gswardman

The SaaS Business Model 101

By gswardman March 29, 2021

The term SaaS business model came into the limelight in 2005, and the Software-as-a-Service industry has since grown in leaps and bounds. Since then, the SaaS industry has experienced exponential growth, and with huge amounts of revenue being directed into SaaS ventures, startups stand a better chance at growth. The SaaS business model

The SaaS business model is a model where your customers do not buy your software for a one-time fee, but you charge them a recurring annual or monthly fee for the service, deliverable via the internet.

Why SaaS is in High Demand

A business owner who is not interested in spending a colossal amount of money investing in IT infrastructure finds the SaaS business solution very convenient, especially if the SaaS solution is an integral part of their business, such as Salesforce for sales teams, or Zendesk for customer relationship management (CRM) systems.

There are more ways than one in which a SaaS software business model earns money, but its major income earner is the recurring membership. Recurring membership is either in the form of ARR (Annual recurring revenue) or MRR (Monthly Recurring Revenue). When the clients pay the membership fee, they can access the software features and products.

Before we delve deeper into SaaS growth strategy, let us look at the different stages of the SaaS business model growth.

Image of Stages of the SaaS Business Model Growth

· Startup

This is the initial stage that gets the business moving, creating a product, building an MVP, and taking it to the market to get a customer base and feedback. Here you are operating with no real clients yet, and have no cash flow yet, but you need to prove that your product has an edge over the competition. You also need to test the app and promptly address any arising issues.

· Hypergrowth

If the market is receptive to your product, you will experience an upsurge in business as clients start using your software. This is an exciting, yet tumultuous phase because you need to expand in bandwidth, data, and other technicalities to handle the new client influx. Your SaaS product allows the customers to breathe easy knowing that your software provides the much-needed infrastructure for their business operations.

· Maturity

Maturity or the Stable Golden Goose is that point when your SaaS business levels out and starts to make good profits. At this stage, the acquisition of a new client will not test your infrastructure’s mettle like the hypergrowth stage, and you become more accustomed to churn, which we shall discuss later on.

The Pros of the SaaS Business Model

· Loyalty

The best advantage of the SaaS business model is the unwavering loyalty of your clients. If your SaaS product serves as an integral part of their business and serves them without fail, they are unlikely to shift loyalty.

· Guaranteed Recurring Income

Since each customer rents your software on a monthly or yearly basis, they guarantee you a recurring annual or monthly fee for as long as you provide the needed service and keep adding new features along the way.

· Easy to Expand

The SaaS model does not involve any physical goods and it allows you to expand rapidly into new markets. Expansion of your SaaS business means you can commit your money to different marketing solutions as well as local representatives in various countries you expand to.

· No Customer Friction

SaaS subscriptions are either annual or monthly, which all customers understand before subscribing. Most customers already know how this works if they have encountered this model such as Spotify or Netflix. There are zero hidden costs and they know what they pay for is what they get.

Cons of the SaaS Business Model

· Capital Intensive

Recurring income for years to come is an attractive idea, however, the huge investment needed to get the business model up and running is a hamper. In the beginning, you will need to hire programmers, developers, and User Interface (UI) designers who will work together to make your product efficient and user friendly.

· Business scaling

Once the product takes off, and you acquire a few clients, you have to re-invest all your earnings, and add more capital for business scaling. You have to expand your storage, security, bandwidth, data capabilities, as well as have a maintenance team for handling issues that crop up in the hyper-growth phase.

· Complex Product

The SaaS model is relatively easy to understand, but effective maintenance is difficult, even for professionals who know the ins and out of the involved coding process. This makes selling the business a lot more difficult than other businesses.

· Easy for others to Copy

A SaaS is distributed all over, and competitors can pay a subscription, see how your software works and replicate it. As a SaaS business, you have to keep re-inventing and re-innovating your product to stay relevant to your clients.

Security

SaaS businesses are prone to data loss, malware, viruses, and other threats. SaaS business owners need to invest heavily in app and data security.

What You Need to Know Before Buying a SaaS Product

1) Understand the Code

If you intend to acquire a small SaaS business, you need to understand the software coding. This is because the small business does not come with a development team as would be the case if you were buying a bigger business. A bigger SaaS business would also come with an outline of the systems and processes so that if your development team left, you can easily acquire another developer to continue the job.

2) Confirm Ownership

Ensure the seller owns the coding, IP (Intellectual Property), and business brand. Make sure you are not duped into buying a portion of the business, as opposed to the entire business.

3) Confirm Churn Rate

You need to know the business’s churn list or the rate at which customers drop their monthly subscription), LTV (Lifetime Total Value), and CAC (Cost Acquisition per Customer). These are crucial SaaS metrics we shall discuss later because they are the lifelines of your business. If the CAC is over the top, or LTV too low because of higher churn rates, that SaaS business is not a worthy buy.

4) Check for Consistent Growth

When buying a SaaS business, buy one with a consistent customer growth level, instead of one with explosive growth. The hyper-growth stage as mentioned earlier will give you scaling problems that you might not be capable of handling.

SaaS Growth Strategies

There are many ways to growing a SaaS business, depending on your competencies and what works for you. However, here are a few growth strategies you can use for your business.

· Improve Your Organic Traffic

The traffic that converts the most is organic searches from search engines like Google, Yahoo, or Bing. One way to increase your organic searches is by engaging tools like SEMRush that shows you where you rank.

Image of different searc engine like Google, Yahoo,or Bing

· Use New Marketing Channels

When testing a novel strategy, you need to set some goals. Ensure you inject enough money into the marketing channel to enable you to reach a significant number of customers. A new marketing channel may be taking your best ranking content and making a YouTube video, which is the second largest search engine, or a paid ad on LinkedIn or other social media platforms.

The different marketing and lead generation channels include:

    1. Referral Marketing: This includes referrals from friends and referral programs
    2. Content Marketing: This includes text audio or video content such as blogs, or YouTube Videos
    • Advertising: Traditional advertising such as TV, radio or billboards can work well, as well as YouTube, LinkedIn, Google, Facebook, or Reddit ads

· Upselling

Upselling your products to your existing customers earns you more in the long run. The upsell could be anything from selling more expensive packages that the client pays some extra money for extra benefits, data storage, features, or all three.

Image of Arrow with improvement on producting upselling.

You can make it a one-time upsell or provide a product such as a webinar on how to maximize the software to their best advantage. This is the ‘freemium’ pricing model, which lures the customers with some functionality for free, then they start paying. Whichever upselling method you decide on, consider the service costs and add them into your final pricing,

· Leaner, Cleaner, and Faster

Improve the customer user experience, satisfaction as well as total loyalty by making your software cleaner and faster by eliminating bad code. Declutter your code, improve your software speed and see an upsurge in customers, and experience recurring revenue over a longer period.

Different SaaS Revenue Streams

SaaS business models have several revenue streams such as:

1) Subscription

Recurring payments form the main revenue generation of SaaS businesses. This revenue stream is fluctuational and varies or month to month or from year to year depending on the pricing model you use, and customer preferences. As long as your app is relevant and serves the customers well, they will continue paying.

2) Upselling

As mentioned, upselling to clients by offering more data, storage and extra benefits such as high-quality API are all ways of earning more income.

3) Charging for Software Setup

Software companies can charge customers upfront for software setup, although it works better if you have bigger clients with more data. This revenue stream improves your SaaS’s profits and also makes it possible to have a customer verification process.

4) Data-Driven Reports

You can earn extra income by charging extra for the creation of data-driven reports based on the service you offer. It may be offered as an extra service or as a feature in one of the plans. To make this service relevant, you have to make sure these data-driven reports offer some added value and give you an ROI (Return on Investment).

5) Customer Support

Developing customer support and charging for the service works well as an extra revenue source. Customer service is an integral, but costly part of a business, and it is crucial in a SaaS business value proposition, or you can also build it into the pricing model.

Important Metrics in the SaaS Business Model

Before we discuss the pricing models, it is important to know some of the key metrics in a SaaS business. For the success of your business, you have to keep up with your business’s key metrics.

· OMTM (One Metric That Matters)

The OMTM is also known as the NorthStar Metric, and it helps you to know how successful your product is-or not. The OMTM is unique for each business and it sets goals for your team. For instance, Slack has goals for two thousand messages per person, while for Airbnb, bookings per night constitute OPTM.

OMTM (One Metric That Matters) - NorthStart Metric for SAAS Businesses

· MRR (Monthly Recurring Revenue)

As mentioned before, the MRR is a crucial financial metric for any successful SaaS business. Since SaaS business models are subscription-based, you need to check how much money you make per month. This metric does not include any profits from upsells or other revenue streams.

Formula of MRR (Monthly Recurring Revenue) in SaaS business

· LTV (Lifetime Value) or CLV (Customer Lifetime Value)

Lifetime Value is the total amount you get from your customers during the entire period they are using your software. The LTV helps in your profit prediction and budgeting. Companies that have a decent LTV concentrate on improving the UI (user experience) of their existing clients.

CLV is calculated as ARPA (average revenue per account) divided by the Customer Churn Rate

· (CAC) Customer Acquisition Cost

CAC is a metric in marketing that shows you how much you spend in acquiring new customers. If you watch your LTV and CAC of your SaaS, you can maintain healthy and balanced growth in your business.

· NPS (Net promoter Score)

NPS helps you in identifying your customers’ satisfaction with your SaaS product. NPS premises on one question, on a scale of one to ten, how likely the customer would recommend your product to a friend or colleague. A scale of 0 means they would never recommend your product and 10 means they definitely would. This metric is closely related to customer service, user interface, and product feature quality.

· Churn Rate

The churn rate is the client percentage you have lost in a pre-defined period such as weekly, monthly, or quarterly. Since SaaS businesses are subscription-based, you need to keep track of all your existing clients and ensure you focus on customer retention more than gaining new users. Trying to learn why they churn may help you in product or service improvement.

Customer Churn is calculated as (Customers in the Beginning of a Period less Customers at the End of a Period) divided by Customers at the Beginning of Period

· Conversion Rate (CR)

Conversion Rate Graph with Conversion Funnel.

The conversion rate shows how many individuals completed a process to the tail end. In the context of customer acquisition, we use the conversion rate to determine how effective marketing campaigns are. CR is calculated as:

CR = Number of People Finishing an Action divided by Number of People Starting an Action

· Customer Acquisition Rate (CAR)

After determining the success and cost of your marketing campaigns, you need to know how fast your new customer acquisition is. CAR lends you an aerial overview of how well your efforts at customer acquisition are faring within a set period.

CAR = Number of Acquired Users divided by Period Length

If you get 1500 new customers over five months, your CAR is 1500/5= 300 users a month.

· PQL (Product Qualified Leads)

PQL’s are potential customers who have used your product before. These PQLs are important to keep track of when you are offering a freemium. Reaching out to a PQL to attempt to convert them into a paid subscriber, does not take much marketing since this person is already aware of what your product can do.

The Different SaaS Pricing Models

Here are some of the pricing models in a SaaS business.

1. Per-User Pricing Model

This is a model that you can use in a hybrid model with freemium and tiered pricing. The idea is that a client pays one price per person, and if a second person will use it, they have to pay for the extra person.

2. Tiered or Per Feature Pricing

Almost all companies start by using tiered pricing as it is simple and has the potential for upselling and improved value addition. You can decide the tiers by the number of specific features or general features. Companies offer services at different rates. The lower the rate a customer pays, the fewer the features. This allows you to provide tiered value levels while serving different customers with different purchasing powers.

3. Freemium

As mentioned, freemium is one of the most common pricing models because of its high customer success rate. However, untold stories abound of freemium model SaaS companies that could not stay afloat because of unpaid server costs.

The freemium model lures users with a free software version but is not a revenue model. Once the clients use the product and like it, or need to add functionality, they have to pay up to get the full version of the software. Some of the success stories of this model are Zoom and Dropbox, whose free version allows users storage of up to 2B. after filling up the 2GB, the users have no choice but to upgrade to a paid version if they still want to use the product.

4. Usage-based pricing

Some years back, the traditional software of the usage-priced model was fight on cable or a pay-per-view movie. In this model, the user is only charged for how much they use the product. This is evident in the majority of industries with their usage being transactions or data processed. The more data, the higher the bill. Almost all cloud server platforms like Google Cloud offer this type of pricing model.

5. Per active user pricing

Per active user, pricing is a variation of active user pricing. This model was designed to improve per-user pricing to allow businesses to use a product without paying for users who did not use the software.

6. Flat-Rate pricing

This pricing model has few real-life examples, so it is almost impossible to gauge how successful this would be. Instead of various pricing tiers, a company offers its product for one flat rate.

Famous Examples of SaaS

· Google Apps or G Suite

Example Examples of SaaS - Google Apps or G Suite

All Google apps from Gmail to Google Photos or event scheduling on your calendar is hosted on the cloud. When a company buys a G Suite package, they use these apps for making work easier by using Calendar to schedule meetings, share documents, or holding meetings on Hangouts.

· Amazon Web Services

Amazon Web Services consists of a pack of over 70 apps covering app integration, development, analytics, etc.

Example Examples of SaaS - Amazon Web Services

· Dropbox

For those not using Google, Dropbox is the next best alternative for file and image storage. When you save a new photo on your Dropbox account, you can access it from any web app or desktop with internet access.

Example Examples of SaaS - Dropbox

Why Clients Go for SaaS Products

Clients opt for the SaaS model for various reasons:

· Reduced Costs

Since a SaaS is subscription-based, it is paid when the client starts using the product, which cuts down on costs. The subscription depends on various factors such as:

· Number of Users

A small company with 4 or 5 workers will pay less in subscription use than a company with over three hundred employees. The subscription fee changes as the small company grow.

· Number of Tasks

Free users can choose how many actions they want to perform with your SaaS software. For instance, you can send 50 emails a month for $50, or 500 emails for 400$. The customer has a choice of cost regulation.

· Amount of needed Database

Depending on the customers' capacity and available resources, the prices may differ.

Final Thoughts

Software-as-a-service is generally a much cheaper option than building an on-premise solution. Clients are cautious of paying a lot of money for unnecessary functionality but worry about needing the extra functionalities in the future.

With SaaS, they are assured of scalability and getting the extra features should they need them later. The client is free of worrying about updates as everything is taken care of by their vendor. A SaaS business model has many dynamics to it and you may have to invest quite a lot, but when it becomes stable, it will become the proverbial golden goose.

The term SaaS business model came into the limelight in 2005, and the Software-as-a-Service industry has since grown in leaps and bounds. Since then, the SaaS industry has experienced exponential growth, and with huge amounts of revenue being directed into SaaS ventures, startups stand a better chance at growth. The SaaS business model

The SaaS business model is a model where your customers do not buy your software for a one-time fee, but you charge them a recurring annual or monthly fee for the service, deliverable via the internet.

Why SaaS is in High Demand

A business owner who is not interested in spending a colossal amount of money investing in IT infrastructure finds the SaaS business solution very convenient, especially if the SaaS solution is an integral part of their business, such as Salesforce for sales teams, or Zendesk for customer relationship management (CRM) systems.

There are more ways than one in which a SaaS software business model earns money, but its major income earner is the recurring membership. Recurring membership is either in the form of ARR (Annual recurring revenue) or MRR (Monthly Recurring Revenue). When the clients pay the membership fee, they can access the software features and products.

Before we delve deeper into SaaS growth strategy, let us look at the different stages of the SaaS business model growth.

Image of Stages of the SaaS Business Model Growth

· Startup

This is the initial stage that gets the business moving, creating a product, building an MVP, and taking it to the market to get a customer base and feedback. Here you are operating with no real clients yet, and have no cash flow yet, but you need to prove that your product has an edge over the competition. You also need to test the app and promptly address any arising issues.

· Hypergrowth

If the market is receptive to your product, you will experience an upsurge in business as clients start using your software. This is an exciting, yet tumultuous phase because you need to expand in bandwidth, data, and other technicalities to handle the new client influx. Your SaaS product allows the customers to breathe easy knowing that your software provides the much-needed infrastructure for their business operations.

· Maturity

Maturity or the Stable Golden Goose is that point when your SaaS business levels out and starts to make good profits. At this stage, the acquisition of a new client will not test your infrastructure’s mettle like the hypergrowth stage, and you become more accustomed to churn, which we shall discuss later on.

The Pros of the SaaS Business Model

· Loyalty

The best advantage of the SaaS business model is the unwavering loyalty of your clients. If your SaaS product serves as an integral part of their business and serves them without fail, they are unlikely to shift loyalty.

· Guaranteed Recurring Income

Since each customer rents your software on a monthly or yearly basis, they guarantee you a recurring annual or monthly fee for as long as you provide the needed service and keep adding new features along the way.

· Easy to Expand

The SaaS model does not involve any physical goods and it allows you to expand rapidly into new markets. Expansion of your SaaS business means you can commit your money to different marketing solutions as well as local representatives in various countries you expand to.

· No Customer Friction

SaaS subscriptions are either annual or monthly, which all customers understand before subscribing. Most customers already know how this works if they have encountered this model such as Spotify or Netflix. There are zero hidden costs and they know what they pay for is what they get.

Cons of the SaaS Business Model

· Capital Intensive

Recurring income for years to come is an attractive idea, however, the huge investment needed to get the business model up and running is a hamper. In the beginning, you will need to hire programmers, developers, and User Interface (UI) designers who will work together to make your product efficient and user friendly.

· Business scaling

Once the product takes off, and you acquire a few clients, you have to re-invest all your earnings, and add more capital for business scaling. You have to expand your storage, security, bandwidth, data capabilities, as well as have a maintenance team for handling issues that crop up in the hyper-growth phase.

· Complex Product

The SaaS model is relatively easy to understand, but effective maintenance is difficult, even for professionals who know the ins and out of the involved coding process. This makes selling the business a lot more difficult than other businesses.

· Easy for others to Copy

A SaaS is distributed all over, and competitors can pay a subscription, see how your software works and replicate it. As a SaaS business, you have to keep re-inventing and re-innovating your product to stay relevant to your clients.

Security

SaaS businesses are prone to data loss, malware, viruses, and other threats. SaaS business owners need to invest heavily in-app and data security.

What You Need to Know Before Buying a SaaS Product

1) Understand the Code

If you intend to acquire a small SaaS business, you need to understand the software coding. This is because the small business does not come with a development team as would be the case if you were buying a bigger business. A bigger SaaS business would also come with an outline of the systems and processes so that if your development team left, you can easily acquire another developer to continue the job.

2) Confirm Ownership

Ensure the seller owns the coding, IP (Intellectual Property), and business brand. Make sure you are not duped into buying a portion of the business, as opposed to the entire business.

3) Confirm Churn Rate

You need to know the business’s churn list or the rate at which customers drop their monthly subscription), LTV (Lifetime Total Value), and CAC (Cost Acquisition per Customer). These are crucial SaaS metrics we shall discuss later because they are the lifelines of your business. If the CAC is over the top, or LTV too low because of higher churn rates, that SaaS business is not a worthy buy.

4) Check for Consistent Growth

When buying a SaaS business, buy one with a consistent customer growth level, instead of one with explosive growth. The hyper-growth stage as mentioned earlier will give you scaling problems that you might not be capable of handling.

SaaS Growth Strategies

There are many ways to growing a SaaS business, depending on your competencies and what works for you. However, here are a few growth strategies you can use for your business.

· Improve Your Organic Traffic

The traffic that converts the most is organic searches from search engines like Google, Yahoo, or Bing. One way to increase your organic searches is by engaging tools like SEMRush that shows you where you rank.

Image of different searc engine like Google, Yahoo,or Bing

· Use New Marketing Channels

When testing a novel strategy, you need to set some goals. Ensure you inject enough money into the marketing channel to enable you to reach a significant number of customers. A new marketing channel may be taking your best ranking content and making a YouTube video, which is the second largest search engine, or a paid ad on LinkedIn or other social media platforms.

The different marketing and lead generation channels include:

    1. Referral Marketing: This includes referrals from friends and referral programs
    2. Content Marketing: This includes text audio or video content such as blogs, or YouTube Videos
    • Advertising: Traditional advertising such as TV, radio or billboards can work well, as well as YouTube, LinkedIn, Google, Facebook, or Reddit ads

· Upselling

Upselling your products to your existing customers earns you more in the long run. The upsell could be anything from selling more expensive packages that the client pays some extra money for extra benefits, data storage, features, or all three.

Image of Arrow with improvement on producting upselling.

You can make it a one-time upsell or provide a product such as a webinar on how to maximize the software to their best advantage. This is the ‘freemium’ pricing model, which lures the customers with some functionality for free, then they start paying. Whichever upselling method you decide on, consider the service costs and add them into your final pricing,

· Leaner, Cleaner, and Faster

Improve the customer user experience, satisfaction as well as total loyalty by making your software cleaner and faster by eliminating bad code. Declutter your code, improve your software speed and see an upsurge in customers, and experience recurring revenue over a longer period.

Different SaaS Revenue Streams

SaaS business models have several revenue streams such as:

1) Subscription

Recurring payments form the main revenue generation of SaaS businesses. This revenue stream is fluctuational and varies or month to month or from year to year depending on the pricing model you use, and customer preferences. As long as your app is relevant and serves the customers well, they will continue paying.

2) Upselling

As mentioned, upselling to clients by offering more data, storage and extra benefits such as high-quality API are all ways of earning more income.

3) Charging for Software Setup

Software companies can charge customers upfront for software setup, although it works better if you have bigger clients with more data. This revenue stream improves your SaaS’s profits and also makes it possible to have a customer verification process.

4) Data-Driven Reports

You can earn extra income by charging extra for the creation of data-driven reports based on the service you offer. It may be offered as an extra service or as a feature in one of the plans. To make this service relevant, you have to make sure these data-driven reports offer some added value and give you an ROI (Return on Investment).

5) Customer Support

Developing customer support and charging for the service works well as an extra revenue source. Customer service is an integral, but costly part of a business, and it is crucial in a SaaS business value proposition, or you can also build it into the pricing model.

Important Metrics in the SaaS Business Model

Before we discuss the pricing models, it is important to know some of the key metrics in a SaaS business. For the success of your business, you have to keep up with your business’s key metrics.

· OMTM (One Metric That Matters)

The OMTM is also known as the NorthStar Metric, and it helps you to know how successful your product is-or not. The OMTM is unique for each business and it sets goals for your team. For instance, Slack has goals for two thousand messages per person, while for Airbnb, bookings per night constitute OPTM.

OMTM (One Metric That Matters) - NorthStart Metric for SAAS Businesses

· MRR (Monthly Recurring Revenue)

As mentioned before, the MRR is a crucial financial metric for any successful SaaS business. Since SaaS business models are subscription-based, you need to check how much money you make per month. This metric does not include any profits from upsells or other revenue streams.

Formula of MRR (Monthly Recurring Revenue) in SaaS business

· LTV (Lifetime Value) or CLV (Customer Lifetime Value)

Lifetime Value is the total amount you get from your customers during the entire period they are using your software. The LTV helps in your profit prediction and budgeting. Companies that have a decent LTV concentrate on improving the UI (user experience) of their existing clients.

CLV is calculated as ARPA (average revenue per account) divided by the Customer Churn Rate

· (CAC) Customer Acquisition Cost

CAC is a metric in marketing that shows you how much you spend in acquiring new customers. If you watch your LTV and CAC of your SaaS, you can maintain healthy and balanced growth in your business.

· NPS (Net promoter Score)

NPS helps you in identifying your customers’ satisfaction with your SaaS product. NPS premises on one question, on a scale of one to ten, how likely the customer would recommend your product to a friend or colleague. A scale of 0 means they would never recommend your product and 10 means they definitely would. This metric is closely related to customer service, user interface, and product feature quality.

· Churn Rate

The churn rate is the client percentage you have lost in a pre-defined period such as weekly, monthly, or quarterly. Since SaaS businesses are subscription-based, you need to keep track of all your existing clients and ensure you focus on customer retention more than gaining new users. Trying to learn why they churn may help you in product or service improvement.

Customer Churn is calculated as (Customers in the Beginning of a Period less Customers at the End of a Period) divided by Customers at the Beginning of Period

· Conversion Rate (CR)

Conversion Rate Graph with Conversion Funnel.

The conversion rate shows how many individuals completed a process to the tail end. In the context of customer acquisition, we use the conversion rate to determine how effective marketing campaigns are. CR is calculated as:

CR = Number of People Finishing an Action divided by Number of People Starting an Action

· Customer Acquisition Rate (CAR)

After determining the success and cost of your marketing campaigns, you need to know how fast your new customer acquisition is. CAR lends you an aerial overview of how well your efforts at customer acquisition are faring within a set period.

CAR = Number of Acquired Users divided by Period Length

If you get 1500 new customers over five months, your CAR is 1500/5= 300 users a month.

· PQL (Product Qualified Leads)

PQL’s are potential customers who have used your product before. These PQLs are important to keep track of when you are offering a freemium. Reaching out to a PQL to attempt to convert them into a paid subscriber, does not take much marketing since this person is already aware of what your product can do.

The Different SaaS Pricing Models

Here are some of the pricing models in a SaaS business.

1. Per-User Pricing Model

This is a model that you can use in a hybrid model with freemium and tiered pricing. The idea is that a client pays one price per person, and if a second person will use it, they have to pay for the extra person.

2. Tiered or Per Feature Pricing

Almost all companies start by using tiered pricing as it is simple and has the potential for upselling and improved value addition. You can decide the tiers by the number of specific features or general features. Companies offer services at different rates. The lower the rate a customer pays, the fewer the features. This allows you to provide tiered value levels while serving different customers with different purchasing powers.

3. Freemium

As mentioned, freemium is one of the most common pricing models because of its high customer success rate. However, untold stories abound of freemium model SaaS companies that could not stay afloat because of unpaid server costs.

The freemium model lures users with a free software version but is not a revenue model. Once the clients use the product and like it, or need to add functionality, they have to pay up to get the full version of the software. Some of the success stories of this model are Zoom and Dropbox, whose free version allows users storage of up to 2B. after filling up the 2GB, the users have no choice but to upgrade to a paid version if they still want to use the product.

4. Usage-based pricing

Some years back, the traditional software of the usage-priced model was fight on cable or a pay-per-view movie. In this model, the user is only charged for how much they use the product. This is evident in the majority of industries with their usage being transactions or data processed. The more data, the higher the bill. Almost all cloud server platforms like Google Cloud offer this type of pricing model.

5. Per active user pricing

Per active user, pricing is a variation of active user pricing. This model was designed to improve per-user pricing to allow businesses to use a product without paying for users who did not use the software.

6. Flat-Rate pricing

This pricing model has few real-life examples, so it is almost impossible to gauge how successful this would be. Instead of various pricing tiers, a company offers its product for one flat rate.

Famous Examples of SaaS

· Google Apps or G Suite

Example Examples of SaaS - Google Apps or G Suite

All Google apps from Gmail to Google Photos or event scheduling on your calendar is hosted on the cloud. When a company buys a G Suite package, they use these apps for making work easier by using Calendar to schedule meetings, share documents, or holding meetings on Hangouts.

· Amazon Web Services

Amazon Web Services consists of a pack of over 70 apps covering app integration, development, analytics, etc.

Example Examples of SaaS - Amazon Web Services

· Dropbox

For those not using Google, Dropbox is the next best alternative for file and image storage. When you save a new photo on your Dropbox account, you can access it from any web app or desktop with internet access.

Example Examples of SaaS - Dropbox

Why Clients Go for SaaS Products

Clients opt for the SaaS model for various reasons:

· Reduced Costs

Since a SaaS is subscription-based, it is paid when the client starts using the product, which cuts down on costs. The subscription depends on various factors such as:

· Number of Users

A small company with 4 or 5 workers will pay less in subscription use than a company with over three hundred employees. The subscription fee changes as the small company grow.

· Number of Tasks

Free users can choose how many actions they want to perform with your SaaS software. For instance, you can send 50 emails a month for $50, or 500 emails for 400$. The customer has a choice of cost regulation.

· Amount of needed Database

Depending on the customers' capacity and available resources, the prices may differ.

Final Thoughts

Software-as-a-service is generally a much cheaper option than building an on-premise solution. Clients are cautious of paying a lot of money for unnecessary functionality but worry about needing the extra functionalities in the future.

With SaaS, they are assured of scalability and getting the extra features should they need them later. The client is free of worrying about updates as everything is taken care of by their vendor. A SaaS business model has many dynamics to it and you may have to invest quite a lot, but when it becomes stable, it will become the proverbial golden goose.