What SaaS Revenue Model is Best For Your SaaS Business?
The SaaS industry is growing rapidly, and businesses of all sizes are finding success with SaaS products.
Recent data show it has grown five times to $172 billion from $32 billion in only a span of seven years since 2015. The opportunity for businesses to leverage SaaS models is undeniable especially, that according to a study, about 88% of companies use SaaS.
However, with all the opportunity comes complexity, and choosing the right SaaS revenue model can be a daunting task. With many options available for you to choose from, you may wonder which one is best for you.
In this article, we’ll take a closer look at each revenue model and help you decide which is the best fit for your SaaS company. We’ll also offer tips on how to optimize your sales process to increase your chances of success.
Keep in mind that you can always change your revenue model down the road if it’s not working well for you. So don’t be afraid to experiment until you find the right fit.
But before we look into the different types of SaaS revenue models, let’s first understand the three essential phases of a successful one.
Three Essential Phases of Successful SaaS Revenue Models
There are three essential phases of any successful SaaS revenue model: initial sale, retention, and expansion. Let’s take a closer look at each one
Initial Sale: The initial sale is when you first make contact with your potential customer and convince them to sign up for your service. This phase includes activities such as lead generation, cold calling, and email marketing.
Retention: Once you’ve convinced a customer to sign up for your service, it’s important to focus on retaining them as a long-term customer. The best way to do this is by providing excellent customer service and continually adding new features and functionality that will keep them engaged with your SaaS product.
Expansion: The expansion phase is all about growing your existing accounts by upselling them on additional features or convincing them to increase their subscription level. Upselling can be done through cross-selling (adding new products), add-ons (bundling products together), or upgrades (switching them to a higher-priced plan)
By focusing on these three essential phases – initial sale, retention, and expansion – you can ensure that your SaaS revenue model will be successful in the long run.
In the next section, we’ll take a look at several revenue models that you can use to maximize your profits.
7 Revenue Models For Your SaaS Business
Below are 9 of the most popular SaaS revenue models you can use to monetize your product, including their benefits and potential challenges you may encounter.
1. Ad-based revenue model
The ad-based revenue model relies on selling advertising space on a website or app to generate revenue.
This is a popular model for many SaaS companies because it’s relatively easy to set up and manage ads. The key to making this model successful is making sure that the ads are relevant and engaging for the target audience.
- Cost effective advertising opportunity – businesses only pay when someone clicks on an ad, so there is little risk involved.
- Easy to set up and manage – ads can be placed on a website or app with minimal effort required to maintain them.
As with any revenue model, there are also some challenges associated with an ad-based approach, including:
- Making sure ads are relevant and engaging – if Ads are not well targeted, they will be ineffective and may even turn off potential customers.
2. Affiliate Revenue Model
The affiliate revenue model relies on partnerships with third-party individuals and organizations to drive traffic and conversions.
These partners, or affiliates, earn a commission on any sales generated from referrals. This model can be effective for individuals and businesses that have a wide reach and want to increase their exposure to a potential audience.
- Increased exposure and potential audience reach – through partnerships or affiliates, businesses can tap into new markets and increase their reach.
- Easy to implement and monitor results – most affiliate programs provide detailed tracking information so businesses can see which affiliates are performing well and generating sales.
- Finding reliable partners – it’s important to partner with reputable websites or platforms that have a relevant audience.
- Ensuring conversions – affiliates need to drive traffic that is likely to convert into sales in order for this model to be successful.
3. Channel Sales (Indirect Sales) Model
The channel sales model relies on existing distribution channels to sell products or services. This could include resellers, wholesalers, or retailers.
SaaS businesses using this approach need to factor in the margins that these resellers require in order to make a profit.
- Ability to leverage existing distribution channels – this approach can be quicker and easier than creating new channels from scratch.
- Increased reach and sales volume – by selling through existing channels, businesses can tap into new markets quickly.
- The pricing structure is limited by reseller’s margin requirements – this means that businesses need to carefully consider their pricing in order to make a profit while still appealing to resellers.
- Limited control over how products are sold – once products are in the hands of resellers, businesses have little control over how they are marketed and sold.
4. Direct sales
The direct sales model is the most traditional way to sell digital products, including SaaS tools. In this model, customers purchase (or subscribe to) products directly from the seller, typically through an online store. This revenue model offers a number of advantages for both the SaaS company and their customers.
- You have complete control over your customer relationships.
- You’re able to collect customer data directly, without going through a third party.
- You don’t have to share revenue with anyone.
- Customers are more likely to form an emotional attachment to your brand when they purchase products directly from you.
- Customers know exactly who they’re buying from and can be confident that their personal information will be kept safe.
- They can expect a higher level of customer service since they’re dealing directly with the SaaS provider.
- The cost of customer acquisition can be high. Because SaaS products are often sold through direct sales channels, businesses need to invest in marketing and sales efforts to reach potential customers. This can be costly, and it can take time to see results.
- SaaS businesses need to focus on building long-term relationships with customers. Unlike one-time software purchases, SaaS products are typically subscription-based, which means customers need to be convinced to renew their subscription each year. This can be a challenge if they’re not seeing the value in the product.
- SaaS businesses need to ensure they’re providing ongoing value to customers to keep them engaged and prevent churn.
5. Freemium Model
The freemium model has become increasingly popular in recent years as a way to sell SaaS products.
In this model, customers can access some content or features for free while premium content or features are locked behind a paywall.
- It’s easy to attract new customers since they can try out your product before committing to a purchase or subscription.
- Businesses are able to offer a basic version of their SaaS product for free, while charging for premium features. This approach can be highly effective in generating revenue from customers who are already using your product.
- Premium features can serve as “upsells” that encourage free users to upgrade their accounts.
- Customers are able to access basic features or content without having to pay anything up front.
- They can decide whether they want to upgrade their account after trying out the product first-hand.
- It can be difficult to get people to upgrade their accounts since they’re already getting value from the free version of your SaaS product.
- Offering too much content for free can cannibalize sales of premium products or services.
6. The Subscription Revenue Model
In this model, customers are charged a recurring fee on a monthly or annual basis in exchange for access to the software.
- It provides predictable and recurring revenue for the company.
- It allows the company to build up a base of loyal customers over time.
- You need to make sure that you have an effective subscription system in place. This means having a system that can easily handle payments and keep track of customer information.
- You need to offer different payment options so that customers can choose the one that best suits their needs.
7. The Transactional Revenue Model
With this model, customers are charged based on their usage of the software. This means that they’ll be charged a certain amount per transaction or per month depending on how much they use the software.
- It allows customers to pay only for what they use.
- It’s flexible and can be adjusted based on customer usage patterns.
- It can be difficult to predict cash flow and there’s always the possibility that customers will use less of the software than expected.
How to Optimize Your SaaS Revenue
Revenue optimization is important because it allows you to maximize the revenue that your business brings in. When you optimize your revenue, you are able to increase your top-line revenue (the revenue generated from your core product or service) and/or your bottom-line revenue (the revenue generated from add-ons or upsells).
There are a few different ways that you can optimize your SaaS revenue. Below are three of the most effective methods:
1. Increase Your Average Order Value
AOV is the average amount of revenue generated per transaction. SaaS companies can increase their AOV in a number of ways such as upselling, cross-selling, and bundling products/services.
Upselling is when a SaaS company encourages a customer to purchase a more expensive version of the product/service they are already using. For example, a customer may purchase the basic package of a SaaS product, but be encouraged to upgrade to the premium version.
Cross-selling is when a customer is offered additional products/services that are related to those they already have. For example, if a customer purchases an accounting software subscription, they may also be offered tax filing services.
Bundling products/services together involves offering customers a discounted package of products/services that they can purchase together. For example, a company may offer a 20% discounted bundle of their SaaS products plus additional services like training.
By increasing AOV, SaaS companies can generate more revenue per transaction which leads to overall growth for the company..
2. Increase Your Customer Lifetime Value (CLV)
CLV is the total amount of money that a customer spends with your company over the course of their lifetime.
You can increase your CLV by offering additional features that complement your SaaS product’s core offering. For example, if you are selling a productivity tool, you can offer additional features such as task management or collaboration tools. You can also provide discounts on your product or bundle it with other services to incentivize customers to purchase more. This will increase the amount of value that customers get from your product and result in higher CLV.
Additionally, providing great customer service and support will ensure that customers have a positive experience with your product, leading to higher retention rates and more repeat purchases
By increasing the CLV, you will be able to increase the amount of money that each customer spends with your company, which will in turn increase your business’s overall revenue.
3. Decrease Your Customer Churn Rate
Customer churn is the percentage of customers who cancel their subscriptions within a given time period.
You can decrease customer churn by providing exceptional customer service and delivering on your promises.
By decreasing customer churn, you will be able retain more customers, which will allow you to generate more recurring revenue for your business.
Choosing the right revenue model is essential to the success of your SaaS business. The 9 options we listed each have their own benefits and challenges, so it’s important to carefully consider which one will work best for your company. Some of the factors you need to consider when choosing a revenue model include your target market, the services you provide, and how much value you can offer customers.
Once you have chosen your revenue model, you should focus on increasing AOV, CLV, and churn rate. Increasing AOV involves offering additional features, bundles, or discounts to customers. Increasing CLV means providing additional value to customers and excellent customer service. Reducing churn rate involves providing a great user experience and supporting customers when they need help
By carefully choosing the right revenue model and optimizing AOV, CLV, and churn rate, you can ensure that your SaaS business is set up for success.
If you’re still not sure which model is right for you, visit our blog for more tips on growing your SaaS business.