Did you know that there are 3 main types of SaaS business models?
Actually, the core values around them are pretty similar: provide a service and get paid for it.
But the way you make money and charge users is different depending on your model.
This article will explain you what are the main differences between the 3 main types of business models around the SaaS offering.
Here are the 3 different models:
- The Freemium Model
- The Paid Version
- The pay per use or Prepaid model
The Freemium Model
The Freemium model is based on giving users a free version of the product. Users can download the software for free and use it to a certain limit.
The software then needs to be paid for to use it fully and remove the limits that were imposed.
The great thing about this model is that it allows super easy user onboarding.
The risk here is that you will get too many users coming in and using the product for free
In fact some might not upgrade to the paid version, which makes it more difficult to generate revenue.
The Paid Version
The Paid version is the main option, where you have to pay for using the software. There are no limits imposed, but it costs money.
Obviously this model is the most reliable when it comes to generating revenue. The challenge here is how much you should charge for your software.
If you sell it too cheap, you might leave profits on the table.
If you sell it too expensive, chances are that only big companies will be able to pay for it.
The cons of this model, is that you risk leaving money on the table by pricing too low and also to not any free user join due to the initial cost barrier.
The pay per use or Pre paid model
The Pre-Paid model is based on pre-paying for a certain amount of licenses.
The business keeps track of the individual license, and once a certain limit is reached the software needs to be paid for again.
The challenge with this model is the need to predict the demand for licenses as accurately as possible, which might prove difficult.
There are several ways to make money, but the main idea is to offer your service for free for basic features (freemium), or to get paid for the service (paid version), either by offering a limited number of licenses, or a certain amount of time.
To wrap up:
Typically, these 3 kinds of business models are used in SaaS.
There are of course some more but these are the main 3.
What is important to know though that all of them can be successful if executed properly.
All it takes is to start testing one of them with your users.
Choose the one that fits more to you and adapt it on the go.
There isn’t a one-size-fits-all solution, so my best advice would be to start with the most popular and simple one: The Freemium Model and see how it goes.
You can read more about this topic here as well as how to test the waters with your idea or startup using the Freemium Model.
Hope you found this article helpful!