Top 6 Business Models adopted by SaaS Companies

SaaS companies or "Software as a Service'' companies are organizations that provide software services to their customers. The world has seen tremendous growth in SaaS-based business during the COVID-19 pandemic. 

They’re so widespread that according to estimates, by the year 2025, there will be a technological revolution where 85% of business apps will be SaaS-based.

But have you ever thought about what makes the SaaS business model so interesting?

The first and foremost fact of interest is the amount of recurring revenue it is generating. The business model of SaaS Startups relies on data and customer retention because of which it is adaptable to the dynamic environment and has stability in the long run. 

But what models are being followed by SaaS Startups in order to maximize their revenue and thereby profits? 

We’re here to help you break down some primary revenue streams for SaaS companies and offer some tips on making more money as a SaaS business.

1. Subscription-Based Revenue Model:

 

SaaS businesses generally adopt a subscription-based business model. 

This model allows access to products and services after the user pays for its subscription. This subscription fee can be charged monthly, or annually as per the customer's convenience. 

Some SaaS businesses also resort to differential pricing according to the scale and size of the organization. There are custom prices for customers like large corporations depending on the level of service they provide. It is a flexible business model. Customers can switch their pricing plans anytime they want or may cancel their subscriptions at any time. 

The income is also relatively stable because they have recurring revenue. The users also benefit from this model as they have access to products without added commitment and ownership costs.

The “subscription-based economy” is developing and according to estimates, almost 70% of CEOs believe that this model will be the leading business model in its respective industry and would generate $10.5 billion with a growth rate of 15.5% between 2019 and 2025.

2. The Freemium Subscription Model

This model is very popular among businesses. They have the freedom to use the application without any subscription, i.e. for free, for as long as they want. 

The only difference between the subscription and freemium model is that the users do not get full access to all the tools and features available.

This is generally used by companies to gain traction and hook their users into trying out their products. If they’re satisfied, the users can subscribe and upgrade to a paid model.

After exceeding the limit on articles they can view, repetitive ads, etc. the companies persuade their users to get a paid plan and this generally works well too. 

 

The Freemium models are more suitable for SMBs or startups that want to try a service before paying for it as most of them have scarce funds to pay for expensive SaaS softwares, so they just look for some free solutions.

3. Flat Rate Pricing Model

This model is the simplest of all and is similar to traditional software licenses, where you pay a single price for one set of features in a single product and that too on a flexible monthly or annual basis without worrying about the price rise.

You get what you pay for, and there is no hidden sales strategy to get you to upgrade to a higher tier. Any customer can understand the simple flat-rate pricing system, and there are no hidden costs involved. Therefore, it gives a sense of satisfaction to its users that the amount paid by them is worth it. Sometimes using an expensive model leads to under utilization of the resources as most of the features go untouched. This model makes budgeting easier and increases operating efficiency. 

4. Usage-Based Model:

Pay for what you use! Simple and straight! This model is very cost-effective and gives its customers an option to reduce their overall bill.

This model is useful for businesses with a predictable usage pattern who only have to pay for the services they use. Such pricing is most common with infrastructure and platform-related SaaS, where companies charge based on data used, number of transactions, process the requests, etc.

Moreover, the price matches the usage volume. 

The prices increase only if their usage increases, so there’s no high up-front cost.

5. Per-User Pricing

This is another popular model used by B2B businesses. A company pays a fixed price for the number of employees who use that product. 

Small businesses benefit from this pricing as their employee base is small and they get access to all the features of the service at a low cost.

Enterprises use this model because they can sign up many employees to use this model but only pay for those who actively use the product. It’s helpful to companies with a larger employee turnover, so they only pay for active accounts, which reduces costs significantly. This is a pretty simple model for customers to calculate monthly costs, and it makes the sales process easy.

6. Tiered Revenue Model

Tiered pricing is the most popular and the most familiar model. It also has a differential pricing system designed primarily for its customers. Most companies use it, and it consists of different packages where you pay a certain price for a specific set of features. 

The logic is that the higher the price, the more features you’re allowed to use and vice-versa. The customers have a great choice and affordability. Each tier is designed for a different customer in mind

Its main feature is flexibility, and this allows the users to upgrade and downgrade as much as they like. 

This model caters to a wide market base including those who might be out of that range. Low budget customers can also be targeted and those who are willing to pay more can be provided with further options and in this way, businesses can control their customer's preferences. 

Conclusion

So these were the top 6 revenue models followed by the most successful SaaS startups. 

I would highly recommend software service providers to at least adopt one of the above-mentioned models after thorough research of your business needs and requirements. If you’re not taking advantage of other ways of making money, you’re seriously missing out on incredible opportunities to grow your business.

How you make money depends on successfully implementing the right strategy. 

While some businesses flourish with usage-based models and per-user pricing, the most popular one is still the tiered revenue model. Some prefer the subscription model. It is you who have to decide which model is the most suitable for your business type. 

Companies should not neglect other ways to garner more revenue, especially with advertising (if they opt for a freemium model), affiliate sales, and APIs. 

Simply tracking your metrics, changing prices, and automating your billing process can tremendously help grow any SaaS business! 

Samantha Paul

Samantha is a SaaS fan who is always on the lookout for great software and lifetime deals. Always up to date with what's going on in the tech world, Samantha prefers Windows to Mac and Android over iOS. You will see her articles here and we hope that you find them useful and informational.