Explain SaaS to your grandmother, with numbers: Silaivik Software sells software to tailoring shops either as a one-time licence or as a monthly subscription. Why does the subscription business look worse in year one and better later?

A subscription earns less up front and more over time: Rs 36 lakh in year one against Rs 120 lakh from licences, overtaking them in year 4. Each year's subscribers stack on the ones who stayed, so revenue climbs to about Rs 147 lakh by year five and keeps rising toward Rs 360 lakh, while licence revenue stays flat. An average subscriber stays ten years and pays Rs 3.6 lakh, three times a licence.

Start with something she already knows. Selling a sewing machine brings in its full price once; renting it out brings a small payment every month for as long as the tailor keeps it. In the first month the seller is far ahead. After a few years the renter has collected more, and still has customers paying. Software as a service, SaaS, is the rental model: the customer pays a small amount regularly for software that is kept running for them, instead of buying it outright. That one comparison is the whole answer; the numbers show it.

Silaivik's year one: 100 licences at Rs 1.2 lakh is Rs 120 lakh. 100 subscriptions at Rs 36,000 is Rs 36 lakh, 30% of it. In year two, 90 of the first 100 subscribers stay and 100 new shops join, so 190 shops pay, Rs 68.4 lakh. Licence revenue starts again from zero each year, while subscription revenue starts from the customers who stayed.

Because of what is left at the end. After five years the licence business has sold 500 licences and has nobody obliged to pay it next year; the subscription business has about 410 shops that will pay Rs 36,000 each next year if they stay. With 10% leaving each year and 100 joining, the base heads toward 1,000 shops, Rs 360 lakh a year. An average subscriber stays one over 10%, ten years, and pays Rs 3.6 lakh over its life, three times a licence. That is the lifetime valueThe total a customer is expected to pay over the whole time it stays, here the yearly fee divided by the share of customers who leave each year. investors pay for.

There is a price for this. The subscriber takes 40 months to pay what a licence buyer pays on day one, so a subscription company needs more cash early, while its costs of selling and supporting shops arrive up front. That is why a young SaaS company can look worse than a licence seller in its first years and still be the better business.

Say the limitation. The comparison depends on churn. If a quarter of shops left each year instead of a tenth, an average subscriber would stay four years and pay Rs 1.44 lakh, barely above the licence. Retention is the single number that decides whether the subscription is worth more, which is why investors ask for it before almost anything else.