Given the unprecedented growth of Saas industry, the software as a service or SaaS business model is one of the most popular ways companies are generating revenue online. A SaaS business model is when you sell access to your software product, rather than selling it outright—you could sell anything from a domain name registration to an app on the iTunes store, for example.
The business model is the main and most important part of a SaaS product. It determines the way you make money with your product, what kind of customers you want to attract, and how much revenue you can expect from each customer. A good business model will generate high sales, which means more money in your pocket.
In this article we will dive deep into some core aspects of a SaaS business model.
What is a SaaS Business Model?
SaaS stands for Software as a Service. This is a model in which software is hosted and run by a vendor, who provides it to customers at a price. Customers pay a subscription fee to use the software, but they don't need to install or maintain it on their computers—instead, the vendor does this for them.
Selling software as a service has become increasingly popular in recent years, with many companies offering their customers access to online applications that they can use from any computer with an internet connection.
As a business owner, the advantage of this model is that it gives you more control over your business and allows you to generate recurring revenue from customers who pay a small subscription fee on a monthly or annual basis. As a user, you don't have to worry about maintaining servers or updating software—your vendor does all of this for you, so all you need to do is send them payment every month.
SaaS Pricing Model
A SaaS pricing model is the way in which a company charges customers for its software products and services. A SaaS company can charge a subscription fee, which is usually recurring. Alternatively, the company may also offer a one-time payment for their product or service and then charge additional monthly charges thereafter.
Pricing is one of THE most important decisions to make in a business, yet according to research by Price Intelligently, companies spend a total of 6 hours on their pricing strategy! An accurately priced SaaS does two things: provides value to customers and gives companies a competitive market advantage. Your pricing strategy must be strategically thought out and constantly re-evaluated - companies with the best pricing strategies re-evaluate their strategy every 3 months and change them every 6 months.
Before we get into SaaS pricing models, let’s talk about some SaaS pricing strategy fundamentals.
Saas Pricing Strategies
The cost-based model is one of the most common business models in the SaaS industry. The company will assess the cost of ownership, acquisition and development of the software, and then determine how to charge the user to generate a profit. The SaaS company may charge an annual fee, or per transaction or charge in a multitude of other ways that we’ll talk about later in this article.
The first step when calculating your cost of acquisition is to determine what your acquisition costs are going to be; this includes both upfront fees as well as ongoing expenses such as supporting customers after they've purchased from you. Once you have those numbers, add them up—don't forget about employee salaries! You'll also need to account for training time required before users can start using the service effectively (and how long it takes them). Finally, think about implementation costs: these include things like software licensing fees and infrastructure setup fees.
If you’re not familiar with competitor based pricing, it's a way to use your competitors' pricing as an inspiration. You can use their prices as a template for how much you should charge in order to grow your business or stay competitive. For example, if an SaaS company charges $100 per user per month and another company charges $200 per user per month (it’s not uncommon for competitors to have close similar product offerings), then there may be a good reason for choosing the higher price point—but if you already have existing customers who pay more than that amount just because they liked what they were getting from one of your competitors more than what's offered by yours? Then maybe it might make sense for them to switch over as well!
If your business is based on a product or service that competes with other businesses, you can use competitor pricing to grow your SaaS business. This approach is especially effective for companies selling software as a service since it gives them the opportunity to price their products at a lower cost than their competitors and still make money from subscriptions. Companies that offer cloud computing services are also able to benefit from this strategy because they don't have to worry about paying for hardware or operating systems (OS).
Penetration pricing is the practice of charging a low price for your service or product, even though you could charge more if it were profitable.
It’s often used in SaaS businesses because they work on a subscription basis and don't have to make a lot of money from each sale immediately. You can use penetration pricing to test whether customers will pay your higher price after they get familiar with what you provide and see how much better off they are by paying it.
However, there are risks involved when using this strategy: If people don't like what you offer initially, they might not continue paying for it—or worse still, cancel their subscriptions altogether! In addition to this risk being high for new products/services (which tend not to be profitable), penetration pricing should also be avoided if there's an existing relationship between buyer and seller where goodwill exists between both parties (e.,g., customer loyalty).
The value-based pricing model is a pricing model that is based on the value that a customer receives from your product or service. This can be in terms of monetary value, time saved, or other factors such as ease of use and efficiency.
Now let’s walk you through some popular SaaS pricing models so you’re better equipped to decide how to price your SaaS product.
Saas Pricing Models
One of the most popular, freemium is where you give your customers access to your service for free but charge them for additional features or services that are only available with a subscription. For example, LinkedIn offers its users basic functionality like creating profiles and sending messages without charging them anything extra unless they want more advanced features such as posting jobs or conducting polls on their network of contacts.
The freemium model is a great customer acquisition strategy. In this model, the free version of your product is sufficient for users who want basic functionality but don't need all of its advanced features. For example, you could offer a free plan with limited access to your content and then charge more for additional features like video or audio production.
A tiered model is a way of charging different prices for different levels of service. You can charge more for a higher level of service, or less for a lower level of service.
For example, you might offer two versions of your product: one with all the bells and whistles (the most expensive one), and another that’s stripped down to its bare essentials (the cheapest). Customers who choose the stripped down version are able to save money while still getting what they need from your product or service.
Usage Based Pricing or Metered Model
A metered model is a pricing model where the user is charged based on the usage of the product. This means that if you use it for 2 hours, you will be charged for 2 hours and more/less if you use the service more/less. The user pays for what they use rather than paying upfront. This can be compared to subscription models where users pay an ongoing fee each month or year (e.g., Netflix) irrespective of how much they use the service.
Per User Model
Per user pricing model is a model that charges customers based on the number of users they have. In this type of business model, you pay per user and not for the whole package. For example, if you have one user and your product costs $100, then your per-user payment would be $100. This model is good for small businesses because it allows them to charge more per user as their audience grows (if they choose).
Per user pricing models are also good for large businesses because they can afford to take on higher costs than smaller businesses and still make a profit if the product continues to grow in popularity. In fact, many SaaS companies use this type of pricing strategy because it gives them room for growth without having to worry about how much they need to spend on advertising or marketing campaigns every month
Flat Rate Pricing
Flat rate pricing is a simple, transparent, and easy to understand pricing model. It's based on a fixed monthly fee that you pay regardless of the number of hours you work or amount of content you produce.
Per Feature Pricing
Per Feature Pricing is a pricing strategy where the customer pays for each feature they use. This is most commonly used in business software and SaaS products.
The customer pays for each feature they use, instead of paying a monthly fee that covers all the features they need.
What Are The Advantages Of Using A SaaS Business Model?
- Customers can try before they buy.
- You can charge a higher price for additional features.
- You can also charge a higher price for enterprise versions of your product, or add-ons that allow you to add more users, data or other services to your product.
- You don't have to charge for every little thing that you've built into the product; when people pay for your service, it means that they value what you're offering enough to pay for something extra—and this is especially true if there are things like training videos or support services outside of just paying money up front (which is still better than not earning anything).
What Are The Disadvantages Of The SaaS Business Model?
- The cost of customer support. As a small business owner, you will have to spend money on hiring people who provide live help or post-sale support for your customers. This is usually done through phone calls or emails which means that you have to buy more hardware like computers and phones etc so that they can be used for their job tasks related to SaaS products/services provided by them (i.e., managing emails sent from clients).
- The need for ongoing maintenance: If you don't want any problems arising out from using SaaS platforms then making sure that all updates get installed regularly without any issues being encountered afterwards would be important because otherwise there could be major problems occurring later down the road when something goes wrong due lackadaisical approach taken earlier on during setup process
How Much Does It Cost To Develop SaaS Applications?
The cost of developing a SaaS application depends on the complexity of your application. Depending on how many features are included and how much customization is required for each aspect (like pricing), costs can range anywhere between $30K to $1M+.
Byldd however, is an MVP development company that specializeS in SaaS application development services and can usually do it for under $10K and within a month. We’re able to hit this price point because we’ve standardized the MVP development process by creating reusable blocks for common functionalities. Things like login, registration, payments, subscriptions, admin dashboards and more work out of the box and don’t cost any extra developer dollars or time. We provide these for free to all entrepreneurs that work with us to build their products.
How Long Does It Take To Create A SaaS application?
Again, the development time of your SaaS application depends on the complexity of your application. The more complex the application, the longer it will take to develop. Byldd reduces this time by using frameworks or templates that provide a skeleton for building on top of.
A Great Business Model For Startups
In conclusion, SaaS is a great business model for startups because it allows you to get your product out to the market quickly and make money right away.
This can be used by large companies as well, but they have to do it differently than smaller companies do: they need to make sure that their customers are happy with the service they're getting before moving forward with any kind of marketing or advertising campaign.