Profitable liabilities create situations where companies receive money upfront while delivering services over time at much lower costs.
SaaS annual subscriptions represent profitable liabilities because customers pay twelve hundred dollars upfront while service delivery costs only two hundred dollars with a CAC of hundred dollars.
This creates immediate positive cash flow where your profit gets locked in because cost to deliver is less than annual payment.
Insurance companies create the same dynamic by collecting premiums upfront and paying claims years later.
They invest this customer money before paying obligations, generating massive profits from the time gap.
Warren Buffett used Berkshire Hathaway’s insurance float to build enormous wealth over decades.
Insurance becomes the perfect business model because you collect premiums hoping customers never use the service.
You receive monthly payments creating liabilities on your books while hoping to never deliver insurance payout.
The ideal insurance customer pays premiums for thirty years and never files a major claim.
Insurance companies get paid to hold other people’s money and hope they never have to return it.
This works like getting negative cost capital where customers pay you to use their money.
Even when insurance companies break even on claims, they profit massively from investing customer premiums.
SaaS companies can create similar profitable liabilities through subscription models where customers pay upfront.
Annual subscriptions work exactly like insurance premiums with customers paying for services delivered over twelve months.
The company receives immediate cash flow while spreading service delivery costs across the entire year.
SaaS businesses profit most when customers pay monthly subscriptions while using the service minimally.
This creates a SaaS model where you are betting customers will not use the product they pay for.
Gym memberships represent another perfect example of profitable liabilities through systematic customer non-usage.
Planet Fitness business model depends on eighty to ninety percent of members barely using gym facilities.
If everyone who paid memberships actually showed up regularly, gyms could never operate profitably.
Planet Fitness charges ten dollars monthly while only accommodating five percent of total members at peak times.
The perfect gym member signs up with good intentions, pays automatically for months, uses facilities twice, then stops coming.
Every customer who never shows up to the gym represents pure profit with near-zero marginal costs.
You maximize profits by adding customers who will never consume the service they pay for monthly.
Customers overestimate their future usage when purchasing annual subscriptions or gym memberships by enormous margins.
Planet Fitness perfected customer filter through their lunk alarm and judgment-free zone marketing campaigns.
The lunk alarm systematically removes the most expensive customers who would use equipment heavily every day.
Serious bodybuilders and powerlifters get shooed away by lunk alarm because they create equipment wear and intimidating atmospheres.
The remaining customers appreciate the non-intimidating environment and use facilities much less intensively.
This customer filtering maximizes profitability by keeping high-usage, high-cost customers away from the business completely.
Planet Fitness literally rings alarms when people lift weights too intensively or make too much noise.
The lunk alarm drives away people who would use equipment for hours and create high facility costs.
This shows that in this framework there are two ways to improve your profitability.
One is to create as much positive liability as possible and another is to have a customer mix where the power users are not making up much of the total composition.
You must power actual users from intensive service usage through friction while improving the percentage of docile customers.
Social friction like lunk alarms makes intensive usage socially uncomfortable for serious users.
Each friction point creates selection pressure where serious users leave and casual ratios improve dramatically.
This creates customer profiles that pay consistently, use sporadically, feel grateful, never complain, and refer friends.
Insurance works as the ultimate SaaS model on steroids because you bet customers will never use services.
You have to actively think how can you make a business more like an insurance company where you are receiving payments, you are delaying and minimizing payouts and you are investing the cash extensively that you are holding.
Annual subscriptions create positive cashflows and profitable liabilities because servicing costs less than charges collected and you can use them to invest in your own growth.
This represents ultimate recurring revenue where customer success means never needing to use the product.
Marketing becomes a psychology play exploiting the gap between human intentions and actual behavior patterns.
Beginner-friendly user interfaces serve dual purposes of making docile users comfortable while frustrating power users.
Simple interfaces reduce support costs because fewer things can break or confuse casual users.
Oversimplified interfaces frustrate experts by missing advanced features power users actually need for intensive usage.
Power users get frustrated by interfaces designed for beginners and leave for more sophisticated alternatives.
Docile users feel safe using simple interfaces because they cannot break anything or make mistakes.
Thus, simple interfaces and features become your lunk alarm of sorts. The same way lunk alarm chases away power users at Planet Fitness, Simple features and interfaces shoo away power users at SaaS.
Of course this results in churn, but one that is worth it. Because you got a positive liability out of it and you get a better customer mix at end.
Deliberately displease expensive customers → optimize customer mix for profitability
Subscription models shall have docile customers who pay consistently while consuming minimal resources and support.
Complex products attract complex customers who demand customization, consultants, implementation teams, and ongoing support.
Thus make simplest of the simple SaaS apps
Wanna do complex shit? go be a consultant.
Tell me, are we building infosys or wipro over here?
Cant even make SaaS product with complexity, because you will have to customize it for customer
Why bother with complex shit?
Make simple thing so that is whole package that way we can keep catering it to the average joe instead of power users.
Ofc this mindset works when you are able to create profitable liabilities.
For something like a burger business it will just tank because it a cash transaction.
Doesnt matter if they use it or not, no effect on our Cashflows, in those cases we WANT power users
Because power user generate net positive cash flow for you in cash sales type business.
While power users in Subscription model create a strain on your finances by using your service a lot.
We should have subscription pricing targeting docile customers while transaction pricing serving power users who demand intensive usage.
With the annual subs sale thing it is better that product stays simple so the cost to deliver can be predictable or the features grow complex while we got paid same and the new CAC is higher because need more to do to explain customer what we are
This principle of keeping things simple and driving away power users is how Apple became what it is.
Because when you do it, you keep making things simple and easier for your customers, and it creates such a good experience that they get attached to you.
That helps a lot with retention and brand.
While the complicated devices such as Android or Linux ones, they are so confusing that they become fringe.
While Apple may not be the example of a company trying to make people use less of their services but it is perfect example of why you should keep things simple.
TLDR :
Charge upfront, have good margins, invest in growth, prune out power user, make it simple and smooth.
And most importantly, make simple things and stick to it. Figure out a way to sell simple things and make the simplicity better, not more complex.
The advice that I read by one of the VC is in the book I am reading is that
keep hiring engineers with your eyes closed
And you know what I kind of agree but that should happen during the stage when we have already gotten some money rolling in both via investment and some revenue
If you have that gun powder then ofc hire engineers and make you a product better
After Our goal is to make the simplicity even better. And we’re going to need the talent for that.
But that should be a thing that comes at a stage when your simple product has gained traction
Time and money investment for the betterment of a product is warranted only after it has generated something.
And the introduction of people into the organization for the betterment of product is therefore warranted after the product itself has gained some traction.