Is SaaS really a profitable market now (compared to 2005)?

It really just depends on what your product is. There isn't one business model that is perfect for all businesses. SAAS works really well in B2B cases where the alternative for the business is dropping 6, 7, or 8 figures upfront vs 4 or 5 figures monthly. It reduces their exposure and helps with their cash flow. For the supplier it builds up a large recurring base of revenue so it's not quite as hit or miss month to month - you pretty much know what you can count on revenue wise for a while.

If you think you can get even $25 user/year through lead gen then that is a better business model than getting $20/mo from 10% of your users. However, if your conversion rate is more like 15-20% then the monthly fee works better. You just have to figure out what works best for your particular situation. You have a couple of different numbers that, based on what they come out to, can have a big impact. Evaluate your market, be reasonable with numbers, and see what you think you can hit. Then see which model plays out the best. Is one model more sensitive to numbers than the other?

In one model you are being paid by end users and the other by companies - I would imagine it is more expensive to process payments, deal with failure to pay, etc from end users. Will you have to hire people to do support for paying customers and answer their billing questions? Factor those costs in as well.

The lead gen approach is an average - so you're revenue month over month can be sporadic - can you handle that financially?

One isn't always better than the other - there are just differences that depend a lot on your situation.

It's actually less profitable that you state. You forget to factor in churn rate and the cost of acquiring each user.

However - the question doesn't really make sense. SAAS isn't a market - it's a particular kind of product/channel to a market.

Customers don't go "I want a SAAS system" :-) They go "I want to manage my finances". Some of them go for free services like Mint.com, some buy packaged software like BankTree. Some of them by SAAS services like Xero.

So - the question is profitable compared to what?

If you think you have a business model where you can get more money per-user from lead generation then obviously go for it. But it's not all upside. For example:

• Are you sure? Mint's dealing with fairly profitable leads... would you be?

• What happens if the market changes and the $ per user from leads drops. You're left with the constant cost of maintaining your free users while you wait out the market change or try and pivot. In a SAAS business your costs are much closer to scaling with your paying users.

There are risks and benefits to every business model. One is not intrinsically easier or more/less profitable than another. It depends on the market and the value you are providing.

I find tools like the Business Model Canvas (http://www.businessmodelgeneration.com/) useful in comparing and contrasting different approaches. Might be worth having a play to see how the different options stack up.

You put out numbers that are very arbitrary and then start believing them to be fact.

What if these were your numbers:

• $200 USD monthly fee x 12 = $2400 p/user/year
• 5,000 paying customers
• At a conversion rate of 50%, one would need 10,000 users

Now you are making $12 Million USD a year.

Okay, maybe you are right, it's hard to get 10,000 users, let's make that 1,000 users and it's $1.2 Million p/year (not too bad still).

Now, of course my numbers are completely arbitrary... just like yours. It turns out arbitrary numbers and equations like this are pretty hopeless to make any sort of meaningful decision.

It isn't about "is SAAS really profitable?", it's about is "X business model profitable". Plug your business model into X and see what you get.

As mentioned in other comments, it varies for every business, but I personally like the SAAS model. I think it's fair for the vendor, fair for the customer, and generally creates an arrangement with integrity.