by Neil Patel
SaaS by itself is not a profitable business model. SaaS only becomes profitable when coupled with a strategic revenue model.
Within the SaaS space, there are endless themes and variations on the theme for the right pricing structure. If you want to succeed in the SaaS space, you’ll need to plan for profitability from the very start.
One of the greatest misconceptions in SaaS is that the monthly subscription is the only source of revenue. This is not the case. As SaaS advisor company SixteenVentures explains, “If you only leverage ‘subscriptions’ you are leaving money on the table.
That being said, you have to start somewhere, and that somewhere is subscriptions. Subscriptions are the de rigueur SaaS pricing model. From the upside of recurring revenue to higher growth rate and customer lifetime value (CLV), the benefits are unbeatable.
Furthermore, when considered over the long term — pros, cons, caveats, and disclaimers all on the table — the subscription model trumps the licensing model by a long shot.
“Upsell” is the generic term for anything that improves both customer value and expenditure. Upselling is at the heart of successful SaaS sales.
Upselling existing customers is easier than attracting new customers. It’s more profitable, too. According to some analysts, it is six to seven times more expensive to gain a new customer than to retain an existing customer. When you upsell an existing customer, you are adding a layer of profit on top of a layer of profit.
3. More Storage, Speed, or Data
One of the common ways to upsell customers is by adding additional storage, speed, data, bandwidth, etc., along with relevant costs. Depending on your product and clientele, this could be a great way to provide your users with the right level of service at an appropriate cost.
4. New Versions
Charging for new versions of your SaaS has plenty of risks, but for some businesses, it makes total sense. The toughest part is persuading your customers that it’s the right thing to do.
5. Affiliate Sales
Affiliate sales could be a major growth hacking win. With a successfully implemented affiliate program, you can lower marketing costs, effortlessly penetrate new markets, produce viral expansion, and retain your existing customers. Customers who succeed with affiliate marketing will stick with you for the long haul, resulting in a lower churn rate.
Use the affiliate program with caution. If unchecked or unmonitored, it can result in tacky marketing and unwanted exposure to adjacent markets.
It’s “critical to focus as much on revenue streams beyond the application as within the core product,” according to SixteenVentures. One such beyond-the-application revenue stream is the API.
An API or application program interface is a means of making your SaaS work with other software applications. Some developers will pay hefty API fees, eyeing the potential of a SaaS that is integrated and customized for their needs.
If you’re going to create an API, give it some careful consideration, including accurate cost forecasting. From a development perspective, APIs aren’t cheap, and future support burdens may outweigh the potential cost.
7. White Label Licensing
If your customers want to sell your solution to their customers, it’s worth considering. Just make sure you charge accordingly. It’s also important to properly set up the license agreement to avoid any future pitfalls.
8. Setup Fees
A setup fee is a good way to validate clients during the onboarding process. A client who is willing and able to pay a setup fee is a client who can afford your service and is committed to using it.
Along with the pros come the cons. Some clients see it as a major turnoff if you insist on charging them every time they turn around. If you choose to add fees to your SaaS, keep them to a minimum. At the very least, only charge fees for services that have true value.
Some SaaS providers have successfully developed a model by which they charge for reporting. Whether the reports are automatically generated or manually prepared, they can be a huge value add for clients.
If you can develop a reporting model that gives value to the client, while at the same time proves the ROI of the SaaS, you’re in a strong to position to charge for it.
It’s relatively easy and cost effective to build a SaaS with room for advertising space and revenue. Ads within the SaaS is a hands-free way to earn residual and recurring income. Companies like SaaSAds specialize in the integration of advertising within Saas.
Keep the risks in mind, however. Some users may see ads as annoying, tacky, or cheap. If you are already charging a fair price for your SaaS, ads shouldn’t be part of the package. Advertising works best only for freemium models.
11. Customer Service
Customer service is expensive. Hiring and retaining the right people is tough enough. Support personnel must be trained continually not only in the software itself, but in the best way of coaching customers through their issues. The more complicated the software and the less aware the customer, the more that it will cost to have a fully staffed support team.
What’s the solution? Charge for customer service. Customers who want or need additional support can be charged a monthly fee, somewhat like a retainer fee, to get support when they need it.
Your SaaS business can be highly profitable, as long as you plan for profits to happen. Think beyond the monthly subscription model, and discover additional revenue streams.
What revenue streams do you use for your SaaS?