March 12th, 2019

Making Money from SaaS Platforms: Revenue Models

What are the best ways to turn a profit after you develop a solid SaaS product? How does each method pay off and how does it affect the future of similar projects?
Each product consists of multiple factors, and while some are more important than others, the money question is something you can't let fall by the wayside. Although initial funding is among the most crucial pieces, if you want to secure stable growth and scaling, there should always be a stable flow of income—all the latter stages of the project will depend on how you manage to monetize it.
While we've seen countless examples of companies who were eager to grab instant cash and paid for it twice as much, EA is probably the most prominent case among recent examples. But giving away a product for free isn't a great way either—even the companies that aim to first accumulate a vast user base will come to a stage when they have to make it generate a profit. That's why there are more than two ways of making SaaS businesses pay off instead of being charity cases.

It's only for you to decide what is the sweet spot between an overcharged and under-compensated monetization; luckily, there are plenty of choices to pick from:

Flat Pricing

The most straightforward, "classical" plan that implies making a direct payment to access the product in the first place. It usually means that there's a monthly payment that grants access to all the product's features along with the yearly plan, by using which you get a certain discount. There can also be a free trial period of up to 14 days for exposing the product to users, but features such as traffic or funnels might be limited just to be enough for basic functioning and presentation needs. This method might be deemed dated, but it has undeniable advantages:

Advantages:

  • defined selling point
You get to know the final offer: the final product is clearly defined, all its technological features are obvious, no "if" or "but."

  • easy to track and understand
SaaS products tend to vary in consumption degrees: some people use it more actively than others, but with flat pricing it is very easy to realize the boundaries, if there are any.

  • simple planning and predicting
You know how much revenue each user brings, while payments are irreversible

Disadvantages:

  • non-diverse income
It's hard to extract revenue from anyone but your subscribers; there's no partial deal where you could receive, let's say, half of a sum.

  • over-abundant package
Some potential buyers might be distracted by the need to buy a product for a full price, even if they need a single feature.

Usage-Based Pricing

You pay for how much you get—this phrase pretty much describes what this method stands for. Companies that offer platform-related services such as Amazon Web Services charge their users a price based on transactions numbers, API request frequency, and gigabytes of data used. Their example resulted in SaaS companies spreading this method towards other areas; for example, accounting companies can be charged based on invoice numbers, media ventures can pay depending on the publications or post numbers, etc.

Advantages:

  • progressive payments
You get a good incentive to improve this product; basically, the better it works, the more revenue you get, and you get to adjust the price based on both parties' performance.

  • users' appreciation
Demand is volatile, so your customers will love paying decreased overheads during quiet months and stay with your product across the entire year.

  • SMBs will love your affordability
Attracting them is a great strategy; one day they will become big.

  • resource economy
With no fixed price, there won't be users who suck up the unlimited amount of resources to leave the rest with a reduced performance level.

Disadvantages:

  • lack of prediction
You can't really forecast the income density when the payments are fluid.

  • customer fluctuation
The users may not appreciate unstable expenditures when their invoices will quadruple all of a sudden after they got used to smaller spending.

  • product concept
Stability is often a key factor for SaaS, so it is somewhat contradictory when this premise is overshadowed by constantly fluctuating prices.

Multiple Tiers

Basically, what you do is dividing potential users into several categories where each gets to pay a certain amount to access predefined features. The higher the tier you choose, the more functions you get and the price increases accordingly. Tier number isn't limited—it can be two or more, but the average value is 3.5 and usually, the versions are defined as basic, premium, pro, and enterprise packages to appeal to certain groups of customers. This is now the most adopted strategy by companies and there's a ton of reasons why it is this way.

Advantages:

  • a broad customer range
This type of service allows for resonating across all types of potential users.

  • upselling
If users start exceeding their current package, there's an obvious way to improve their experience by getting a better one.

  • easy analysis/adjustments
Having users tied to their package segments allows to master both marketing and performance features at any time.

Disadvantages:

  • slightly confusing
The customers, especially the new ones, may not know their estimated usage plans and be puzzled by several options.

  • heavy usage
The top-tier users may dramatically exceed the capacity of your service, as such packages don't often have limitations in traffic or funnels.

Freemium

Derived from a fusion of free and premium notions, this model pretty much replicates a tiered analog but has an additional feature: a fully-free version of the product. This means that you get your hands on a product's entry-level tier with limited functions, and the lack of missing features is what should spur an advancement towards paid plans. Free version limitations can be rigid and remove certain features or be more loyal and only reduce capacities, for example, memory storage or a number of contacts in your friend list.

Advantages:

  • viral spread
This pretty much covers all types of potential clients: from the poorest to richest.

  • easy pass to the market
SaaS has great value, but the adoption level can still be somewhat concerning, so providing tons of users with your product is a strong statement right from the get-go.

Disadvantages:

  • watch out for your revenue
Although free users can potentially become paid users, they still soak up the resources from your company. So make sure that your paid user base generates enough income to cover the expenses for all users.

  • churn rates
Human psychology says that we tend to value things that we pay for, so keep in mind that free-version users are susceptible to fluctuation—they lose no value if they just turn away from your product.

  • community outcry
People love free stuff, period. And as much as they love it, on the other hand, they hate when anything increases in price, even if it's a tiny bit.

Per User Pricing

Like usage-based pricing, this method is very popular among SaaS companies and is gaining popularity as a go-to option. Its simplicity is the reason why it works so well: each new user means an additional fixed payment and allows for SaaS creators to easily predict and manage their income while mostly focusing on larger companies. The consumers also appreciate a very plain and flexible payment scheme that allows for shaping up their overheads based on the size of a team.

Advantages:

  • scaling revenue
Growing your income inside a single company is very achievable if the adoption level grows as well.

  • clarity
Both the sales department and user base will be happy about how non-confusing the monetization system is.

  • predictability
You can build on your user numbers to foresee income and making plans onward.

Disadvantages:

  • cheating consumers
There's not much incentive to buy more copies as the users can find ways to consume a single copy for multiple people.

  • adoption risks
If there's no adoption progress, lower user numbers can lead to churn rates.

Per User Pricing

Pretty much resembling a tier-based approach, this method puts more emphasis on separating users based on software features. By dividing users into groups such as basic, plus, and premium, you can connect whole feature categories, for example, customer support and integration:

  1. No support and no side-software integration for basic version;
  2. Support via email and a few programs that can be used inside the program for the plus subscription;
  3. Live-chat support and all possible integrations and data transfer for premium users.

The same rule can be applied to all sorts of technological features, and the marketing team has to decide which of them should spur the customers on to advancing to the better tiers.

Advantages:

  • clear reasons to upgrade
The upselling is a strong side: the users get to see which features they need and are ready to pay for.

  • strong grasp over capacities
You can put resource-demanding features into more expensive categories to keep the capacities fairly balanced.

Disadvantages:

  • balance issues
Finding the sweet spot is an ever-present factor for this method: you need to not mess up the adoption by asking for too much money or avoid putting too many key features into a basic or a cheaper version of a product.

  • half-measure packages perception
Some users may feel bewildered when they pay for a medium-price plan and still don't get a full set of features; this just feels bad.

Per Active User Pricing

This approach is aimed at larger enterprises who have hundreds of workers; by getting a sizeable number of users from them, SaaS providers provide an opportunity to use a loyal plan when the client is charged per each active user. It makes a lot of sense for the annual plans—a common practice for this type of product; so, if a part of the employers stops using the software, the customer won't have to deal with extra expenses, making it attractive to sign up as many users as possible. Moreover, companies like Slack even compensate credits for the inactivity time until a worker comes back to using it again.

Advantages:

  • cost-effectiveness
Customers only get to pay for the actual value; no money wasted.

  • viral potential
The adoption becomes extremely easy inside the company—there's no financial risk of spreading it too much.

Disadvantages:

  • limited marketing pool
Meanwhile, this approach is stellar for the bigger enterprises; SMBs may not appreciate it when their budget and team size are small.

  • the product has to be top-notch
Big power means the same responsibility level—you should allocate vast resources to please them.

Conclusion

So, with the abundance of different ways to monetize your SaaS product, you have various tools to tackle the revenue question; however, none of them is perfect for all case scenarios. But first of all, you need to know your potential customers so that the pricing and feature availability could reach their sweet spot—a happy customer will make you happy as well.

Try to always keep a balance between giving too much or too little for your price. In the end, SaaS implies having vast maintenance power, so your income should always cover the expenses of bringing your service to the customer. Picking up the right strategy will also impact the scale of your business: whether it focuses on large enterprises or SMBs, you need to know the answer before you launch the marketing campaign so there's no mismatch.

Also, keep in mind the psychological factor: people get used to free stuff, so the upselling should be designed in a precise manner. They also want solid value if there was more than a dime paid for it, so make sure that even the mid-size packages offer some real value. Your free version might give just enough to explore and see its potential but should never be used at its full strength unless it is upgraded to a better package.

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