Business owners can now scale their businesses effectively, thanks to the ever-advancing technology and tools that make the processes simple and straightforward. This blog describes the SaaS revenue model, how to implement it, and how the model can help your business grow.

What is SaaS?

Software as a service – SaaS is simply a cloud-hosted software. Users can access such services through a desktop application, a mobile app, or an internet browser. However, users pay for the SaaS services on a subscription basis, which can be annually or monthly.

A good example is Zoom. It is an app perfect for group video chats. As a Zoom user, you can conduct as many meetings, whether group or one-to-one meetings, as well as meet your objectives without experiencing technical mishaps. What’s more, you can record the meeting proceedings, use boards, share screens, and run a meaningful discussion on any matter. However, to enjoy all these services, you will need to pay a subscription fee.

Understanding the SaaS revenue model

Before we explore what a SaaS revenue model is, let’s first differentiate between revenue model, revenue stream, and business model. The three terms may seem the same, but they are quite different.

• Revenue stream – The revenue stream is one revenue source for a business. A company can have one revenue stream with several streams. In the case of a SaaS business model, a SaaS business setup can have a subscription plan as a revenue stream.
• Revenue model – The revenue model is the designed plan through which the revenue stream is implemented. One revenue model can have several revenue streams. For instance, if you have a SaaS business with subscription revenue, the subscription model can have different subscription plans.
• Business model – This is a high-level structure of a business establishment. It carries revenue streams and revenue models, including all other business operations.

A SaaS revenue model, therefore, is a detailed plan or framework to generate more money. It highlights the monetization approach for the products and their pricing. What’s more, the plan also helps you identify your potential market and how you can reach the target audience as you scale and grow your business to the next level.

In a simplified definition, the SaaS revenue model is a customized plan to make more money and grow your business.

Revenue streams for the SaaS business model

While the main element of the SaaS business model is to generate more revenue while scaling the business higher, the following are the best revenue streams in any SaaS business model:

• In-app purchases

These are the additional services or features a user can get once they have subscribed to a specific product or service. For instance, a user can access free features based on their subscription plan but can also pay for other premium features directly on the same platform.

• Subscriptions plans

In the SaaS business model, users have to pay recurring fees to access the wide range of features & benefits offered by the product. The subscription plans vary depending on a number of factors, such as services offered and the plans the users select.

• Devoted support

SaaS business solutions aren’t complete without competent staff ready to offer solutions. In fact, customers prefer accessing competent staff at any given time to get the most out of a product. Some are more than willing to spend on such services by paying even more.

Therefore, SaaS companies can identify key areas that need extra customer support and take advantage of them to generate extra revenue by letting customers pay for these services. However, make sure the packages available will benefit customers in one way or the other.

• Upsells

Upselling is all about offering extra services or products to customers along with the products or services they have already purchased.

Upsells can take different approaches. For instance, you can include special add-ons, discounts on extra features, closer support, or high-level plans. These upsells add value to customers based on the services or products they are acquiring while maximizing profit for the SaaS business, too. Besides, it creates customer loyalty and satisfaction, thus enhancing customer retention.

You can do upsells, whether online or offline. Again, it is easier to reach out to already existing customers through upsells than to get new customers.

• Direct web sales -Self-Service transactions

Direct web sales include revenue generated when visitors perform self-service transactions as they complete the purchase of services or products on their own. This revenue stream is convenient as it allows customers to initiate transactions faster and easily while cutting down vendor costs for the business.

• Premium onboarding

Premium onboarding involves offering premium services to customers to stay ahead of the competition and to grow your subscription base. Through premium onboarding, you can customize products and services to meet what the customers want, thus promoting customer retention.

• Affiliate Sales

Affiliate sales are one big win in SaaS business revenue streams; if you plan well and launch a reliable affiliate program, you can expand your market, keep already existing customers, cut down on marketing expenses, and penetrate new markets easily. This, in turn, will stimulate business growth, thus generating more revenue.

How SaaS revenue model works?

The SaaS business model varies from other business models based on a number of factors that enhance the operation of the business. These elements include the following:

• Enhanced customer retention

Every business yearns for long-term customers. In the SaaS business model, the main concern is doing everything possible to retain 100% of customers. After all, customer retention is what keeps the business moving and surviving.

Again, in the SaaS business model, you cannot claim the money from clients until you deliver all the services required to achieve recurring revenue, as described in the next point.

Therefore, SaaS business models ensure by all means possible that customer relationships and upselling are on the right track. Ideally, in a SaaS business model, an already existing customer spends more than a new one. Again, an existing customer is likely to leave your business to competitors just in case you fail to deliver the anticipated results. One of the key concerns in the SaaS business model is to ensure higher customer retention.

• Recurring payments

SaaS business models rely on a subscription basis, where users have to use an app after subscribing to access products and services. Therefore, it is upon the user to decide if they prefer to pay annually or monthly. This is contrary to other business models where payments are only made once.

Recurring payments, therefore, are known as MRR- monthly recurring revenue. While the SaaS business model offers services and not products, it can be hard to estimate appropriate revenue. For instance, you can get some upfront fee immediately after a customer subscribes and sign up. However, you can assume this upfront fee to be revenue until you earn it. This means it is a liability as a business owner to some extent because the customer can ask for their money back if you fail to deliver.

Therefore, in the SaaS business model, revenue recognition is a key element you should master.

• Regular updates

In other business models, the focus is often on next-gen product versions. This is contrary to the SaaS business model, whose concerns are on small, consistent, and regular updates of the services to keep the customers happy and add value to what the customers need.

Ideally, SaaS is simply a software-based business model. Therefore, in the tech space, software malfunctions risk customer’s confidential details and expose them to varied forms of risks, such as hacking and related threats. That is why regular and consistent updates address any possible loopholes that could pose risks to customers’ details.

Again, since the SaaS business model hosts their products, SaaS companies can initiate updates, improve the product’s versions, add new features, and introduce new products as needed.

With regular updates and good customer relationships, SaaS companies are the best when handling customer requests and issuing feedback.

Stages of SaaS business model

The SaaS business model is just like any other business model. The SaaS business model also has several stages it passes before it becomes successful. These stages include the following:

• Early or startup stage

Here, the SaaS business model is still under development. The main focus is to prepare products and services, launch preparations, and introduce the product to the market.

While you may have many customers at this stage, the product is still in the early stages of development. As a way of keeping your operations bar higher, you may consider bootstrapping or seeking initial funding to sustain the processes.

Again, you don’t need much staff at this stage since the focus is on one product that hasn’t started yielding returns. Some of your top concerns at this stage should be:

• Optimizing pricing
• Tracking the metrics
• Attracting new customers
• Focusing on the growth of the business

• Hypergrowth stage

This is where all the plans, the products, and the services you have been working on start making sense. Everything is now taking shape based on the plan you initially had. At this point, you are gaining more subscribers, your business is growing, and you can now account for MRR with an admirable cash flow.

However, you will need to put in more effort and raise more funds to keep your business booming. You will have to add team members, add product iteration, and scale your business to the next level.

When sourcing funds to sustain your SaaS business model, you can opt for the following approaches:

Angel Investors – This is a single business operator with adequate finances, ready to collaborate with your business. This is a perfect choice for a startup searching for a practical investment plan that can add financial value to the business.

Venture Capital – Venture capital refers to firms or fund organizations that can predict good growth in your SaaS company. As a result, they won’t hesitate to extend financial support to see your business grow and scale.

Note: If you don’t want to use venture capital or angel investors to fund your SaaS business, you can continue to bootstrap your SaaS business or simply focus on increasing the revenue as you push your business to the next level.

The key takeaways from stage two of SaaS business model development include:

• Establishing KPIs – Key Performance Indicators
• Setting up a solid monetization approach

• Stability or Mature stage

At the mature or stable stage, your SaaS business is now fully established. Here, you have a clearly defined audience, you know what your customers want, and you have all the means to meet their demands.

As a mature SaaS business, seeking funds can aim to buy competitors or break new markets. This means that seeking funds at this stage requires you to have a bigger plan in mind and not plans to sustain the business operations.

The major takeaway at this point for a SaaS company will be re-evaluating pricing strategies and their effectiveness in the overall business operations.

Best tools that will help your SaaS business grow

At this point, you have a better understanding of the SaaS business model. The following tools will help you achieve the objectives of SaaS business operations:

• Retention software

As discussed in this guide, the retention rate is a key element in SaaS business. Therefore, retention software will come in handy when you want to evaluate the retention rate, especially as a new business. With retention software, you can identify loopholes that make customers leave your business and work on them appropriately.

• Billing software

Again, the SaaS business model operates on a recurring billing basis. Therefore, as a way of ensuring accurate billing, you will need a billing tool and integrate it with other payment approaches for your business to control all the revenue and payments.

• Analytics

The data you gather from your SaaS business performance will guide you on the directives to take. The insights will show you the areas that need extra effort, things you need to change, and ideas you need to add to scale your business higher. For instance, you can identify product features that customers are willing to pay more for; you can also see elements that are cutting down on subscription rates or features that are making customers leave your business. Analytic tools will help you identify all these and take the necessary measures to streamline your business operations.

Conclusion

The SaaS business model is a perfect idea for anyone who wants to grow & scale their business. The funding question shouldn’t demotivate you from initiating your SaaS business idea. There are diversified financial ways through which you can always fund your SaaS business, as long as the initial ideal has potential growth. Just don’t forget the need to integrate SaaS business tools, as they will enhance your business growth.

Any queries? Connect with our SaaS development company – Aalpha information systems!