What You Need To Know About The Different SaaS Business Models

Understanding the different SaaS business models and how to apply them is essential for success. From subscription-based business models to freemiums, every model carries its own intricacies that need to be unraveled in order to make informed decisions about what type of monetization works best for your product or service.

In this post, we will dive deep into different SaaS business models, providing an in-depth exploration of the pros and cons of each method as well as tips on selecting which one is most suitable for you. So get ready founders: it’s time to unlock all the secrets of various SaaS business models!

Common SaaS Business Models

Below are a few of the most commonly used SaaS business models:

Subscription-Based Model

A subscription-based model for SaaS lets customers pay a recurring fee to access the software or service. According to projections, it is expected that a significant portion of software revenue, specifically 53%, will be generated through the subscription model by the year 2022.

Under this model, the customer typically signs up for a subscription plan for a fixed period, such as monthly, quarterly, or annually. The subscription fee usually includes access to the software, ongoing maintenance, and customer support.

Pros

• It provides you predictable recurring revenue, which allows for better planning and investment in product development, marketing, and customer support.
• Your customers can access the software or service for a lower upfront cost, as they pay for the software over time.
• Your customers can scale up or down their usage of the software based on their needs, which provides greater flexibility and cost savings.
• It allows you to maintain an ongoing relationship with customers, which can lead to higher retention rates, increased customer loyalty, and more opportunities for cross-selling and upselling.
• Your customers can easily budget for the subscription fee, as it is a fixed cost that they can plan for in advance.
• It provides a more reliable revenue stream compared to a one-time purchase model, as customers are committed to paying the subscription fee for a fixed period.
• With an ongoing customer relationship, you can receive ongoing feedback from customers, which can help you improve your tool.

Cons

• Customers can easily cancel their subscription, which can lead to revenue loss and lower customer lifetime value.
• The model has become more prevalent, which can lead to increased competition and price pressure.
• It can be expensive to acquire new customers, as the cost of acquiring a customer may not be recouped until several months or even years into the subscription.
• Once you have established a pricing model, it can be difficult to change it without alienating customers or causing confusion.
• You are reliant on customer usage to generate revenue, and if customers do not use the software, revenue may suffer.
• With an ongoing customer relationship, you may be required to provide ongoing customer support, which can increase costs.
• Technical issues and downtime can negatively impact customer satisfaction and retention rates.

Freemium Model

The freemium model for SaaS businesses give people a taste of the product without having to pay upfront. It works by allowing customers to start out with a basic version of the service but encouraging them to upgrade to more comprehensive plans once they have had a chance to experience it. 

This model, used by about 17% of SaaS companies, can be a great option for those looking for ways to expand their customer base quickly, as it is easier for people to get on board than those that require payment from the outset. It can also help in getting people familiar with the product and hooked on the features that set it apart from other services.

Pros:

• It allows potential customers to get familiarized with your solution in an accessible way. They can try out the basics of your tool on its freemium version first and then upgrade if they like what it has to offer.
• It helps build relationships between your business and your customer base – those who take advantage of free options are more likely to think positively about your company and your solutions in the future.
• It can increase sales quickly – as you make your tool available for free, you encourage users to sign up quickly and eventually convert them into paying customers once they have discovered all of its features.

Cons

• Converting free users and monetizing the tool can be difficult.
• Some customers may view the platform as a “cheap” option because of its freely accessible features leading to negative branding.
• Numerous competitors can capitalize on similar features of your tool, making your organization more vulnerable given that your base services may not be unique enough.

In order to get around these challenges, you must focus on providing quality customer service and upselling premium plans in order to differentiate your tool from their competition.

Per User Model

A per-user model for SaaS business charges based on the number of users that are being supported by the software. By charging each user separately, you can increase your profits drastically.

This model is extremely appealing to businesses that operate with large teams because it allows them to provide access to the software for hundreds or thousands of employees without having to pay too much upfront. In fact almost half of SaaS businesses use this model (46%). Not only does this allow teams to access all of their services cost-effectively, but it also encourages team members to share data accurately, securely, and in real time.

Pros

• It allows you to closely monitor your subscription base as every user is billed separately.
• It gives you greater control over your subscription revenue and finances, making it easier to accurately plan for future growth or future updates.
• It gives you a much better picture of your customer engagement level, enabling you to optimize your SaaS offering accordingly.
• You have the flexibility to adjust yur prices and encourage users to upgrade if they think they are missing out on certain features.

Cons

• It may be difficult to accurately estimate the license fees needed in order to cover operational costs and generate a profit. 
• Most per-user models come with a minimum purchase requirement, so if a particular user doesn’t require more features beyond the basic ones then the additional cost becomes wasted money for your business. 
• Too expensive of a price tag can be off-putting for potential customers and drive them away from using your tool. 

Per Feature Model

A Per Feature Model for SaaS Business is a method of charging customers based on the features they use. This model allows companies to offer customers a wide range of pricing options based on the different packages available, ensuring that each customer only pays for the features they need and want. 

The feature-based approach encourages people to scale their services as their business grows, making it a versatile and attractive business model for many enterprises. 

Customers also benefit from improved control over service spend, as businesses can easily add or remove features when needed and pay according to usage. This scalability ensures that your company’s services are always relevant and up-to-date while meeting customer needs in a cost-effective manner.

Pros

• It allows you to customize your offerings based on your client’s needs, charging them only for the features that are being used.This encourages the use of the software and makes it more accessible to customers who may not be able to afford large software subscriptions while still allowing more profitable users to pay for a la carte options as needed.
• Offering different levels of customization provides marketing opportunities such as opting into premium tiers.
• It allows you to make more informed decisions which can lead to increased customer satisfaction and greater profit down the line.

Cons

• It may lead to an incomplete understanding of customer needs, as the pricing models used in this system vary widely depending on the services provided.
• Your customers may find it difficult to access some features due to the complexity of navigating the wide range of packages available.
• You may struggle to reflect your true value proposition due to bundles or upgrade options being hidden from customers.
• You are at risk of losing your competitive advantage if you rely too heavily on the feature model and fail to offer any unique options or innovative solutions.

Tiered Model

A tiered model for SaaS business is a convenient way to offer subscription services while ensuring customers have access to the features they need. With this model, different “tiers” of service are available, each with its own features, functions, and cost. 

Within each tier, there might be multiple levels of service so customers can choose the one that best fits their needs.

Pros

• You can choose different pricing tiers that contain different features to determine which best fits your customer’s needs and budget.
• Customers don’t have to pay large upfront costs, allowing them to receive access to functions they may not otherwise have had.
• It offers your customers flexibility when choosing what functionalities they would like from your tool and control decisions related to potential additions or changes in the future without any drastic changes in price.
• It provides an interesting experience for users as there are often incentives for upgrading their subscriptions as their business grows and needs change.

Cons

• Your customers may not use all the features they are forced to pay for in the higher tiers, leading them to feel like they are overpaying for what they need. This can hurt customer loyalty and lead them to seek out comparable services with cheaper pricing structures.
• Offering too many tiers can make it difficult for customers to know which one is best for them.
• Too much complexity in developing and managing tiered models can be an administrative burden as well.

Uncommon SaaS Business Models

Here are some unique SaaS business models that are being used in the industry today:

A. Pay as You Go, Model

A pay-as-you-go model enables you to provide services on a consumption-based payment system. Instead of being locked into long-term contracts or expensive upfront fees, your customers are able to access services when or as frequently as needed and only pay for the usage they require.

Pros

• It helps you keep your costs low and mitigate financial risk, as each payment is based on the exact amount of services used.
• Your customers get more flexibility to use only the services they need without committing to a long-term contract.
• Since you pay as you go over time rather than upfront, initial start-up costs are kept to a minimum.

Cons

• Bigger upfront payments are typically more cost-efficient and incentivize long-term customer loyalty.
• It is difficult to predict usage levels.  
• You may face difficulty capitalizing on scalability or planning for other business growth opportunities.
• Customers can easily switch providers or change their level of service with minimal effort.

Usage-based Model

A usage-based model for SaaS Business is a great way to create a more flexible service offering. This type of model allows the user to pay based on how much, or little, they use the software or service. This offers them the freedom to choose their level of service and pay only for what they need. 

Furthermore, it reduces the risk associated with upfront costs, allowing entrepreneurs and business owners who are on a budget to still have access to great software and services. With this approach, businesses can save costs significantly while still receiving great quality services that would otherwise be unaffordable.

Pros

• It makes it simpler for you to manage your customer base as you can adjust pricing and offerings quickly and easily in response to customer needs.
• Clients only pay for what they really need, making the process more cost-effective and efficient.
• Providing such customization helps you create a better level of service as customers can identify an offering that best fits their budget without having to pay for features that are not used.

Cons

• There is an issue of scalability as dynamic changes in user needs can easily overwhelm the system.
• Customers often feel burdened by any additional fees associated with increased consumption and can be highly critical if they receive surprise charges they weren’t expecting.
• It requires a significant amount of maintenance to keep track of customer data and usage, which can take up valuable resources that could be used elsewhere.
• It takes more creative effort to market the product when it has different pricing based on usage levels.

Hybrid Model

The hybrid model is popular for those looking for a way to combine the flexibility of multi-tenant SaaS with the control of on-premise software.

This allows businesses to select portions of their environment that are held within their on-premise applications and private clouds, with other parts located in public clouds such as Amazon Web Services, Microsoft Azure, or IBM Cloud.

In this way, a company can take advantage of the scalability and cost benefits while keeping mission-critical functions or data in familiar and secure systems. 

Pros

• It offers greater scalability
• It provides cost savings and security while allowing customers to enjoy access to the most up-to-date tech features.
• It allows customers to own and manage their own infrastructure
• It provides built-in adaptability for expanding digital needs in a secure environment.
• It does not require large upfront expenditure or dedicated onsite support.
• The flexibility allows you to respond quickly and effectively to changing customer demands and market opportunities,
• It allows you to o perate in multiple geographies with minimal disruption
• It eliminates downtime associated with system maintenance
• It reduces capital expenditure by building software only when needed.. This adds up to an efficient and excellent service delivery that better suits the needs of today’s business world.

Cons

• It could lead to operational difficulty. Providing infrastructure and managing customer data can add extra workloads while taking away resources that could be used on other tasks.
• It incurs additional maintenance cost associated with the different third-party applications and hardware.
• Increased time investments might have to be made for debugging purposes.
• There are also compatibility issues as not all private clouds may run all apps without facing compatibility issues.

Choosing the Right SaaS Business Model

Choosing the right SaaS business model can be an overwhelming task. With so many options available, there are a few key  factors to consider and which may include the following:

• Pricing strategy: You need to determine the right pricing strategy for your SaaS product. Each pricing strategy has its advantages and disadvantages, and you need to choose one that aligns with your business goals and objectives.
• Target audience: You need to know their needs, preferences, and buying habits to develop a product and pricing strategy that resonates with them.
• Competitive landscape: It’s essential to analyze the competitive landscape and identify how your product fits in. You need to evaluate your competitors’ pricing strategies, features, and target audience to determine the best way to position your product in the market.
• Customer acquisition and retention costs: You need to consider the costs involved in acquiring and retaining customers. A freemium model may attract more customers, but it can also be costly to retain them.
• Sales and marketing strategy: Your sales and marketing strategy should align with your SaaS business model. For instance, a subscription-based model may require a different sales and marketing approach than a pay-per-use model.
• Scalability: You need to ensure that your product and pricing strategy can scale as your business grows.
• Cash flow: Your SaaS business model should generate positive cash flow to sustain your operations and fuel growth. You need to determine the right pricing strategy that generates enough revenue to cover your costs and generate profits.

Final Thoughts

Taking the time to study and understand the different SaaS business models available can be daunting. However, once you start investigating, you will find that each one offers several advantages that you must consider. In the end, it’s all about finding the model which best fits your company’s goals and objectives.

Ultimately, no two businesses are alike and SaaS business models must be taken into account when deciding what service or product to provide. With research and consideration, you can find a model that works best for your company, as well as how to make changes as it grows.

To continue learning more information on growing your SaaS business, visit our blog for more tips on growing your SaaS business.