by Alex Ho
These are some concepts about SaaS that I learned from the daily work and some insightful articles.
(Image source: freepik)
- SaaS Intro
- What is SaaS (software as a service)
- Common characteristics for SaaS companies
- Advantages of SaaS
- For software company
- For customer
- For stock investors
- How can a SaaS company keep wining customer’s heart
- Common revenue streams in SaaS business model
- Subscription Fee
- Setup Fees
- Fees based on transactions amount
- Customer service or consulting
- White label licensing
- API fees
- Common Subscription Pricing Models for SaaS
- Flat Rate Pricing
- Tiered Pricing
- Usage-based Pricing
- Per-user Pricing (a.k.a Per-seat Model)
- Per-feature Pricing
- Important financial metrics for a SaaS Company
- Users (quantity of customers)
- YOY Revenue Growth Rate
- Annual Recurring Revenue
- Unearned Revenue (a.k.a Deferred Revenue)
- Remaining Obligation Performance
- ARPU (Average revenue per user)
- Customers Retention Rate
- Active Users & Churn Rate
- How to operate a SaaS company
- Other References
What is SaaS (software as a service)
- The software is delivered to clients over-the-air through internet. No need to download in install file to the local side of your computer and then install it (as the traditional way to purchase the whole software)
- The software itself and the related processing data are stored and managed in the cloud space.
Common characteristics for SaaS companies
- In order to keep clients satisfied and continue to pay, SaaS companies need to keep investing in improving and updating their products
- Thus it’s reasonable for a SaaS company to reinvest its profit into product development for future growth, acquiring new customers, market expansion
- Even though a young SaaS company might looks like “losing money” in some way, they might be aiming at becoming defensive and generating future revenue
- Many SaaS companies focused on revenue growth in their early years, and became profitable in the later phases
- Unearned Revenue (a.k.a Deferred Revenue 遞延收入)
- Even though customers might signed a contract for multiple years, the unearned revenue (to be paid in the future months or years) can not be included in the current financial report
- Fast expansion to acquire more users
- SaaS companies might spend much budget in marketing and business development
- SaaS companies can sell the same software to more and more clients, without investing more physical spending, it’s easier for SaaS companies to scale their business.
- And as the business is scaled up, the initial product development costs can be recovered. And thus the gross margin can go up.
- SaaS companies have to monitor if existing customers (i.e. old customers) maintain the subscription. See why they are still happy or why they are not happy anymore about the product
- For SaaS products targeting at enterprises, the products/systems can sometimes be very complex. SaaS companies might need to provide consultant services to onboard and guid the customers to use their products.
- This also means “do not only focus on acquiring the new customers
Advantages of SaaS
For software company
- Build the feature once, sell the product to many customers.
- Steady and predictable recurring revenue (as long as the customers do not cancel the subscription)
- SaaS company can digest the user data (in legal way) to find out area to improve its product.
- Customers can pay and start to use the software by their own (through website or mobile App). SaaS companies do not necessarily need resellers to sell their softwares.
- Some marketing spending can be saved.
- This could result in higher operating income.
- Start small, and scale up
- Customers do not need to purchase the whole software at once (with a chunk amount of money).
- They can start using the software with small amount of money right away.
- Practically, many SaaS companies allow customers to start using their product/service with a N-days free trial. They have to win customer’s heart during the trial and attract customers to become paid users after the trial ends.
For stock investors
- Because of the steady and predictable recurring revenue, it’s easier for investors to assess if a SaaS company has a bright future.
How can a SaaS company keep wining customer’s heart
- Well designed pricing model
- Figure out “what keeps the existing customer continue to pay for the subscription” ?
- In short, what is the value proposition of your product?
- Do not think in this way - “make everything free and think about revenue generation in the future”. Most likely you will regret from this in the future.
- Trello.com worked on monetizing from paid users too late. Trello should have figure out way users use Trello (instead of other todo list Apps), what are the sweet points that they can charge users money to pay for premium features.
- Integration with existing major tools in the market
- No one can build all of the features that customers need.
- SaaS companies can build integration between their own product and other existing tools. And of course, you can charge your customers when they use the API integration features that you provide.
- Those ties also help to secure the existing customers (so that they cannot live without your product)
- Shopify merchants can automatically upload their merchandises to Facebook Shop, Google Shop, Youtube Shop.
Common revenue streams in SaaS business model
- Customers pay monthly or yearly subscription fee to use the products
- For most of the time, this only occurs when a customer “start” to use SaaS product for the very first time.
- And such setup fee is not charged repeatedly.
Fees based on transactions amount
- Taking Shopify for example.
- For a merchant to start to use Shopify system, he/she needs to pay the monthly subscription fee. (This is named as the Subscription Solution Revenue in Shopify’s ecosystem)
- Besides the subscription fee, Shopify also charges transaction fees and payment fees from merchant’s e-commerce transactions (This is named as Merchant Solution Revenue in Shopify)
Customer service or consulting
- Normally, for the purpose of scalability, most SaaS companies provide clear instruction guides or user manuals in the product for customers to solve the problems (when using your product) by themselves.
- However, as your product gets more and more complex (especially in the enterprise products), customers might want additional on-site support or consulting service from you so that they can solve the problems faster. Then SaaS companies can charge their customers additional fees from this.
- Display ads somewhere in your product (e.g. in the backend console)
White label licensing
- For example. If your customers want to wrap up your product and sell it to their own customers, they might want to change the logo or the title of your product seen in the product backend console.
- For such scenario you can charge your customer licensing fee.
- E.g. Company_A charges Company_B when the later request for allowing the system integrations.
SaaS Business Model
The SaaS business model is one of the most famous business models that has been developed in the internet era. But in the business world, it's a relatively new business model. To give you an idea, the term SaaS - software-as-a-service - is only 15 years old and was coined by John Koenig for the [...]
Common Subscription Pricing Models for SaaS
In general, a good SaaS pricing model can help software companies to achieve these goals
- Maintain the future recurring revenue over time.
- Serve the right customers at the right pricing.
- Upsell customers to purchase more features or service
Flat Rate Pricing
A fixed price per month or per year. No multiple tiers available.
- (For Customers) Simple and straightforward for customers
- (For SaaS Company) Simpler product and pricing structure.
- (For Customers) There are no “levels” in this pricing structure. Customers might wonder “Do I really need to pay $XX to buy these whole things? Am I overpaying? for this”
- (For SaaS Company) Less room to tweak the price when needed.
Different product/service level are offered for customers to choose
- (For Customers) Easier to start. All different kind if customers could find a tier suitable for themselves.
- (For SaaS Company) Acquire different levels of customers. Able to maximize the potential revenue from different customers.
- (For Customers) The complicated pricing models might overwhelm the customers and do not know which one to adopt.
Customers are charged based on the quantity of sth that they use in the product
- (For UX prototyping tool) Based on the maximum different files that you can create
- (For cloud storage service) Based on the storage space scale.
- (HR system) Based on the number of “employees who get paid (in customer’s company)”
- (For Customers) Customers can pay for the exact of amount of service that they truly need. And they can upgrade to buy more as their business scales up
- (For Customers) If there are low season and peak season for customer’s business, then for some time they do not actually need “that much of services”. Customers might want to ad-hoc adjust the service level to purchase
- (For SaaS Company) If customers might ad-hoc adjust the service level to purchase, it can be difficult for SaaS companies to predict there revenue
Per-user Pricing (a.k.a Per-seat Model)
- Customers are charged based on “how may users in their company are going to use this SaaS product”
- SaaS companies might have to work on the situations when a customer have huge amount of users (employees), as the price goes up badly.
- (For productive tools, collaboration platforms) Based on the number of users (in customer’s company) who need to manage one single Instagram account
- (For Customers) Customers can start from the cheapest option, and then upgrade to buy more as their team size scales up.
- (For SaaS Company) Gaining higher revenue when onboarding larger companies or enterprise.
- (For Customers) Larger companies need to spend huge amount of money (if there is no according well designed pricing structures for larger companies)
- A SaaS product provides a few tiers for customers to choose from. But for some customers, they only need a certain feature instead of all of the features in the higher tier. Then they can purchase that specific feature only.
- (For Customers) They can buy exactly what they need.
- (For SaaS Company) More flexibility to upsell.
- (For SaaS Company) It makes the product and pricing setup more complex.
- (For SaaS Company) It might be more difficult to explain the full flexibility and combinations (to choose from) to the customers.
SaaS Pricing Models: a Comprehensive Guide | Beamer
The average time a SaaS company spends determining their SaaS pricing model is less than six hours. Despite pricing determining revenue, perceived value, and potential growth in the future, pricing is vastly overlooked. With the right pricing strategy, SaaS companies can greatly increase revenue over time and serve customers a product at the right value.
11 Revenue Streams For SaaS Business
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 [...]
Important financial metrics for a SaaS Company
Users (quantity of customers)
- More users means:
- More recurring revenue
- Faster for a SaaS company to recover its investment in product development
YOY Revenue Growth Rate
- This is especially important for SaaS companies in the early stage, while they might not be profitable yet.
Annual Recurring Revenue
- Recurring Revenue of current year - revenue contribution from the lost customers + revenue contribution from the new customers acquired this year
- We can use this metric to assess if a SaaS company can keep wining hearts of existing customers and new customers
Unearned Revenue (a.k.a Deferred Revenue)
- Unearned Revenue means that a SaaS company has signed contract with customers already, but they haven’t fulfilled the service or delivered the product to customer yet.
- Unearned Revenue should be seen as a liability item in the balance sheet
- Because the SaaS company owes customers some service to be delivered in the future
- For example, a SaaS company signed a contract with customer A in 2022. The service will be delivered in 2023.
- The payment will be paid only in 2023.
- So the unearned revenue will be recognized in the financial report in 2023 in stead of 2022. But it can be included in the future guidance section
- Even though it is not calculated as “revenue“ yet, we can use unearned revenue to asses if a SaaS company is continuing to acquire new customers and revenue.
Remaining Obligation Performance
Remaining obligation performance includes
- Unearned revenue
- Un-billed unearned revenue (invoices not issued yet)
ARPU (Average revenue per user)
- If ARPU goes up, it might means
- Product price increase
- Customers are happy with the product/service
- Existing customers purchased more product/features
- If ARPU goes down, it might means
- Company lowered down the product price (maybe because of the fierce competition in the market)
- Existing customers purchased less product/features (or canceled the subscription of certain features that they purchased before)
Customers Retention Rate
- DO NOT only focus on acquiring new customers and forget the old customers
- Your existing customers can continuously generating revenue for you.
Active Users & Churn Rate
- Some SaaS companies have lots of customers, but it’s likely that part of the users are not actively using the products or even not paying subscription fees anymore.
- Some companies still include those customers in the lump sum when they file the quarterly financial reports. It makes the investors feel that the churn rate is very low, while the truth might not be the case.
Some materials that I haven't sorted out yet
How to operate a SaaS company
(Below content is a brief summary from the article by
The Cadence: How to Operate a SaaS Startup
You think you need a COO. What you really need is an operating philosophy.
1. Set a clear “cadence” to operate a startup
- Put the 4 key functions in a SaaS company (Sales, Finance, Product, Marketing) on a quarterly calendar.
- Potential cadence to run repeated review meeting/discussions
- Weekly sprints focusing on specific objectives that help the team makes progress towards its larger and long term goals.
- Monthly review. Review metrics and performance to assess the overall health and direction of the business. Make corrections if needed.
- Quarterly planning. Set the goals and priorities for the next one or two quarters. Identify major initiatives/projects and assign responsibilities to the PICs.
- Focus on customer needs.
- Prioritize customer feedback.
- Drive product development.
- Improve overall customer experience.
Why Trello Failed to Build a $1 Billion+ Business
In 2011, Joel Spolsky launched his company Fog Creek's new product at TechCrunch Disrupt called Trello. It looked a lot like a whiteboard with sticky notes translated into a web browser and an iPhone App. Instead of physically moving a sticky note on a whiteboard, you could drag and drop cards on a board from your web browser.
129 Well-Known Unicorns in the SaaS Industry
Have you ever wondered which private companies in the SaaS industry have the highest valuations? You're not alone. There are lots of unicorn companies in this space, and it can be difficult to keep track of them all. We've decided to take a deep dive and put together a list containing 129 SaaS unicorn startups, from highest to lowest valuation.
The Best Posts on SaaS: Metrics, Growth, etc. - For Entrepreneurs
The best posts on SaaS, including SaaS Metrics 2.0, SaaS Economics, etc. that help SaaS startups understand how to grow their business.
EP 21. 对话神策数据CEO桑文锋：神策从0到10的三个关键阶段，SaaS新常态下的新思考
Listen to this episode from OnBoard! on Spotify. 又一期重磅的中国企业服务创始人访谈来了！这次请来的嘉宾，可以说是聊到中国企业服务必须要提到的一家公司，神策数据。神策数据(Sensors Data)成立于2015年，是国内专业的大数据分析和营销科技服务提供商。目前已服务付费客户2000余家。今年一轮高达2亿美金的D轮融资后，累计融资金额近3亿美元。 神策数据的创始人兼CEO桑文锋，也是我们一直非常想要深度交流的创业者。他的很多分享，从大数据营销行业，到ToB 公司业务成长，到创业思考，又细到ToB企业产品、营销、销售、客户成功怎么做，让很多从业者都受益匪浅。 Hello World, who is onboard? 这次访谈得到了嘉宾很多支持。访谈之前跟桑老师讨论访谈提纲的时候，他特意说，自己从0到1 的故事已经分享了很多次，但是最近，尤其是面对剧变的资本和市场环境，他对于企业从1到10，有了更多的新的思考，希望能作为这期播客的重点。 所以，我们这次讨论的很多话题，都是桑老师新鲜出炉的实践和思考，有深度迭代，又有时代应景。相信你们也会跟我们一样，受益匪浅。 上一次跟酷家乐董事长黄晓煌的对话，我们收到了很多好评！有一位观众说，没有所谓话术，都是大实话。我们也正是希望将创业者们从0到1，从1到10的实践与思考，挑战与反思，通过播客传承为行业中沉淀的思考，让创业者从业者，都能在前人的基础上，少走一些弯路，跑得更从容。Enjoy！ 公司介绍 神策数据(Sensors Data)，是国内专业的大数据分析和营销科技服务提供商，为企业提供神策营销云、神策分析云、神策数据根基平台三大产品方案，通过全渠道的数据采集与全域用户 ID 打通，全场景多维度数据分析，全通道的精准用户触达，帮助企业实现数字化经营。业务现已覆盖以互联网、品牌零售、金融、融 合媒体、企业服务、高科技、汽车、互联网+ 等为代表的 30 多个主要行业，并可支持企业多个职能部门，目前已服务付费客户 2000 余家。 我们都聊了什么 02:43 文锋总的自我介绍，为什么会创业，早期如何探索创业方向？ 11:55 把百度的经验变成对外产品，早期如何验证 Product-Market-Fit (PMF)?
Linkedin : Alex Ho
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