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SaaS Business Models

One could say that there are two types of entrepreneurs. The first group are the people who have an amazing idea, develop a nice app or SaaS and then realize they need to figure out how to monetize it. The other group starts at the end: they first decide how they want to make money, and then try to find a way.

Anyone familiar with the ideas of Simon Sinek knows which kind of entrepreneur has his preference. But really, who is to say that one is better than the other?

The two groups have one thing in common: they need to generate revenue to keep their SaaS company afloat. If you haven’t yet decided on your business model, this article is for you. Let’s have a look at several common SaaS business models.

 

What kind of SaaS business models are there?

Freemium

The freemium business model isn’t new, it has been around since the 1980’s, but it is extremely well-suited for many SaaS companies

The name, derived from “free” and “premium” perfectly describes this business model. Basically, you offer your users a free version of your SaaS, one that offers enough to cover all basics, but not enough if you really want to excel. Users that want the more extensive version will need to purchase the premium version.

Freemium versions often provide fewer features, less capacity (storage, for instance), have a limited use license, or restrict access to online services. Another frequently used type of Freemium as a business model is the “Free trial”-model.

Examples of SaaS companies that adopted Freemium as their business model are Majelan, the French podcast platform that raised € 10 million last year, and Toggl, a time-tracker used by many freelancers and corporate teams.

The Freemium business model is quite common among B2C-SaaS offerings. Examples are educational SaaS platforms (such as Duolingo or Kahoot), entertainment (mobile games, such as those developed by Glu Mobile or HashCube and e-Sports platforms like the CS:GO-platform built by Esportal Group),  and health and exercise (Welltory, Strava).

Make no mistake though, Freemium is also a very valid business model for B2C SaaS companies. Not just to track time like Toggl (mentioned earlier), but also for advertising and marketing (Salesforce, MailChimp and of course Google), data analysis (Splunk) 3D modeling, HTML Editing…, the list seems endless sometimes.

 

Enterprise subscription

Many SaaS companies use a business model that aims to turn individual users into ambassadors who do their share to get businesses to sign up.

This business model is especially useful when your SaaS offers amazing added value to companies, provided individual users have access. The Enterprise-business model is also used to appeal to bigger companies. Once a certain number of users is reached, this version basically provides a discount for bulk membership. It is also particularly useful when a customer has frequent changes in their staff. Instead of having to start (and close) a new account for every new hire (departure), you just pay a fixed price and add/remove users on the fly.

One SaaS everybody knows which works by the rules of this business model is Microsoft Teams. As an individual user, all you have to do is download the free app. Once you’ve done that, you’re ready to take part in (secure) online meetings, while also having access to limited cloud storage. Businesses, however, pay a monthly subscription for easy remote solutions, secure cloud storage, and many other tools.

 

Pay per product

The pay-per-product business model isn’t really a SaaS business model. After all, this has been around since the first time someone exchanged a pretty shell for a coconut (or something like that). This model is all about price multiplied by the quantity (PxQ).

Basically, you pay for what you use. When you go to a bar, your tab grows with the number of drinks you order. When you fill-up your car, you pay an amount based on the number of liters (gallons) you purchase and so forth.

The pay-per-product is considered to be the go-to choice for companies that expect one-time purchases, instead of repeat buyers. So if your SaaS offers something companies need infrequently, pay-per-product makes a lot more sense than a subscription.

The big advantage of this business model is that it’s very transparent; users understand what they pay for and they understand why the price is fair. However, the number at the bottom of the invoice might become a bit large when they need your service frequently.

Also, there’s the matter of cost allocation. Experience shows that it isn’t always easy to allocate indirect costs to products in a way that feels fair to everybody. Furthermore, the revenue generated via the pay-per-product model is extremely unpredictable.

The Pay-per-product is used by a wide range of SaaS companies. Clooper, for instance, charges tradespeople a 10% fee for transactions (while landlords and tenants have a free account). AirBnB, has become the biggest hotel while owning no real estate by charges both the hosts and guests a service fee based on the number of reservations.

 

SaaS business models important part of your Business Plan

Now that we know the main revenue models, let’s look at your business plan. Yep, that’s right, you’re not done.

While choosing the right business model is an amazingly important step, your business plan needs to be a bit more elaborate than “We’re gonna sell freemium-products/subscriptions/uses”.

Choose carefully from the available SaaS Business Models, as it will determine the direction of your future. (Image: Jon Tyson, via Unsplash)

Your business plan must contain information about every possible aspect of your SaaS startup: you need to show you understand the market, your clients. You provide proof-of-concept (PoC) for your SaaS, while also thinking about the way you will organize things. And, not important, your business plan has to explain how you plan to get funding.

You need your business plan. Not just so that you can create that killer Pitch Deck that gets investors to beg for permission to invest in your ideas, but also to ensure everyone involved knows the direction in which you are heading. But most importantly, your business plan forces you to properly think through your plans.

Many aspects of your business plan will be greatly influenced by your choice out of the possible SaaS business models. Will you go for pay-per-use? Then you need to ensure you can quickly adapt to (large) increases/drops in revenue. Will you opt for the enterprise subscription model? Then you will need to figure out how to turn people into ambassadors.

If your Business Model of choice is Freemium you need to figure out how to make an appealing product, without giving away all of your goodies for free. And you are going to need deep pockets, as a lot of time may go by before a significant portion of your users goes Premium.

All this makes one thing clear: choosing your SaaS business model is not something to be done over a beer (or two). Think this through.

This choice will define the shape and future of your SaaS startup.

 

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[…] uses a freemium business model. As an entrepreneur, you might find all you need in the free version. But even if you want more, […]

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