. But its loss also expanded, partly attributed to increased R&D investment and HR SaaS product development. That raises a key operator question: can high R&D spending become a major drain on SaaS profitability?
Shopify, SHOP.US, period ended June 30
Shopify’s revenue was still growing, but subscription revenue accounted for only about 30% of total revenue. The company moved into an operating loss, with operating margin at -12%.
Salesforce, CRM.US, period ended July 31
Salesforce still had stable growth and a large subscription base, but sales and marketing consumed almost half of subscription revenue. R&D also continued to rise. Net income fell about 90% year on year.
The broader question is simple: can SaaS make money?
Common SaaS rules of thumb are useful, but operators need to know why they work and when they fail.
The model is designed as a management-accounting tool rather than a strict financial-reporting model. Revenue, cost, and expense are simplified into the current period. The model separates one-time costs, recurring costs, and pre-launch R&D.
The model focuses on a pure SaaS product, not hybrid SaaS plus project software, and tracks one year of new ARR plus the following 10 years of retention and expansion revenue. The author compares this to throwing a shot put: first-year new-logo ARR creates a revenue curve over time through renewals and expansion. A company that signs new customers every year is effectively adding multiple such curves.
The model is intended for a single SaaS product. If a company launches products in different domains, such as CRM plus HR SaaS, or restaurant POS plus restaurant SCM, each should be modeled separately.
The model uses these starting assumptions:
The example starts with RMB10 million in first-year ARR and tracks 10 years of ARR. At the initial benchmark values, the modeled SaaS business has an overall profit margin of -6.0%.
The model tests NDR from 50% to 110%, plus a ceiling case of 140%.
Initial conclusions:
However, the test holds customer success cost, total R&D cost, and R&D allocation constant. In reality, NDR usually does not rise without extra investment in customer success, R&D, or both.
The model sets NDR at 60% and tests CAC from 30% to 100% of first-year ARR.
Findings:
The model then tests CAC and NDR rising together from 40% to 70%. If higher CAC is used not merely to buy more customers, but to acquire better-fit customers with stronger survival, product fit, and renewal potential, the trade-off can be attractive.
At NDR = 70%, CAC = 70% and CAC = 100% are also tested. Raising CAC by 30 percentage points consumes 9.3 percentage points of net margin, but the business can still remain profitable.
The model supports the common view that LTV/CAC between 3x and 4x is often around the profitability threshold, though the true break-even point depends mainly on NDR.
Customer success cost has two parts: first-time implementation and ongoing customer success operations.
The test uses:
Findings:
The model supports a customer-success-led path to SaaS profitability: stronger implementation, adoption, renewal, and expansion improve NDR, and NDR is the foundation of the subscription model.
Several listed SaaS companies attributed larger losses partly to increased R&D investment. But financial reports do not always make it easy to isolate SaaS R&D efficiency. For example, Kingdee’s 2022 interim report disclosed overall R&D expense of RMB700 million, equal to 33% of total revenue. Salesforce disclosed subscription revenue of US$13.999 billion and R&D expense of US$2.647 billion, equal to about 20%.
The model tests R&D% and NDR% rising together from 40% to 90%, while keeping the new-logo versus install-base R&D split at 80/20 and customer success investment unchanged.
Findings:
A second test fixes NDR at 60% and R&D at 60% of first-year ARR, then changes the R&D split:
The result: the higher the share of R&D spent on existing customers, the lower the profit margin.
This suggests two operating risks:
The better R&D strategy may be to focus investment on the core product and main version, keeping the product ahead in features and competitiveness. That can help acquire new customers while also supporting retention and expansion among existing customers.
Note: all listed-company, market-value, IPO, and forward-looking model figures are historical as of the article’s September 14, 2022 publication context.