Developing a business model for SaaS is easy when you know the recipe. Use these ideas to fine-tune your SaaS business model and grow your recurring revenue over time. Each of these strategies is critical to increase SaaS revenue and get more users on your applications.
If you hit income growth challenges, use this article as a resource to give your sales teams and marketing team a boost.
1) Software As A Service: Offer Software By Subscription (i.e. The Core Business Model)
The foundation of your business model for SaaS is to create a software as a service or a similar technology offering (e.g., platform as a service or infrastructure as a service). You can leverage cloud computing from Google and other companies to build it. Instead of emphasizing downloading and installing the product once, the customer relationship involves a monthly revenue stream. A potential customer needs only to enter payment details and start to use the product right away.
With a monthly revenue stream coming in, you will have more resources to invest in improving the product’s impact. You might build an integration with Slack or Salesforce or boost your marketing to get more customers. If you’re not interested in growing through an integration, you might decide to apply your revenue to recruiting new talent.
2) Recurring Revenue Billing: Customers Pay You Each Month Is Critical To Business Model
A successful business model for SaaS requires that your customers pay an ongoing revenue stream. Assuming you manage churn rates successfully, you will automatically see growth in your revenue stream month after month. You can use a service like Stripe to process payments for you.
There is a downside to having customers pay you every month. Like it or not, your customer will see those charges come in and wonder if they should keep paying for the product. That means you have to invest resources into improving the customer relationship by offering training, top-notch customer service, and constant product improvement.
3) Customer Acquisition: Predictably Acquire New Customers Every Month
Growing your software company ultimately comes down to your ability to pull in new customers. You can use email marketing best practices to convert site visitors to paying customers. In addition, your approach to social media and Google needs to play a role in attracting your target audience over time. Finally, you need to have a process to convert free uses to a monthly subscription. Finally, your sales team must be disciplined about using outreach, retaining your existing customer base, and finding out more about customer needs.
Tip: Make sure you are spending enough to stay competitive. A 2017 CMO survey found that companies spend a minimum of 11% of company revenue on marketing. If you have $1 million in SaaS revenue, you need to be spending $100,000 to keep up with other Internet companies.
4) Achieve Real SaaS Scalability: It Is More Than Using Web Services
Adding a new customer should not break your company’s infrastructure. Instead, using web services like Amazon Web Service to maintain your software company’s stability. Scaling in terms of technology tends to be the first point that founders consider. No doubt, it matters!
However, what if you are worried about meeting your investor’s expectations for growth? You might have promised that you would reach a billion-dollar valuation within five years. To have any hope of reaching that goal, your scalability ambitions have to go beyond fancy ways to use a cloud service.
The next part of the equation is to find a predictable way to get more customers. Start by figuring your customer acquisition cost. For example, do you have a solid onboarding plan so that your customers can achieve quick wins? If not, achieving scalability will become quite challenging.
5) Pricing Strategy: Thinking Creatively About Margins and Value
If you are a small business owner used to buying software with a credit card, you need to think bigger. I have found multiple software companies that charge customers over $100,000 per year for software in my research. Even better, charging a high price doesn’t mean you will lose customers either. For more insight on this point, check out my past article: SaaS Churn Metrics: Insights From 16 Companies with ACV Over $100,000.
To reimagine your pricing strategy, use these questions:
- What could we provide to customers if we charged ten times more than we charge right now?
- Can we offer a self-serve option (i.e., pay with a credit card) for smaller accounts?
- Do we have enough customer success stories to win attention from larger companies?
- Does our inbound marketing compare well to the software industry’s giants like Salesforce, Microsoft, and HubSpot?
- Could we offer a new time-based pricing tier (e.g., buy the annual plan and save 10% vs. the monthly plan cost)?
- Should we have a different price for each operating system?
If you can improve your user pricing model, developing a more profitable customer acquisition cost will be much easier.
6) Does Your Freemium Model Have A Clear Value Proposition?
“Use our product for free for 14 days!”
You see this type of freemium model every day in the software industry. The thinking is simple. If a customer can achieve something for free, they might be more inclined to pay for access. One of the best-known examples of the freemium model is Mailchimp
Giving away their product with a freemium model has been a winning business model for SaaS. Don’t believe me? Look at Mailchimp’s business’s size – they have reached approximately 700 million dollars in revenue, which makes them a bit larger than HubSpot.
In the case of Mailchimp’s approach to freemium, you can use most of the product’s core functionality for free. Specifically, you can get subscribers and send emails to them without a paid plan. Even as you use the free version, the product introduces you to other parts of the value proposition like:
- Remove Mailchimp branding. That’s attractive because it means you can reinforce your branding on all of your emails.
- Get more than 2000 subscribers. This feature is appealing because you might be planning a big advertising push to grow your email list.
- Run Facebook Advertising campaigns right from Mailchimp. If you prefer to work inside the Mailchimp interface, this feature is helpful.
If you are experimenting with a freemium model, take lessons from the Mailchimp approach to acquire more customers. Ultimately, offering a freemium is also an excellent way to position upsells to your core value proposition (e.g., Mailchimp’s product with 2000+ subscribers).
7) Use The Business Model Canvas To Improve Your Business Model
There are two broad ways to improve your business model for SaaS. First, you can make incremental improvements, like tweaking your pricing strategy. Second, you can make wholesale changes! When you need the inspiration to make a more significant change because your growth plans are going nowhere, the business model canvas can help.
At its simplest, a business model canvas is a template document that gives structure to your business model brainstorming. Thanks to Wikipedia, you can see a screenshot of a business model canvas below:
For example, did you see the section on channels? Your growth might be stalled because you’re using the wrong channel. Maybe your account executives and sales development representatives love to cold call. However, they may find that they can’t get a chief financial officer on the phone after making 1000 cold calls. In that case, the solution may lie in using other SaaS marketing channels. You can also think about channels in the form of distribution partners – Microsoft and Salesforce both use third party firms to sell their software and offer related professional services.
Further Reading: To dive more in-depth information on the business model canvas methodology, take a look at the business model canvas website or the book that started it all: “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.”
8) Do You Have A Project Management Method In Place?
For a mature stage SaaS company, project management is a critical capability.
Project management? You might be surprised to see that here. After all, software as service companies has a “move fast and break things” reputation. Here’s the nuance. Once you get your software product off the ground and have customers, you will enter a new phase to manage your set of SaaS products.
Each day, tech support will receive a constant stream of bug reports. Customers will ask for new features. The sales team will pass along suggestions. Further, your engineers and programmers probably have plenty of ideas to make the product better. Your customer support team may have ideas to make more people happier with your product features (e.g., offer the product UI in French and Spanish). You may even get comments on your WordPress blog demanding new features!
Let’s assume that you have a relatively straightforward product strategy, and you have chosen five features to build. Now, you need a system to manage those projects. If you are a software enthusiast, you probably immediately thought of using an app like Asana or Basecamp to manage your project tasks. Those tools will help. Even more important, you should choose a project management methodology like agile so that everybody is on the same page and increase collaboration effectiveness.
9) Use An affiliate program to reward your customers for referrals
Everybody dreams of getting more business through referrals. If you are a salesperson, you can use books like “Endless Referrals” by Bob Burg to get more referrals. When a sales representative gets a handful of new referral leads, the business can grow faster. Getting customers to sell for you via an affiliate program is a fantastic way to make your SaaS model more attractive to investors.
There is another way to get referrals that can be even more powerful – using an affiliate program. In this model, you pay a commission to a third party when they bring you a new customer. For instance, FreshBooks, a cloud accounting tool, currently pays $10 for trial signup. That’s just the start! Affiliates can earn up to $200 if those free trials convert to a paid plan. By paying money directly to affiliates, you encourage them to keep bringing you, new customers.
There are multiple ways to run affiliate programs. If your affiliates are a strategic focus in your business model, I recommend reviewing the ClickFunnels affiliate program. They pay an ongoing commission for new subscribers. Further, the company offers special rewards (e.g., a cash bonus to pay for an affiliate’s car) for higher performance levels.
Whether you want to pay a simple upfront commission like FreshBooks or offer a more complex program like ClickFunnels, an affiliate program is well worth considering. This type of reward is a good option if your software company sells to individuals or small businesses. If you sell to larger corporations like the Fortune 500, sales teams are the better method to reach your hypergrowth goals.
Offering an affiliate commission to a marketing manager at a large corporation like Wal-Mart is less likely to work. Corporate employees are often prohibited from receiving special compensation or benefits from vendors. However, you might be able to reward them with a different set of benefits like a free month of product access when they bring you a new customer. In this case, there is no monetary cost to your business, and the corporate professional still has benefits to show to their colleagues.
Tip: Use testing to improve your affiliate program over time. Some affiliates might prefer a large upfront payment. If those acquisitions are profitable, update your venture capital presentations with this additional cost element.
10) Increase Customer Lifetime Value To Reach Hypergrowth
Recently, I read Netflix’s Q2 2020 earnings report, which came out in October 2020. The consumer company reports a wealth of customer data in the entertainment niche. I found it interesting to see that the average revenue per subscriber is gradually going up across their different geographic segments. Netflix’s success reminds me of a simple way to boost your revenue stream: increase your prices annually. Such a move will help you to maintain stable profits.
After all, how many subscribers will care if their monthly subscription goes from $8 to $10? For happy customers who spend an hour or two using the service each day, a small price increase doesn’t matter. When you add up those price increases, its overall revenue model and income start to look better.
The Netflix data also suggests that the company is doing very well in terms of retention rate. Minimal price increases and continually releasing new content helps. That said, don’t copy everybody Netflix does. Their cost structure includes spending billions on product development (i.e., new TV shows and movies).
11) Social Media: Choose Your Platform Carefully
Whether you use are building a low touch SaaS or relying on sales teams for growth, social media should be part of your SaaS business model. Specifically, I recommend viewing social media as a way to feed your marketing funnels with new leads. If you need to look for a new potential customer, you can almost always find those prospects on social media. People are constantly checking their social streams for new distractions, and you can attract some of their attention by publishing engaging content.
Start by publishing your new educational content to your content management system of choices like your resource center or WordPress. Afterward, post part of that new content to a social media platform. For example, avoid merely posting a link to a blog article on LinkedIn. Instead, copy and paste a few paragraphs of the content into LinkedIn to promote your company.
Regardless of the social media you use, there are expenses to keep all of these status updates coming. A mature stage company might have a dedicated marketing employee for social media. A smaller company might rely on outside talent for social media. If you find that social media doesn’t help you get new customers, don’t write it off yet. It might play an essential role in customer retention.
Want more profits in your SaaS business model?
Contact me to request a review of your marketing funnels, content, and email marketing. I’ve been in the Internet marketing field for years, and I love working with companies in the SaaS industry.