Ever wondered how SaaS companies make money? Who pays for the service? Where does the revenue come from?
While I am sure you are able to name several SaaS companies, the majority of users won’t be sure how they generate revenue.
To many people, SaaS is a free service.
You don’t pay for it directly and you probably never even see an invoice (with freemium plans sometimes that’s even true).
This post will explain how the business model works.
So how do SaaS companies actually make money?
The short answer is: From customers subscriptions.
Subscription-based revenue is the key to success for almost every SaaS company out there.
When you sign up to a service, you usually have to provide some personal details, usually an e-mail address.
This is used to bill you for the service.
Subscriptions can be based on monthly, quarterly or yearly billing cycles.
In the case of SaaS, you usually have a range of plans to choose from, some of which are more expensive than others.
The more features the plan has – the higher the cost.
Without having to pay per hour, most people are more willing to pay for a service that they will use frequently.
The Saas business model explained
You provide a range of products or services that are suitable for different types of users.
Monetize your service by offering different plans, charging more for certain features or allowing multiple people to use the service with just one account.
The more flexible your service is, the more likely people are to accept a subscription-based billing cycle.
Maximizing LTV (Lifetime value)
Because SaaS firms make the bulk of their money from subscription payments, the appropriate pricing strategy may increase customer lifetime value and stimulate future growth.
Upsells, such as premium plans, affiliate programs, and advertising, are also used by SaaS firms to generate revenue.
To wrap up:
So here was the basics of how SaaS companies make money.
Remember that subscriptions are the source of revenue for almost every SaaS company, with prices based on features or number of users.
The more people subscribe, the more revenue you get.
When people subscribe, they provide personal information which is used to bill them regularly for the service.
Monetizing your service is very important, so find the pricing model that works best for you.
Maximizing LTV (lifetime value) is also important, which you can do through upsells.
So in case you were looking to start a SaaS company yourself, then hopefully this post has given you some insight into how to go about it.
I’ll be releasing more posts related to SaaS soon, so don’t forget to check back.
If you have any questions or comments, feel free to ask me!