38 Scalable SaaS Business Model Examples & 7 SaaS Business Models Explained + [KPIs & Metrics To Track Growth]
What is SaaS?
SaaS is a type of subscription software that allows users to access and use the software from a remote location. It is a newer software model that delivers software over the Internet instead of through the traditional software installation process.
SaaS generally has three components: application software, platform, and infrastructure. Application software is the primary focus of the SaaS model and is what users interact with when using it. Platforms provide a way for developers to create and deliver their applications, while infrastructure offers the necessary computing resources to run the applications.
There are many benefits to using SaaS, including reduced costs, increased flexibility and scalability, and improved access to data and applications. SaaS can also help businesses improve their customer service and reduce IT support requirements.
If you’re considering using SaaS for your business, it’s essential to understand how it works and what the benefits and drawbacks are.
In this article, we’ll take a closer look at the SaaS business model and SaaS Business model examples, B2B SaaS metrics, OKRs, and KPIs to keep an eye on to fuel growth in your B2B SaaS.
It is important to note that the global SaaS market is expected to grow from $85.1 billion in 2019 to $118.4 billion by 2022, at a compound annual growth rate (CAGR) of 7.5%. North America is expected to continue to be the largest SaaS market, followed by Europe and the Asia Pacific (APAC).
Software companies generally establish a complete infrastructure and charge customers an upfront fee to receive the software. SaaS companies, on the other hand, only need to focus on developing their software since all other infrastructure-related tasks are outsourced. This makes it possible for SaaS companies to charge customers a monthly or yearly subscription fee instead of an upfront fee.
This means that with SaaS, you essentially rent access to software instead of buying it outright.
The main advantages of the SaaS model for businesses are:
- Reduced costs: since you don’t need to invest in hardware or software, your upfront costs are lower. In addition, you can avoid unexpected expenses related to system maintenance and upgrades.
- Increased flexibility and scalability: Since you’re not tied to a particular piece of hardware, you can quickly scale up or down according to your needs. This is particularly useful for businesses that experience seasonal fluctuations.
- Pay-per-use or usage-based pricing: with SaaS, you only pay for what you use. This makes it easy to budget for your software expenses.
The SaaS firm needs to host the program on their infrastructure, and the user would be able to use it from their computer remotely through a cloud. The option of pivoting from there has grown dramatically in recent years, thanks to the significant rise in cloud resources.
SaaS can be used for a wide variety of applications, such as customer relationship management (CRM), enterprise resource planning (ERP), human resources (HR) and payroll, content management (CMS), e-commerce, and more.
The benefits of SaaS for businesses are clear. If you’ve already switched to SaaS, Algocentric Digital can help you market it effectively. We have a team of experienced consultants who can advise you on the best way to implement SaaS marketing growth strategies in your business at any stage of your SaaS.
In the section on SaaS business models, we’ll get into more detail with specific examples. Software firms are increasingly going the SaaS route because this method is far easier to reach a minimal viable product. However, there are challenges with SaaS solutions, so let’s dive right in.
What is a SaaS Business Model and SaaS Business Models Explained
A SaaS business model is a subscription software that allows users to access and use the software from a central location. It is a cloud-based model that delivers software over the Internet.
SaaS business models have become increasingly popular in recent years as more and more businesses move away from traditional, on-premise software solutions. SaaS models offer several advantages over on-premise solutions, including lower upfront costs, increased flexibility and scalability, and easier maintenance and updates.
Suppose you’re considering moving to a SaaS business model for your business. In that case, it’s essential to understand how this model works and the different types of SaaS business models. SaaS as a business model appeals to a massive demographic of entrepreneurs as almost anyone with knowledge or skill can contribute to building a SaaS company.
Gather a team that includes a coder, a marketer, a sales professional, a creative professional, and anyone with an idea for software that can be sold as a service. All of a sudden, you have a potential SaaS business.
And what’s more, the SaaS business model is one of the most scalable in existence, which is why Venture Capital firms love to invest in these companies. With a few tweaks here and there, a successful software as a service business can quite literally be worth billions.
38 SaaS Business Model Examples
There are countless examples from both the B2B and B2C sectors of successful SaaS startups in artificial intelligence (AI) and video streaming, online commerce, and more. We’ve compiled a list of top SaaS companies to give you an idea.
There are countless examples from both the B2B and B2C sectors of successful SaaS startups in artificial intelligence (AI) and video streaming, online commerce, and more. We’ve compiled a list of top SaaS companies to give you an idea.
Wistia is a video hosting platform that provides online training videos for businesses. The company was founded by two former Google employees and had been growing rapidly since its launch in 2009. Wistia now hosts over 1 million hours of video per month.
The company has been profitable since day one, with revenues growing at an average rate of 30% per year over the past decade. It’s also grown organically, without any outside capital or venture funding. The founders have built a strong team around them, including CTO David Littman (who was previously VP of Engineering at Google), CMO Kevin O’Connor (formerly VP of Marketing at LinkedIn), and Chief Revenue Officer Michael Krige (former CEO of Vimeo). The company has raised $150 million in VC funding and is valued at $1 billion.
Shopify is a web-based e-commerce solution that helps merchants sell their products online. Founded in 2006, Shopify now powers over 2 million stores across 200 countries. In 2017, Shopify announced they had reached profitability after only 5 months of operations. They were able to achieve this through a combination of organic growth and strategic acquisitions. The company has raised $200 million in venture capital funding and is valued at over $3 billion.
Chorus.ai is a voice recognition AI platform that allows users to create custom voice apps. Chorus.ai was founded in 2014 and launched publicly in 2016. Since then, the company has snowballed, reaching a user base of over 100,000 developers. Chorus.ai has raised $100 million in venture capital funding and is valued at over $1 billion.
Lever is a CRM platform that helps small businesses grow. Lever was founded in 2013 and went public in 2018. The company has snowballed since its inception and today serves over 50,000 customers globally. Lever has raised $70 million in venture capital funding.
Zapier is a workflow automation tool that connects different services together. Zapier was founded in 2011 and went public in 2015, raising $50 million in venture capital funding along the way. Today, Zapier has over 500,000 active users who connect over 20,000 applications together.
Clearbit is a real-time data streaming service that collects and analyzes billions of events every day. Clearbit was founded in 2010 and went public in 2017. The company has raised over $120 million in venture capital funding to date.
UiPath is a robotic process automation software developer that makes robots do human work. UiPath was founded in 2008 and went public in 2019. The company has raised more than $250 million in venture capital funding so far.
Segment is a real-time analytics platform that helps companies understand how their website traffic breaks down. Segment was founded in 2012 and raised $60 million in venture funding in 2017.
Truework is a payroll management system that automates the entire payroll process. Truework was founded in 2007 and went public in 2018, raising $80 million in venture funding.
Lumen5 is a video creation platform that helps businesses create videos quickly and easily. Lumen5 was founded in 2016 and has raised $10 million in venture capital funding. The company has snowballed since its inception and today has over 100,000 users.
Vidyard is a video hosting and analytics platform that helps businesses track their video performance. Vidyard was founded in 2011 and has raised $50 million in venture capital funding to date. The company has over 250,000 customers worldwide.
AppDirect is a cloud service marketplace that helps businesses find and subscribe to cloud-based services. AppDirect was founded in 2009 and went public in 2014, raising $85 million in venture funding along the way. The company has over 700,000 customers worldwide.
SendGrid is a cloud-based email delivery platform that helps businesses send and track emails. SendGrid was founded in 2009 and went public in 2017, raising $131 million in venture funding along the way. The company has over 80,000 customers globally.
Buffer is a social media management platform that helps businesses publish and track their social media posts. Buffer was founded in 2010 and went public in 2013, raising $24 million in venture funding along the way. The company has over 75,000 customers globally.
Hootsuite is a social media management platform that helps businesses publish and track their social media posts. Hootsuite was founded in 2008 and went public in 2018, raising $60 million in venture capital funding along the way. The company has over 18 million users worldwide.
Sprout Social is a social media management platform that helps businesses publish and track their social media posts. Sprout Social was founded in 2010 and went public in 2017, raising $42 million in venture funding along the way. The company has over 20,000 customers globally.
Dropbox is a SaaS cloud-based file storage and sharing platform that helps businesses store and share files online. Dropbox was founded in 2007 and went public in 2018, raising $600 million in venture funding along the way. The company has over 500 million users worldwide.
Google Drive is a SaaS cloud-based file storage and sharing platform that helps businesses store and share files online. Google Drive was launched in 2012 and had over 800 million users worldwide.
OneDrive is a SaaS cloud-based file storage and sharing platform that helps businesses store and share files online. OneDrive was launched in 2014 and had over 300 million users worldwide.
Asana is another B2B SaaS project management platform that helps businesses track their work and collaborate with team members. Asana was founded in 2008 and went public in 2018, raising $75 million in venture funding along the way. The company has over 60,000 paying customers worldwide.
Trello is another SaaS project management platform that helps businesses track their work and collaborate with team members. Trello was founded in 2011 and acquired by Atlassian in 2017 for $425 million. The company has over 50 million users worldwide.
Basecamp is also a SaaS project management platform that helps businesses track their work and collaborate with team members. Basecamp was founded in 1999 and had over 30,000 paying customers worldwide.
Slack is a SaaS-based communication platform that helps businesses communicate with team members.
You create channels for communication and organization on Slack. With separate channels for each project, task and assignment, everyone can see all communication–making it easy to follow. Plus, additional features include private messaging, video and voice calls, as well as attached documents.
Slack was founded in 2013 and went public in 2019, raising $427 million in venture funding along the way. The company has over 12 million daily active users. Slack is an excellent example of a SaaS tool.
Amazon Web Services
Amazon Web Services (AWS) is a SaaS cloud computing platform that helps businesses store and access data online. AWS was launched in 2006 and had over 150,000 customers globally.
Microsoft Azure is a SaaS cloud computing platform that helps businesses store and access data online. Azure was launched in 2010 and had over 57,000 customers globally.
Google Cloud Platform
Google Cloud Platform (GCP) is a SaaS cloud computing platform that helps businesses store and access data online. GCP was launched in 2008 and had over 50,000 customers globally.
HubSpot is a SaaS company that provides marketing, sales, and customer service software. HubSpot was founded in 2006 and went public in 2014, raising $100 million in venture funding along the way. The company has over 60,000 customers globally.
Adobe Creative Cloud
Adobe Creative Cloud (CC) is a SaaS platform that helps businesses create and manage digital content. Adobe CC was launched in 2012 and had over 12 million.
Cloud-Based Microsoft Office 365
Cloud-Based Microsoft Office 365 is a SaaS platform that helps businesses create and manage digital content. Office 365 was launched in 2011 and had over 85 million users worldwide.
Evernote is a notes management platform that helps businesses create, organize, and store notes online. Evernote was founded in 2008 and had over 225 million users globally.
Google Docs is a word processing application that helps businesses create, edit, and store documents online. Google Docs was launched in 2006 and had over 300 million users worldwide.
G-Suite is a set of productivity tools that helps businesses manage email, calendar, and file sharing. G-Suite was launched in 2006 and had over 6 million paying customers.
Zoom is a video conferencing platform that helps businesses communicate with team members. Zoom was founded in 2011 and went public in 2019, raising $356 million in venture funding along the way. The company has over 500,000 customers globally.
Canva is a design platform that helps businesses create visual content. Canva was founded in 2012 and had over 15 million users worldwide. Canva is an excellent example of a SaaS Solution designed for small business owners.
SurveyMonkey is a survey software platform that helps businesses collect and analyze data. SurveyMonkey was founded in 1999 and had over 500,000 customers globally.
Box is a file storage service that allows you to store files on their servers. They offer unlimited storage space, and they’re easy to set up. Box is an excellent example of a SaaS product because it doesn’t require much setup time and it’s very intuitive. If you want to upload a file, just click “upload” and select your file. You don’t need to worry about setting-up folders or anything like that. You can even send files directly to someone else using Box. Box offers apps for iOS, Android, macOS, Windows, and web browsers. It has a desktop app as well as mobile apps for iPhone, iPad, Android, and Windows Phone. Box has been around since 2006 and has been growing steadily ever since. In 2018, Box had more than 4 million paying customers and generated $1.2 billion in annual revenue.
Zendesk is a customer support software that helps companies provide better customer service. Zendesk is a SaaS solution that integrates with CRMs, ERPs, and other applications. It has a robust API so developers can incorporate Zendesk into their own products. Zendesk has a number of features, including ticketing, knowledge base, chat, reporting, analytics, and marketing automation. The company also provides a hosted version of Zendesk called Zendesk Online. Zendesk reports that it has more than 1.5 million paying customers and generates $500 million in annual revenue.
Salesforce is a cloud-based CRM platform that enables salespeople to collaborate, track leads, and close deals. It’s a robust CRM system that includes a suite of tools for sales management, marketing, and customer service. Salesforce is a popular choice among small businesses because it’s affordable and easy to use. It’s a SaaS solution, and you only pay when you use it. There are no upfront fees or long-term contracts. Salesforce has been around since 1999 and has snowballed since then. In 2017, the company had more than 50 million paying customers and generated $10.3 billion in annual revenue.
These are just a few examples of SaaS business models that are out there. As you can see, there is much variety in how these companies operate. Each company has its own unique approach to business, and each one has been successful in its own right. If you’re thinking about starting a SaaS business, take some time to research the different options and find the model that best fits your needs. And if you’re already operating a SaaS business, use these examples as inspiration to help you grow and scale your company to new heights.
But first, let’s take a step back. What actually is the SaaS business model that you should go with?
At its core, a SaaS business model is based on recurring revenue. In other words, instead of making a one-time purchase of a piece of software that you then own and are responsible for maintaining, with a SaaS solution, you pay a monthly or annual fee to access the software. This gives you the benefit of always having the latest version of the software and not having to worry about updates or maintenance.
It also allows businesses to budget more accurately, as they know exactly how much they will be spending on their software each month.
There are three main types of SaaS business models:
- Application-based: This type of SaaS provides access to a specific application, such as customer relationship management (CRM), human resources (HR), or accounting software.
- Platform-based: This type of SaaS provides access to a platform that can be used to build and run applications. An example of a platform-based SaaS is Amazon Web Services (AWS).
- Infrastructure-based: This type of SaaS provides access to infrastructure services, such as storage, computing power, or networking. An example of an infrastructure-based SaaS is Google App Engine.
The most important thing to remember when choosing a SaaS business model is that it needs to align with your overall business and marketing strategy. This will ensure that you are able to maximize the benefits of moving to a SaaS solution and charge appropriately for it.
7 Positives to choosing a SaaS-based business model and building a SaaS Product
There are always pros and cons to weigh with any business model. SaaS is not for everyone, but these positives speak to a large population of entrepreneurs.
- Short-Term Cost Savings
The ability to avoid the initial expenditures of dealing with a software infrastructure is a game-changer, which modern internet technologies have made possible. An IT infrastructure is costly, and avoiding those first expenditures is the most appealing aspect of the SaaS business model.
SaaS provides much flexibility for users. It can be used on-demand and doesn’t require any installations. You can access it from anywhere, at any time, using any device with an internet connection.
- Cost Control
With SaaS, you don’t need to spend money on hardware, software licenses, and hosting fees. All you need is a subscription plan. The cost per user is often lower than traditional solutions.
SaaS is a scalable solution. Since it’s delivered over the Internet, adding or removing users is a simple matter. This type of scalability is perfect for businesses that experience fluctuations in their user base or seasonal changes.
In the case of a SaaS, server space is never an issue. In enterprises that use traditional software, there must be a strategy in place to increase server capacity. A lot of successful software firms go through a short period of adversity while they expand. The only difficulty for a SaaS business is to upgrade its hosting service.
The scalability of SaaS is another significant advantage. If you have more customers, you can simply add more servers and storage without having to worry about physical limitations. With traditional software, you would need to buy more licenses or physically install the software on more machines, which can be costly and complicated.
Every firm has its own market, but the SaaS business model widens it. Anyone with internet access and a simple browser can easily access the product and use it on the fly. The geographical reach is unlimited, which helps small firms to grow big and big firms to go global.
The main advantage of SaaS applications is that they are available over the Internet and can be accessed from anywhere in the world. This is a huge advantage for businesses with employees who work remotely or travel frequently. They can still access the software and their data from any location.
- Upgradeability and Auto-Updates
A recurring thought emerges: not having to deal with infrastructure is a significant benefit. All hardware and software upgrades must be managed by the hosting service provider. One thing all software eventually needs is updates. With SaaS applications, these updates are automatic. The service provider manages them, so users are always using the most up-to-date version of the software.
If a SaaS firm uses a top-tier hosting service with built-in redundancy and backups, it becomes more resilient. Contingency plans in a self-hosted infrastructure are prohibitively expensive. Hosting services spare time, money, and resources by having this handled by them.
The cloud is often associated with increased security and resilience since service providers invest heavily in these areas. When a SaaS firm entrusts its software to a reliable hosting service, it becomes more resistant to power outages, natural disasters, and other risks.
These are some of the advantages that make the SaaS business model so appealing to entrepreneurs. The low cost of entry and the flexibility to scale quickly are two key factors that have made SaaS one of the most popular choices for businesses today.
7 negatives to choosing a SaaS-based business model and building a SaaS Product
With the SaaS business model, there is less upfront investment and infrastructure simplicity. The advantages of SaaS include a price tag and complexity. However, there are also several disadvantages to consider:
You are also outsourcing security when you outsource server space and other cloud infrastructure requirements. This isn’t always a negative thing, but if a cloud service is breached and used, the responsibility for the breach will still rest on the SaaS provider’s shoulders.
- Vendor Lock-in
The idea of “vendor lock-in” is when a customer becomes so invested in a product or service that it becomes difficult to switch to another provider. This can happen with SaaS products because, as your business grows, you may find that the features and flexibility of the SaaS product you’re using are no longer enough. But because you’ve been relying on the SaaS product for some time, it can be challenging to make the switch to another provider.
- Lack of Control
When you use a SaaS product, you’re essentially renting space from someone else. This means that you don’t have as much control over your data or how the product works. If the product goes down, you’re at the mercy of the provider to get it back up and running.
Downtime is an inherent risk with any cloud-based service, but it’s worth mentioning as a potential disadvantage of SaaS. If the servers where your SaaS product is hosted are down, you won’t be able to access the product. This can be frustrating for users and can lead to lost productivity.
Pricing is always a tricky issue, but it’s worth mentioning as a potential negative of SaaS products. Because you’re essentially renting space from a provider, the price of the product can increase over time. This can be difficult to budget for and can lead to sticker shock when the bill comes due.
Compliance is an essential consideration for hosting providers and any other vendor utilized since it can vary depending on the industry sector. In specific sectors, using a third-party service could be prohibited.
- Capital Intensive Scaling
Hiring more designers, coders, and other team members is costly. You need to have the cash on hand to pay for these additional team members when you need them. With a SaaS product, you’re also paying for extra server space and other resources as your user base grows.
This can be a capital-intensive endeavor that requires careful planning. You also might need a ton of capital to scale quickly, especially if the market pressure is high and competition is snowballing.
Two Main SaaS Business Model Categories
The two broad categories are low-touch and high-touch SaaS. The former is designed for single consumers, whereas the latter is designed for large-scale enterprise sales.
Low-touch SaaS firms rely on some method of taking a potential customer straight to their website more than half the time. The potential client will usually be enticed with a free trial.
The hope is that the free trial user will appreciate the product and want to buy a subscription for continued use. There are frequently different service levels available for users to select from after the free trial expires. The pricing is generally lower than high-touch SaaS, but the customer acquisition costs (CAC) are also usually higher.
The products in this category should not be complicated to use. There are applications that may be learned effortlessly or via an automated onboarding process. These solutions work best with a large number of users signing up for them, as low-touch software is generally less expensive than high-touch software. This type of SaaS relies heavily on intelligent marketing and simplified automated onboarding.
Mailchimp is an excellent example of a low-touch SaaS firm that uses both inbound and outbound marketing to bring in a large number of consumers. The company also offers a free version of the software so people can use it before deciding whether to upgrade to the paid version on a monthly or yearly contract.
High-touch SaaS companies do everything the opposite way a low-touch SaaS company would do it.
Rather than sending a potential customer to a website in order to be pulled in with a free trial, direct sales are often made with large companies that want to and can pay a lot of money for the service. Sometimes the company will use the software to manage a process, or they provide the software to an existing user base (their employees).
Since high-touch SaaS companies deal with enterprise-level potential customers, the specific needs of each potential customer need to be met. This means that resources need to be put towards the relationships built with customers.
It also means that customer support is more personal and turns into managing an account rather than supporting customers when they need help randomly.
7 B2B SaaS Business Pricing Models
Some pricing models are more common than others, and you should decide what’s best for your B2B SaaS. We describe the most common to the least common pricing models in the SaaS industry. Some of these pricing models can be used together for hybrid pricing models.
Pay Per-User Pricing
This approach to pricing is the simplest B2B SaaS pricing model. You charge a fixed price per user, per month (or year). As your customer adds additional users, they pay more. This is the most common B2B SaaS pricing model.
How it works:
Per-user pricing is a pricing strategy that may be utilized in any type of hybrid model with tiered prices and freemium.
The basic idea is that if a customer’s company has one person using the software, they’ll pay one price. If someone else at their company wants to use it too, though, they have to pay an additional fee. Oftentimes, discounts are available once the number of users reaches a certain maximum.
Tiered Pricing or Per Feature Pricing
With different pricing tiers, customers pay more as they use more features or add more users. The most basic B2B SaaS products have three tiers: a free tier with limited features, a mid-tier with additional features for power users, and an enterprise tier with the full complement of features.
How it works:
Tiered pricing is a great way to increase customer lifetime value (CLV) because as customers use additional features, they’re likely to get more value from your product. By offering various rates for their services, a company can provide different levels of value to appeal to users with different needs.
The one downside of this pricing strategy is that it can be confusing for customers. They may not know which features they need or how many users they need to add to get the best price.
Freemium Model Pricing
Freemium is one of the most well-known pricing models because of its high-profile success stories. What people don’t see are all the freemium model companies that died via server costs that couldn’t be paid.
How it works
The freemium pricing model pulls users in with a free version of the software. Once a customer likes it or needs more functionality, they need to pay to get the full use of the software.
Usage-Based Pricing Model or Pay-Per-Use Pricing
This B2B SaaS pricing model charges customers based on how much they use the product. This is common for companies that have products that are used by teams or organizations, such as project management software products.
How it works:
With a usage-based pricing model, customers are charged based on how often they use the product. This could be per month, per year, or even per project. This type of pricing is typical for B2B SaaS products that are used by teams or organizations, such as project management software.
Per Active User Pricing Model
Per active user, pricing is a direct variant of active user pricing. With this pricing model, customers are charged based on the number of active users. A variation of per active user pricing and per unit pricing is what this model is about.
How it works
Per active user was created as an improvement on per-user pricing to allow companies to use software without having to pay for users that would not actually use the software.
This improves a sales proposition for software companies as well, making the case that if no one wants to use the software, then the potential customer won’t have to pay a cent.
Flat Rate Pricing
Without many real-world examples of a flat rate pricing model, it is hard to tell how a successful, genuinely flat-rate priced SaaS software would do with many successful companies using other models. With flat-fee pricing, customers pay a set price for unlimited use of the product. This is common for B2B SaaS products that are used by small businesses or individuals, such as email marketing software.
How it works
Instead of adding pricing or quality levels to its services, a firm provides everything it does for one price. With flat-fee pricing, customers pay one price for a software product that they can use as much as they want. This type of pricing is typical for B2B SaaS products that are used by small businesses or individuals, such as email marketing software, CRM, or other similar MarTech vendors.
This could either be a subscription model or a one-time payment for the use of the software. The only real-world example that is close to this is Microsoft Office, where everyone pays the same price for the suite of applications.
Ongoing Subscription-Based Pricing
The subscription pricing model has become synonymous with SaaS as it is the most common way to price these services.
How it works:
With subscription pricing, customers pay a recurring fee to use the product. This could be monthly, quarterly, or yearly. This type of pricing is typical for B2B SaaS products because it allows customers to use the product for as long as they need it.
3 Main Revenue Model Concepts for any B2B SaaS to think about
Before exploring the different SaaS revenue models, let’s go over a few key definitions. We need to differentiate between three similar sounding but very different concepts: revenue stream, revenue model, and business model. You can think of these as layers of jargon with a revenue stream being within a revenue model, which is in turn inside a business model.
A revenue stream is a source of income for a company. All but new companies have at least one revenue stream, and most have multiple streams. For example, a SaaS (Software as a Service) company might make money through subscription fees charged monthly or yearly.
This is the “how” of charging for your product. It’s a specific way to generate revenue from a customer through pricing model(s). For example, a B2B SaaS company could have a monthly recurring revenue (MRR) stream and a one-time professional services revenue stream.
This is the “what” of charging for your product. It’s the broad category or types of revenue streams you offer. The two most common B2B SaaS revenue models are subscription and usage. This is how a business creates and executes a revenue stream. A single revenue model may have numerous revenue streams. For example, your subscription income operation may include a base fee as well as an add-on source of income.
Finally, this is the “why” of charging for your product. It’s how you deliver value to customers and make money doing so. A business model answers the question: how does your company make money?
Charging for a product is just one way to do that. This is the top-level structure of your company. It includes your revenue model(s) and revenue streams, as well as marketing, developing, recruiting, and operations.
This is a crucial distinction to keep in mind while we look at the following 10 revenue models below.
The 10 revenue models below that we cover are not mutually exclusive—you may utilize any combination of them at once or even all of them.
As a SaaS business grows, it will eventually need to use different tools as its market presence increases. You may also segment the streams to any level of granularity—for example, if there are different tiers for various products, you might want to consider each tier a separate stream or combine them all together into one big stream.
B2B SaaS Business Model: Specific Stages and the Right Metrics To Track to Fuel Growth
Ever since John Koenigs first coined the term “SaaS” back in 2005, the SaaS industry has been one of our fastest moving and most creative industries. With the field undergoing two knockout expansion years, with more revenue pouring into software as a service (SaaS) than ever before, it has never been an easier time for a young SSA company.
The SaaS (Software as a Service) business model powering all of these activities is strikingly unique, still young, but inextricably linked to the power of cloud technology. Understanding the fundamentals of how SaaS works is vital when building out a plan for your company’s forward growth.
Clients don’t buy hardware when using software-as-a-service. With SaaS, you provide a subscription service for using an application. You will therefore need to pay the annual or monthly subscription fee rather than just one time. Monthly recurring revenue (MRR) is the one-way companies generate income from their products and services. Accounting for revenue correctly can be difficult because SaaS companies don’t sell products but rather services.
Once your customer has signed up for your service and subscribed, you may receive some cash upfront, but you won’t actually see any revenue from them until they start using your product. Until then, it’s a liability—money that your customer can ask back from you if you don’t deliver the service they paid for. Because of this, revenue recognition is an essential aspect of the SaaS model.
Heightened customer retention
For any business, customer retention is critical. However, for SaaS companies, customer retention is ten times more important than for traditional brick-and-mortar businesses because retaining paying customers is the only way to keep a SaaS company alive. As we said above, you can’t lay claim to all of your clients’ subscription money until you’ve provided a complete term of service, so if you’re signing customers up for 12 months who are then leaving after 2, then you’ll be without the other 10 months of recurring revenue.
Because of this, the SaaS model values nurturing long-term customer relationships and upselling opportunities. A new SaaS customer spends less, on average, than an existing SaaS customer and is more likely to leave their current provider due to bad customer service than they are to switch providers for a better product.
Other companies may release new versions of their products, but SaaS providers consistently provide smaller and more frequent updates for their services to keep their clients satisfied and increase their client’s lifetime values.
One part of this comes from the fact that we’re in the software business: Software vulnerabilities can put customer information (and therefore revenue) at risk from hackers, which means constantly assessing the state of security patches is a top priority for us.
They also get to host their own products, which allows them to release new features, enhance existing ones, and even launch new products at any time. Combining this with good customer communication can help SaaS companies respond quickly to the needs and feedback from their customers.
Early-Stage B2B SaaS
At the beginning of your SaaS company, you’re just starting out. You’re operating at the bare-bone level. It’s unlikely that you’ll have many customers, so your product won’t be fully developed yet.
If you’re looking for your first round of pre‑seed funding, or if you’ve decided to go for the “bootstrap” approach to keep tighter control of your operations, you may want to consider applying for an SBIR grant.
At first, your team will probably be small, and you will most likely still have just one product you’re focusing your attention on, but you might not have started turning real profits yet. At this point, you should ask yourself these primary questions:
- Do I track metrics, bring in new users, and look for ways to improve pricing?
- Have I begun creating my own personal business model for seeking the right kinds of funding and using them effectively?
Minimal Viable Product Stage (MVP stage)
The MVP stage is where you begin to test out your idea and see how people respond to it. It’s when you start building an audience and getting feedback from them. This is the time when you start thinking about whether your product has any market potential and what kind of B2B SaaS marketing strategy you want to pursue. The goal here is to get enough traction to show investors that there is demand for your product.
You might already have some sort of prototype ready, or you could be working on a completely different product entirely. Either way, you’ll want to ensure that you’re testing your ideas thoroughly before you launch into the next phase.
Product-Market Fit Stage
This is the point where you really know if your product is going to work. If you’ve been able to build a solid user base, you’ve probably found something that people love using, and you’ve got a sense of whether or not you’re making money. Now you’re ready to move on to the next step, which is to raise capital.
If you haven’t built a solid user base, you may find that you don’t have much interest in raising capital. That doesn’t mean you shouldn’t do it, but you’ll want to consider whether you’re willing to take a lower valuation because you don’t think you’ll be able to grow quickly enough to justify a higher valuation.
If you’ve raised capital, now you’re ready to focus on scaling up your business. You’ll want to look at ways to expand your team, increase your sales channels, and maybe even add additional products.
When you’re at this stage, you’ll want to ask yourself these questions:
- How am I growing my user base?
- Have I reached 10 customers, 10 weekly MQLs, 10 Monthly 10SQLs, 10 Ranked SERP keywords with high search volume?
- Do I have a clear SaaS marketing plan for how I’m going to scale my company?
- What are my goals for growth in the next 90 days, quarterly, yearly, or bi-annually?
- Is my product sustainable?
Scaling-up or Growth Stage
At this stage, you’re trying to figure out how to scale your business while maintaining profitability. You’ll need to decide whether you want to continue with the same business model or whether you want to change things up. For example, you might decide to switch to freemium pricing, or you might choose to offer a subscription service instead of charging per month.
At this stage, you’ll also want to look at ways you can improve your customer experience. Maybe you want to provide free support, or perhaps you want to offer live chat. Whatever you choose, you’ll need to determine whether it makes sense for your business.
Once you’ve made those decisions, you’ll be ready to move forward.
The growth stage is when things really start to happen. You’ve built something that’s growing fast, your product is gaining subscribers, and you’re beginning to bring in MRR and possibly positive cash flow.
As part of your growth stage, you’ll need to raise serious funding that will help your business grow its team, invest heavily in product development and iteration so you can scale, and hire new employees.
Fully Funded Stage With Serious Venture Capital
Now you’re ready to scale up your business to the next level. You’ll want to invest in hiring more employees, increasing your sales channels, and adding new features to your product.
The critical thing to remember here is that you should always be looking ahead. Don’t just sit back and wait until you reach the fully funded stage. Instead, keep investing in your business so that you can stay competitive.
That said, once you hit the fully funded stage, you’ll want to spend less time focusing on day-to-day operations and more time thinking about what’s coming down the road.
You’ll want to start planning for the future by asking yourself these questions: How will I finance my next round of investments? Will I need to raise more funding? How will I pay myself?
Venture Capital With Series A, B, C, D, E
The way to get funding for your startup is through venture capital. Venture capitalists invest in startups because they think there’s a good chance that the startup will grow into something big. They provide financing so that the startup can keep growing until it becomes profitable.
Angels: An angel investor is someone with substantial financial means who invests in your business. It used to be that startups had to go through an angel investor before they could get any kind of financing from venture capitalists. However, now there are so-called “super” angels who invest in companies at later stages of development.
Should You Go With Angel Investors?
A venture capitalist is someone who invests in companies. They may be willing to invest in yours if they think it has potential. Angel investors are usually ideal for startups looking for a small initial investment, but they’re increasingly playing an important role in later funding rounds, too, especially when it comes to seed investments.
They’re not the only route to growing your business. There are plenty of ways to grow your business without going through venture capitalists or angels. There are various ways in which startups get funded. Some companies go through incubator programs in their very early stages, whereas others find startup accelerators that fit their needs and use them to fund their business differently.
Some companies continue to bootstrap for a much longer time, and others are so adept at raising revenue from the start that they find they don’t need external funding until much later.
At this point, you should be asking yourself these 6 main questions:
- Have I established key performance indicators (KPIs) to ensure I’m primed for further scaling?
- Is my business operationally scalable if I bring in 50 more staff or 10X my user base or raise a Series A of 5+ million to fuel growth?
- Are we tracking the right metrics like MRR, ARR, ARPU, LTV, and LTV: CAC Ratio?
- How much marketing budget do we need to allocate to reach our growth goals in the next 3 years?
- Do I already have a good monetization strategy in place if I were to seek any kind of investment?
- Have you reached profitability or MVP or Product-Market fit before you go for a series of investments?
A mature SaaS company has proven its worth and can consider itself established enough to be considered an “established” business. At the mature stage, a company has a defined target audience and a reliable product that it makes regular updates too. The company has been generating good revenue for some time now, and its key performance indicators (KPIs) are stable. Mature-stage startups may still seek and receive funding, but it’ll be for a much larger sum than before, aimed at breaking into new markets or acquiring their competition.
A mature enterprise B2B software company should ask themselves when is the last time they checked their pricing strategy? Software companies often reach the mature phase and become complacent, believing that, because their business runs smoothly, it must be running close to its full capacity.
In fact, mature-stage SaaS companies are often positioned on a pile of potential revenue that they’re wasting with poorly chosen price points.
8 Critical B2B SaaS Business Metrics You Must Evaluate Regularly
Successful SaaS companies rely heavily on data, and their success depends on how well they understand and manage key metrics, how they relate to each other, and how they can be improved. These are five key business metrics for determining the health and potential of any SaaS company.
LTV (customer lifetime value)
Lifetime Value (LTV) is a fundamental metric for any software company. It’s crucial that you calculate it correctly.
Retention-rate numbers (which we’ll come to shortly) are essential but leave gaps in your understanding of how much retained customers are bringing in each month and won’t tell you much about the success you are (or aren’t) having with upselling.
It’s also crucial to know what your average LTV is so you can make informed decisions about whether to invest in additional features or not. If you don’t know your average LTV, then you don’t know whether you’re making money off your users or losing them.
Lifetime value is the total amount of money you expect to get from a customer over the course of their relationship with your product.
It’s calculated by multiplying the average LTV by the number of active accounts.
In other words, it’s the total amount of money your customers are worth to you.
The higher your LTV, the better.
If you’re having trouble attracting new customers, then you’ll need to figure out why. Maybe your pricing model is too high, or perhaps you’re not providing enough value.
Or maybe you just need to spend some time improving your existing products and services.
Whatever the reason, make sure you know what your LTV is so you can focus your energy on improving it.
Average Revenue Per User (ARPU)
This metric tells you how much money you’re making per user. It’s calculated by dividing the monthly recurring revenue (MRR) by the number of active users.
Suppose you’re getting more MRR per user than you expected; congratulations! That means you’ve got an excellent retention rate and are doing something right. But if you’re seeing less MRR per user than expected, there could be a problem.
You might want to look at why your ARPU is lower than expected. Is it because your product isn’t as popular as you thought it was? Or maybe your marketing efforts haven’t worked out as planned? It’s hard to say without knowing exactly what’s going on.
You need to track your revenue growth every quarter. This will help you see how fast your business is growing and where you need to focus your attention.
For example, if you have a steady stream of $1 million in MRR, but you’re only able to grow your user base by 10% each year, then you’re probably not growing quickly enough.
That’s why tracking your revenue growth is such an essential part of managing your business.
Revenue per employee
Your employees are the ones who actually do all the work of building your product. They’re the people who create new features, fix bugs, and improve your product.
But while they’re working away, they’re costing you money. And if they cost too much, then you’re paying too much.
So it makes sense to measure how much money your team is generating for you. The best way to do this is through revenue per employee.
- How many employees does it take to run your business? You should aim to keep your headcount stable or reduce it slightly.
- How much money are those employees generating for you?
- What percentage of your overall revenue comes from these employees?
- Is it increasing or decreasing?
If it’s increasing, then you’re likely to be spending too much time and effort on things that aren’t adding value to your business.
If it’s decreasing, then you may need to find ways to cut costs elsewhere.
CAC (customer acquisition cost)
Customer Acquisition Cost (CAC) refers to the total cost of acquiring a new customer. It includes both direct costs, such as advertising and promotion expenses, and indirect costs, such as employee training. It’s true that bringing on new customers requires a lot of effort and resources.
However, once you’ve brought a new customer on board, the extra MRR generated by that customer will offset the cost of acquiring them. You need to keep an eye on your customer acquisition cost (CAC) so that you don’t end up spending too much on acquiring new customers without making sure that they’re worth it. Too high a CAC means missing out on potential revenue and profit opportunities. But too low a CAC could mean losing money by not having enough paying customers.
MRR & ARR (Monthly Recurring Revenue & Annual Recurring Revenue)
MRP, or monthly recurring profit, and APR, or annual recurring profit, is the lifeblood of a SaaS business. They measure the total expected amount of predictable revenue for a given period of time. Many companies manage to get their MRR wrong, however.
A survey hosted by ProfitWell showed that one in five SaaS companies were not reporting expenses correctly when accounting for MRR; 2/5 were incorrect, including trialing or free users in some manner in their MRR; and a majority were making mistakes when differentiating between MRR and ARR payments.
There is no excuse for slacking with MRR calculations, regardless of the fact that it’s not a figure you need to report to a government entity.
It is an important statistic because it allows investors to track your progress and see where you stand relative to others in your industry.
Churn rate is a measure of customer retention. It’s the percentage of people who leave your business over a certain time frame. Even a tiny percentage of churned accounts can be devastating to a company’s chances of maintaining its growth rate.
If you’re not careful, churn can be disastrous for companies, even if they have good metrics elsewhere. It’s vital to know the foundation of your customer retention rate and the ways in which you can improve it if you’re running a software business. It can be a complicated metric to grasp fully.
By segmenting your churn by cohort, you’ll be able to identify which groups drive your churn. Breaking down your churn into segments and cohorts will reveal the different drivers behind your churn while failing to correctly account for trials or episodic/seasonal customers when plotting churn can muddle the picture. There were 43 different ways public software companies were accounting for the “churn rate” metric.
You need to keep your customer retention rate high if you want to grow your business through subscriptions. Churn is the opposite of retention, and keeping your retention rate high is just as important as keeping churn rates low.
We’ve seen a common trend emerge when we speculate on key SaaS metric trends: They tend to be miscalculated. You must calculate both user and MRR retention together so that you can account for the effects of your product and marketing, customer service, pricing, and sustainability of profits.
You may not be taking into account which stage of the customer life cycle your customers are at when calculating retention rates or whether they’re on any plan. There are a number of things that could go wrong when calculating your retention rate.
Thank you for reading this blog post and if you have any comments on your favorite SaaS business models or examples, please leave us a comment below. If you want to inquiry about SaaS marketing solutions please send us a message.