How do SaaS startups earn money?
When it comes to software companies, customer acquisition is often challenging. This is because companies face stiff competition from giants such as Google and Facebook.
To acquire customers, companies rely on marketing efforts such as email campaigns and product demonstrations. While these are effective ways of attracting new customers, companies require recurring revenue to sustain growth. That’s where subscription-based business models come into play.
They provide companies with recurring income and help them build a customer base over the long run. Most importantly, they give companies the freedom to experiment with new features without worrying about the immediate payoff.
In this blog, we’ll cover everything you need to know about subscription-based business models and how SaaS companies make money using them.
What is SaaS?
SaaS is a software licensing and delivery model in which software is made available on a subscription basis to the user and is centrally hosted.
Under this model, users no longer need to install or download a copy of the application as the product’s provider manages and updates the software based on user needs.
With SaaS, companies don’t have to invest in hardware or infrastructure and can focus on developing and marketing their product. This model has become popular due to its cost-effectiveness.
SaaS companies offer their products as services on a monthly basis for an annual fee. A service such as a customer support, web hosting, and database management is included in the subscription fee.
Typically, companies offering SaaS products make money from recurring revenue generated from customers’ subscriptions. Besides, companies also make money from customers who purchase additional services or products (as add-ons) for their products after signing up for it for a certain period of time.
With SAAS, the business startup can reduce the cost of provisioning new servers, as customers are only required to pay for product subscriptions every month.
Benefits of SaaS for Customers
SaaS has several benefits for customers. It provides customers with a try-before-you-buy model and the ability to access software solutions via a web browser or mobile device.
Customers don’t need to install or maintain software, freeing them from complex software and hardware management. Furthermore, customers can access SaaS software easily and quickly, allowing them to get their business apps up and running quickly.
In addition to these benefits, customers also save money by accessing SaaS services through subscription models rather than purchasing software outright. As organizations move toward a subscription model, customer satisfaction increases as customer costs are significantly reduced and business value is increased through access to new features and functionality as they become available.
SaaS Revenue Model
The software as a service (SaaS) model is the latest model of the software business. It is a new business model that has emerged in recent years promising greater business flexibility, cost-efficiency, and scalability.
In the SaaS model, companies don’t own or operate the software themselves; they pay to use it instead. The customers pay per month or year for access to the software. This model involves companies renting their software to customers rather than selling software licenses.
The main advantage of the SaaS model is that companies don’t need to invest heavily in hardware and infrastructure like with traditional software business models. This model allows companies to generate revenue quickly by selling access to their product rather than selling copies of it.
A customer purchases a SaaS product for an annual fee or monthly subscription fee. Depending on how often the customer wants to use the product, he will be charged accordingly.
Another important aspect of the model is that companies can scale rapidly as they don’t need to worry about investing in growing their business.
Additionally, companies can focus more on product development and marketing rather than managing servers and IT infrastructure.
However, companies still need to ensure that customers are satisfied with their products before they can consider expanding their businesses in this model.
The Initial Sale
SaaS companies make money by selling subscription services or additional features. To make money, SaaS startups need to provide a valuable product or service that meets the needs of their target market. They can do this by offering subscription plans and one-time fees for additional features.
Selling subscription services through an e-commerce site or affiliate program is also a monetization option. In these cases, companies earn revenue from customers’ subscription fees or commissions from sales made through the affiliate link.
SMBs usually have an ACV of $6K to $15K for annual subscription services. Enterprise deals start in the six figures and there is no ceiling for the high end.
SaaS businesses targeting SMBs typically have an ACV of $6K to $15K per customer per year.
Startups selling software as a service (SaaS) are attractive to investors due to their ability to generate recurring revenue. Keeping the customer churn rate low is essential to retain customers and maintain a steady growth trajectory. To reduce customer churn and boost retention, companies should focus on providing innovative solutions and exceptional customer service.
Among the various factors that are important for customer retention, cost plays a vital role. SaaS companies have relatively low costs for development and distribution compared to other businesses. Also, the profit margins of companies offering SaaS business models are much higher than a traditional business model. Therefore, startups offering a SaaS model can easily earn profits from customers’ subscription fees over the lifetime of that customer.
Even if the startup business model is lucrative as compared to others, it requires immense capital investment and time-consuming processes. Startups offering SaaS models can churn customers easily by providing them with outdated service or product versions. However, companies must focus on customer retention to earn profits from customers over the long term.
Another important factor affecting the growth of Sas startups is their rate of expansion. Due to their recurring revenue, startup companies are able to sustain operations and grow quickly without any financial challenges, making it a lucrative business opportunity for investors.
A subscription business model is an ideal model for companies offering software-as-a-service (SaaS) solutions. It allows companies to easily adapt their product to customer needs and helps them scale efficiently.
As companies continue adapting new business models to stay relevant, subscription-based business models have proven to be a winning solution for companies. If you are looking to start your own subscription-based SaaS startup, we hope these points help you understand the basics of subscription business models further.