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Since the the Software-as-a-Service (Saas) industry exploded onto the scene around 2005, it has experienced exponential growth. Tremendous amounts of time and money are now flowing into SaaS startups and ventures, which have a good chance of success if they meet market demands.

The SaaS business model allows subscribers and other customers to use the SaaS software with an annual or monthly subscription, rather than a one-time fee. Delivered online thanks to cloud computing, this type of pricing model allows startups and other businesses in the SaaS industry to generate monthly recurring revenue while focusing on new features, new products, better service, and other benefits that offer lifetime value to both new customers and existing users.

However, there’s more to SaaS business models than just monthly fees and cloud services. Whether you are just considering building an SaaS product or you already own one, it’s critical to realize that this rapidly changing industry is far more than selling subscriptions.

Certainly, subscription-based revenue remains the foundation of most SaaS business models, but there are other creative approaches to the SaaS pricing strategy as well as innovative ways to grow the customer base and increase cash flow. SaaS companies can also charge more for ongoing support or premium onboarding and sell services to increase revenue.

In this post, we’ll explain the SaaS business model, and cover the pros and cons of SaaS businesses. We’ll also reveal how to optimize your SaaS revenue streams and illustrate the whole strategy with three case studies.

SaaS business model explained

What is Saas Business Model

The typical SaaS business model involves selling cloud-based software at a monthly or annual subscription fee, which users typically access via mobile app or web app, but possibly via desktop. SaaS is now used by nearly every business and most consumers.

Many popular B2B software companies provide software-as-a-service, including those focused on communications such as Mailchimp, Slack, and Zoom, and customer relationship management (CRM) platforms such as HubSpot and Salesforce. Consumer SaaS products include the Adobe Creative Cloud and budgeting apps like EveryDollar, and of course some individual users like B2B platforms.

It’s certainly not impossible to build a successful B2C SaaS, but it’s far more difficult to create sustainable value in this space. This is because most consumers expect apps to be extremely low cost, if not free.

In contrast, SaaS businesses that touch upon B2B market pain points in meaningful ways can reliably and quickly grow to large valuations.

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SaaS business model pricing
DevSquad Infographic SaaS Business Model saas business model pricing

Three basic types of products come to mind when we consider what SaaS business model pricing looks like:

“Freemium is an acquisition model, not a revenue model.” – Patrick Campbell, CEO of ProfitWell

freemium-is-not-a-revenue-model

However, the Freemium model is not actually designed to generate revenue in a classic sense: it is a form of marketing. A SaaS business that can convert Freemium users to paying customers at a rate of 4% is experiencing “really good” success.

The bottom line here is that the free version of SaaS software should be created not necessarily to generate immediate revenue, but instead to bring in mass numbers of free users, convert as many of those users to product evangelists as possible, and spread the word about the platform. In fact, once they need to get past the growth stage, many Freemium platforms—even those with massive user bases—can struggle to monetize successfully and reach the stage of maturity.

This is why when internal metrics and KPIs indicate that the business can support a Freemium model, it must be seen not as part of revenue streams, but as a marketing strategy and expense.

SaaS business model pricing connotes what actual paying customers pay for the service.

Most founders of SaaS businesses set pricing based on anecdotal information. For example:

These are solid strategies for initial pricing, but as the SaaS business expands, ensure that pricing tiers accurately reflect value to avoid excessive churn rates and lost revenue.

Pros and Consof the SaaS Business Model

DevSquad Infographic SaaS Business Model pros and cons

Pros of the SaaS model

Among the benefits of the SaaS business model are these pros that make SaaS products excellent bets for business owners:

Cons of the SaaS  model

Obviously, there are also downsides to the SaaS business model, although they shouldn’t worry anyone excessively if they have vetted their SaaS concept:

SaaS revenue streams

DevSquad Infographic SaaS Business Model v1 saas revenue streams

SaaS revenue comes from more than subscription fees:

New SaaS businesses should prioritize validating product-market fit and selling core subscriptions. After meeting those goals and confirming which marketing channels allow the best rate of customer acquisition at a favorable cost, divert funds toward those channels and attention toward more growth acquisition by adding additional revenue streams.

Saas-Blog-Funnel

How to optimize your SaaS revenue

DevSquad Infographic SaaS Business Model v1 how to optimize saas revenue

There are two main ways to achieve hypergrowth by optimizing your SaaS business model:

Let’s explore some strategies within each.

Lower your CAC

Focus on getting the right customers at the best cost possible to reduce customer acquisition cost (CAC). This may involve different marketing channels, more specific targeting, or perhaps a target audience that is slightly different.

There are a variety of ways you can lower your CAC:

Remember: lowering CAC may go beyond improving targeting strategies and into expanding or redefining target audiences.

Increase your LTV

Another great way to optimize your SaaS business model is to increase the Lifetime Total Value (LTV) of each customer. There are many strategies to increase the LTV for a SaaS:

3 SaaS business model case studies

Let’s take a look at three very different SaaS business models that are working for real companies:

  1. Lower costs versus main competitors
  2. More pricing tiers versus main competitors (and no freemium)
  3. Enterprise software sales with additional services 

1.) OneUp: Adding functionality that popular tools don’t have (at a lower cost)

You wouldn’t think that we need new social media tools on the market, and yet apparently there’s still room. Using their blog as the main channel for new user acquisition, social media scheduling tool has launched and grown to $10k MRR in just 11 months. Not bad considering they are relying on organic growth and word of mouth. 

What makes the tool special is that they’ve added a feature that social media heavyweights Buffer and Hootsuite don’t have, and that’s the ability to re-use social media posts. Even better, they’ve added this for less than half the cost of comparable subscriptions (based on number of social media accounts and number of scheduled posts).

oneup

2.) Monday.com: A new twist in a saturated market

Of course you’ve heard of Trello and Asana and Basecamp. With these big players already in the market, how was Monday.com able to surpass a $1 billion evaluation in 2019 when their 2016 revenues totaled just $4 million MRR?

Well, there are a few reasons:

monday.com_You can see how adding a simple twist to an existing SaaS category and tightening up the revenue streams allows a small player to dominate a big market.

3.) Brightpearl: Nicheing successfully & increasing ARR with services 

ERP software (Enterprise Resource Planning) is known for being overly complicated, challenging to customize, and not cloud based. It’s a generic type of software designed for the integrated management of all key business processes–from customer service to procurement to human resources. 

Depending on the industry, an ERP could help a business manage just about anything. But with that overarching value proposition comes a lack of speciality that frustrates enterprise users across a variety of roles. Brightpearl, a cloud-based ERP software designed for retailers and wholesalers, has designed every future for the ecommerce use case, both direct to consumers and business to business. By doubling down on their niche, they were able to go from near failure to $10 million ARR in a little over two years. 

saas-business-model-brightpearl

Part of the reason Brightpearl has been able to succeed is the addition of custom services, namely implementation support and team training. 

Not sure if your SaaS business idea is likely to succeed? Check out our recent blog post on vetting your SaaS ideas

Also make sure to take our free course, SaaS School, which walks you through the creation of a successful SaaS business from A to Z. 

DevSquad Infographic SaaS Business Model v1
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Whether you already have a SaaS product or are considering building one, you need to study SaaS business models as much as possible. It’s a rapidly changing industry and what was once taken for granted just a couple years ago (that SaaS companies make revenue from selling subscriptions) is now not the whole story.

SaaS companies can also increase revenue by selling services or charging extra for premium onboarding and ongoing support.

Yes, subscription-based revenue still forms the backbone of most SaaS business models, but there’s still much to learn about the pricing strategy for subscriptions as well as additional, creative ways to add revenue.

In this post, learn the pros and cons of SaaS businesses, as well as how to optimize your revenue streams.

SaaS business model explained

What is Saas Business Model

The SaaS business model means selling a cloud-based software (typically accessed via web app or mobile app, but also sometimes via a desktop app) at a monthly or annual subscription fee. 

SaaSwhich stands for software as a serviceis now used by nearly every business and most consumers. Popular B2B SaaS companies include Slack, Mailchimp, and QuickBooks Online. Consumer SaaS products include budgeting apps like EveryDollar and Adobe Creative Cloud. 

While it’s not impossible to build a B2C SaaS, it’s much, much harder to create something of value and grow it sustainably, when many consumers expect apps of any sort to be free or extremely low cost.

On the other hand, SaaS businesses that solve problems in B2B markets can grow to large valuations much more quickly, and predictably. 

Your first squad ebook optin

SaaS business model pricing
DevSquad Infographic SaaS Business Model saas business model pricing

 

When most people think about SaaS business model pricing, they consider the difference between three types of products:

“Freemium is an acquisition model, not a revenue model.” – Patrick Campbell, CEO of ProfitWell

freemium-is-not-a-revenue-model

But the reality is that Freemium is a form of marketing. It’s not a revenue model. A 4% conversion rate from Freemium to paying customer is considered “really good,” meaning that the free version of your software is intended to spread the word and bring in mass amounts of volumes of free users, but not necessarily to bring immediate revenue. In fact, many Freemium products with large user bases struggle to monetize successfully. 

That’s why (if you decide you can support Freemium), you should treat it as a marketing expense and strategy, not part of your revenue streams.

SaaS business model pricing refers to what you charge your actual paying customers. 

Initially, most SaaS founders use anecdotal information to set their pricing, such as:

These are all smart ways to set your pricing initially, but later on, as your business grows, you’ll need to test your subscription piers and their individual pricing amounts. You should also check that each pricing tier accurately reflects the value being given, so that your largest accounts aren’t being undercharged (which hurts revenue), and your smaller customers aren’t being overcharged (which causes churn).

Pros of the SaaS business model

DevSquad Infographic SaaS Business Model pros and cons

The SaaS business model has plenty of pros. Here are some of the things that make SaaS products great for founders:

Cons of the SaaS business model

Of course, the SaaS business model does have some downsides. If you’ve vetted your SaaS concept, these shouldn’t scare you away too much.

SaaS revenue streams

DevSquad Infographic SaaS Business Model v1 saas revenue streams

Subscription fees aren’t the only way to add SaaS revenue. 

Here are all of the ways that you can increase revenue as a SaaS company:

When you first start your SaaS business, you’ll want to prioritize selling your core subscription and validating product-market fit. Once that is achieved, and you know which marketing channels provide a favorable customer acquisition cost, you should double down on those channels and then divert some of your attention towards adding additional revenue streams that will further support growth acquisition. 

Saas-Blog-Funnel

How to optimize your SaaS revenue

DevSquad Infographic SaaS Business Model v1 how to optimize saas revenue

When it comes down to it, there are two main ways to optimize your SaaS business model to allow for hypergrowth:

Let’s explore some strategies within each. 

Lower your CAC

To lower your customer acquisition cost (CAC), you need to focus on acquiring the right type of customers at the lowest possible cost. To do so may require better targeting, different marketing channels, or even a slightly different target audience.

Here are a variety of ways you can lower your CAC:

As you can see, working on lowering your CAC isn’t just about improving your targeting, but also questioning whether you have the best possible target audience.

Increase your LTV

Increasing the Lifetime Total Value (LTV) of your customers is another way to optimize your SaaS business model. Of course, within this huge category, is a whole host of strategies.

How to increase the LTV for your SaaS:

3 SaaS business model case studies

Let’s take a look at three very different SaaS business models that are working for real companies:

  1. Lower costs versus main competitors
  2. More pricing tiers versus main competitors (and no freemium)
  3. Enterprise software sales with additional services 

1.) OneUp: Adding functionality that popular tools don’t have (at a lower cost)

You wouldn’t think that we need new social media tools on the market, and yet apparently there’s still room. Using their blog as the main channel for new user acquisition, social media scheduling tool has launched and grown to $10k MRR in just 11 months. Not bad considering they are relying on organic growth and word of mouth. 

What makes the tool special is that they’ve added a feature that social media heavyweights Buffer and Hootsuite don’t have, and that’s the ability to re-use social media posts. Even better, they’ve added this for less than half the cost of comparable subscriptions (based on number of social media accounts and number of scheduled posts).

oneup

2.) Monday.com: A new twist in a saturated market

Of course you’ve heard of Trello and Asana and Basecamp. With these big players already in the market, how was Monday.com able to surpass a $1 billion evaluation in 2019 when their 2016 revenues totaled just $4 million MRR?

Well, there are a few reasons:

monday.com_You can see how adding a simple twist to an existing SaaS category and tightening up the revenue streams allows a small player to dominate a big market.

3.) Brightpearl: Nicheing successfully & increasing ARR with services 

ERP software (Enterprise Resource Planning) is known for being overly complicated, challenging to customize, and not cloud based. It’s a generic type of software designed for the integrated management of all key business processes–from customer service to procurement to human resources. 

Depending on the industry, an ERP could help a business manage just about anything. But with that overarching value proposition comes a lack of speciality that frustrates enterprise users across a variety of roles. Brightpearl, a cloud-based ERP software designed for retailers and wholesalers, has designed every future for the ecommerce use case, both direct to consumers and business to business. By doubling down on their niche, they were able to go from near failure to $10 million ARR in a little over two years. 

saas-business-model-brightpearl

Part of the reason Brightpearl has been able to succeed is the addition of custom services, namely implementation support and team training. 

Not sure if your SaaS business idea is likely to succeed? Check out our recent blog post on vetting your SaaS ideas

Also make sure to take our free course, SaaS School, which walks you through the creation of a successful SaaS business from A to Z. 

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