Suppose a SaaS business has a considerably low churn rate and earns millions of dollars annual revenue. In that case, they still want to explore alternative SaaS revenue models to diversify their income sources.
If you are a SaaS entrepreneur looking to diversify your revenue stream, you have come to the right place. In this article, we’ll walk you through all the 13 revenue models for SaaS Company:
- Ad-based revenue model
- Affiliate revenue model
- Indirect support
- Direct support
- Freemium support
- The product is free, not the service
- Transactional revenue model
- Web sales
- Paid courses
- Custom integration or development work
- Premium support
- Premium onboarding
Before we dig deeper into the different SaaS revenue models, we first need to be crystal clear on similar-sounding words like revenue stream, revenue model, or business model.
This is the single largest source of earning for a SaaS Company. Whether a company is in its initial or growth phase, it must have at least one revenue stream to stay afloat. Generally, all SaaS Companies have a subscription-based revenue stream regardless of their market size or customer base.
It is how the SaaS business owners generate revenue for their Company. It represents the company strategy to earn money. A single revenue model can have two or three revenue streams. For instance, the subscription-based revenue model always has add-on and base-free revenue streams.
It represents the overall structure of your SaaS Company. Furthermore, it enables potential investors to gauge what consumer problems SaaS Companies claim to resolve. The business model covers both the revenue model and revenue streams.
Additionally, the business models of a SaaS Company specify product development, marketing, and recruitment.
Different Revenue Streams for the SaaS Business
Recurring revenue allows the enterprise investors to evaluate the worth of your SaaS Company. The more revenue streams a company has, the more valuable it could be for the investors.
Companies that are being evaluated based on their revenue have two to three recurring revenue sources.
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There are different types of recurring revenue sources, and some are more important than others.
1. Hard contracts
They are deemed as part and parcel of the recurring revenue. Most internet packages or mobile phone service plans guarantee a predictable revenue stream.
2. Subscription Add-Ons
You are free to include as many add-ons as you want in your basic subscription plan. It is an excellent strategy for generating revenue for a couple of reasons:
- It allows you to earn more income from the same customer
- It doesn’t require increasing the price of your basic subscription plan
- Allows the users to only pay for the features that are relevant to them.
The most prominent example of this revenue stream is Zoom, the leading video conferencing platform. They have an additional feature of the Audio plan that allows you to call the conference participant instead of waiting for them to join the conference meeting.
Apart from that, they offer free cloud storage. If you want to record your savings for a prolonged period, you must pay the storage cost.
3. Auto-Renewal of Subscription Plan
This type of subscription keeps generating money for the SaaS business until the customer finishes the contract. Most SaaS businesses work on auto-renewal subscriptions. Customers often hesitate to cancel the subscription even if they no longer want the service.
One of the greatest misconceptions amongst SaaS business owners is that monthly subscription is the only source of revenue. In reality, it is not valid. According to a well-known SaaS advisor Company:
“If you are solely relying on the subscription plan to generate revenue for your SaaS business, you are typically leaving money on the table.”
However, the subscription remains the largest revenue source for the SaaS Company. You develop software and then charge a client monthly, quarterly, or annually for consuming your service.
Earning decent income from the subscription revenue stream could not be commercially viable. To mitigate this problem, SaaS Companies should consider switching to a premium model or monetization of website traffic.
4. Sunk-money Subscriptions
Apart from a subscription plan, some SaaS platforms ask their customer to buy proprietary accessories to use the platform.
5. Standard Subscriptions
There are limited subscriptions that can be easily renewed upon completing the contract. Standard subscriptions are deemed better than the loyal customers in the SaaS business who continue using your service.
6. Sunk Money Consumables
Both sunk money subscription and sunk money consumables are the same things. However, the only difference between them is that they don’t force customers to purchase proprietary accessories.
Consumers do not purchase a product, but instead, they buy a platform. For instance, if you no longer want to buy coffee from the market, you will likely purchase a coffee-making machine. However, you still need to purchase different accessories such as coffee pods.
SaaS Revenue Models
There are many ways to earn a substantial amount for SaaS business. We have already discussed the different forms of earning recurring revenue from the SaaS product. This section of the article will walk you through other revenue models that can consolidate your Company’s bottom line.
- Ad-Based Revenue Model
It is one of the most straightforward and fantastic revenue-generating models for a SaaS business. For this purpose, you must have a website for your product with lots of traffic. You can allow advertising companies to place ads on your website or app.
In this case, you are earning by monetizing your website traffic rather than sheer relying on the subscription purchase.
The two most effective strategies to accomplish this task are:
- Directly contacting advertisers and allowing them to place ads on your website/app.
- Using a third-party such as Google AdSense to run the ad.
Even though you can earn a few dollars from the thousands of reviews, if your website traffic comes from a demographic that has a propensity to pay, your earning potential goes up dramatically.
The most significant advantage of this revenue model is its ease of implementation. You don’t necessarily have to spend your time and money on market research.
However, one apparent setback with this revenue model is that you first have to garner colossal traffic to earn a handsome amount from traffic monetization. Moreover, running too many ads is likely to hurt your brand credibility, and you’ll end up with a high bounce rate.
2. Affiliate Revenue Model
Like ad-based revenue, this model relies on your brand popularity and your ability to capture viewers’ attention. Instead of merely relying on ad revenue, you can place referral links on your platform to earn some extra cash in the form of affiliate revenue.
3. Freemium Support
If you are working in a B2C market, you cannot afford unsatisfied clients as it could have a devastating impact on your business. To increase your customer retention rate, consider providing the basic version of your software followed by an ad to your customer for free.
In this way, you can prove your value to the customer and earn your customer loyalty. As a result, your conversion rate goes up dramatically.
4. The Product is Free, Not the Service
In some cases, it makes sense to provide your product at a dirt low price but charge them to harness the product’s full potential. This strategy works well for technical products.
To keep that in perspective, suppose that a SaaS Company provides a network monitoring service. However, using the tool effectively is a cumbersome task. Therefore, the Company makes the tool-free, but it charges its customers to use that tool effectively.
5. Transaction Revenue Model
This revenue model charges customers for their consumption. Customers who aren’t sure about the product’s efficacy prefer this option due to its transparency.
6. Web Sales
This revenue model is equally effective for transactional and subscription sales, but it requires a website. You run a targeted marketing campaign for your SaaS business and convert leads into paying customers.
7. Paid Courses
Paid courses are not a standard revenue model because most SaaS companies provide these resources for free as part of their content marketing strategy.
If you have a paid course that can help your customers widen their skill set or earn some extra cash, they must be willing to pay for it. Clickfull, a leading SaaS Company, uses this revenue model to make a hefty amount by selling e-books and digital courses.
Every SaaS Company should not try this revenue model, particularly those working for the B2B market. However, they can still explore innovative ways to cross-sell additional products to existing customers.
8. Custom Integration or Development Work
This revenue model is standard among SaaS Companies that serve enterprise clients. These customers often need customization. Furthermore, they might have a unique requirement because of their security architecture or industry regulations.
Additionally, enterprise-level customers often require integrating your software into their existing app.
Xapiapps, an automated system for tracking on-the-job training requirements, needs to be integrated with different LMS. However, it must not be compatible with all the available LMSs in the market.
9. Premium Onboarding
Apart from the quality customer support, you can charge customers for premium onboarding. This onboarding might include a strategy to assist customers in achieving their desired goals.
It might also include hands-on training so that your team knows how to harness the software’s full potential. It might require some migration work from a different system.
If your targeted customers are enterprise owners, there are many ways to charge the customers for additional work you are supposed to do to ensure your customers gets the value they expect from your product.
Hubspot makes the onboarding service essential for the customers who opt for their enterprise plan. They firmly believe that proper training is punitive for inbound success.
Making it essential for the customer might not sound great to you, but you can make it work for you. You can develop a custom pitch for each customer, depending on your offering.
10. Premium Support
If you want excellent customer support, you need to purchase a top-tier plan. This might be the support readily available with all the SaaS products or additional support.
Nevertheless, SaaS Companies are free to charge for additional support regardless of how your subscription plans are designed. In most cases, support is the decisive factor that makes the subscription costly.
How you create your subscription plan is entirely up to you. One thing that remains the same for certain software or companies is that customers are only ready to pay a premium cost for top-tier support.
Always try to realize why your service is exceptional and worth spending money. You should not let customers feel they are paying something useless for them.
TravelPerk is a prominent example of the Company using this revenue model. There are distinct features that distinguish between the Free and Premium plans, but the deciding factor is the level of support.
In the Premium plan, customers get immediate access to the senior support team, whereas, in an Enterprise plan, customers can enjoy dedicated support.
“Upsell” is the broad term that affects both value that customer gets and customer satisfaction. Upselling is at the forefront of successful SaaS Companies.
Upselling to existing customers is more manageable than targeting new customers. It brings more money to your bank account. According to some industry experts, attracting new customers is seven to eight times more costly than retaining an existing customer.
When you are upselling to an existing customer, you are typically adding a new revenue model to your business.
Cost Associated with Different SaaS Revenue Models
Each revenue model comes with an utterly different cost structure. Profitability is not all about increasing revenues, but it also demands optimizing your expenses. Offering your software for free for a long time might provide you with revenue benefits, but you need to have cash in hand to bear the bleeding cost.
Variable cost is the cost incurred per item of the service. It includes both the transaction and hosting costs. Conversely, fixed cost is not directly related to an individual product. It usually comprises rent, equipment, furniture, and wages.
Marketing and advertising expenses are an integral part of any business, but you need to bring sales. If you are not targeting the right customers in your marketing campaign, you are unlikely to generate leads and sales for your business.
Your SaaS business can be highly lucrative as long as you are crystal clear on your SaaS revenue models. As a SaaS entrepreneur, you should not limit yourself to monthly, annual, or annual subscription plans but explore all the available revenue models.
In order to incorporate more revenue models and revenue streams in your SaaS business, consider seeking help from freecashflow.io.