The business of SaaS (updated 2023)

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Here is why a marketing funnel does not apply to SaaS.

Business models

In SaaS, charging a subscription to access the product is the de facto default business model. If you don't know any better, you charge a monthly fee and you roll with it. Charging a subscription is only one of the business models you can offer, though.

Depending on the business model you choose, the offer you present to your target market will most likely differ, as will the pricing.

SaaS products can have a range of different business models. You can put these on a spectrum:

Ownership You sell a software license with some additional recurring packages like ongoing support, etc. Recently, we had a lot of buzz around the idea of ownership as the Basecamp guys started talking about the upcoming launch of Once, which personally I don’t think will end well. We shall see.

Pay upfront Make the customers pay a high setup fee and then either give them more value or discount their monthly subscription as they go (or both). This model works because of a few principles:

The longer the customer stays subscribed, the less it costs us. This is based on the fact that keeping a customer is always more convenient than acquiring a new one. As an example, in month 1, the customer will cost you more because you'll have to pay for the acquisition costs. Maybe you'll have to pay for more resources because they open more tickets. Whereas in month 10, you'll have already repaid the acquisition costs, and they'll be more familiar with the platform.

Customers are also typically less excited and perceive less value from the product as the months go by. This means they are also more likely to churn in month 10 than in month 1. That's why the more they stay with us, the more we want to reward them.

Subscription-based You charge customers a recurring fee, often monthly or annually, to access your product. This model provides a predictable stream of revenue and can build a loyal customer base if the value proposition is strong.

Consumption-based Lately, I've been thinking of SaaS as a service that can reach net negative churn. The fact that the word software is in there just means I'll have no replication costs as well. Consumption is a great pricing model for achieving net negative churn because it brings expansion revenue by nature. Here, instead of charging a flat fee per month, you are charging a (usually low) fee per unit of whatever you sell, or per seat. Especially if your product has enough stickiness, the more the customer grows their business, the more they'll need your product, and the more their account with you will grow, too.

Pure performance-based Here, you don't charge anything upfront or monthly. You just charge your users when they use your product and get the ultimate outcome they signed up for. An example of this would be lead generation software that just charges a fee when their customers close a lead. The cons of this model are that you have to get your tracking down to perfect, otherwise, you'll risk leaving money on the table.

Of course, these business models happen on a continuum, meaning you can mix and match these and utilize multiple at the same time. It’s not about choosing, say, to use just a consumption-based business model but rather how much you’d want to use a consumption-based business model and how much you’d want to use a pay upfront business model.

For example, one business model that I like a lot is lump sum + performance-based: you make the customer pay a one-time (usually high) fee to access the software for free, for lifetime, and then make the customer pay when they actually get value from the software.

Business model implications

Risk “How much of the business risk are we willing to put on our shoulders?”

Switching from monthly subs to lump sum, from consumption to performance-based, we make the customer risk less and less and only pay when they drive value from our product. We are also becoming more and more partners of our customers. Their success is our success in that we will literally be able to charge them more the more they get value from the product.

Sales cycle “How fast do I need sales to come in?”

Selling a lifetime software license has a much longer sales cycle compared to a SaaS that uses a consumption-based model where you can self-onboard the customer so the sales cycle is virtually non-existent. In contrast, usually, longer sales cycles have a better close rate compared to longer sales cycles because the commitment required from the customer is less. This is also similar for churn rates.

Ticket size “How much do I want customers to pay us?”

Selling a lifetime software license usually has a higher ticket size, whereas consumption-based models at the other end of the spectrum usually have a low ticket size per unit.

How to properly mix business models

Last year, I was at an affiliate marketing conference last month and had the chance to speak with a renowned Italian marketer, Joe Di Siena.

This is something I frequently do: go to a conference that is not necessarily strictly about my industry (SaaS) but is kind of complementary, or adjacent. It allows you get ideas from other industries to grow your business.

Anyway, I saw Joe speak many times, and this time, yet again, he was stressing the concept of having back-end products/offers in addition to front-end products/offers.

Let’s clarify the two terms.

The front end is the first product that a new customer buys. It’s your foot in the door. The aim of front-end marketing is to generate a new customer, to generate a sale from somebody who has never participated in a transaction with you before, and to get them to participate in that transaction for the first time.

The back end is all the marketing that you do with existing customers. The back end includes all of the additional products that a customer will purchase from you over the course of their relationship with you. The goal is to generate a profit by increasing customer LTV.

Cross-selling multiple products

In SaaS, we typically have a front end where the customer subscribes to our product. Then, in the back end, we might try to increase the customer lifetime value by upselling a larger pricing plan. Maybe we do that by pricing per unit, per seat, or using a metered approach. That’s fine, that’s the tip of the iceberg.

The internal funnel of a SaaS can and should have front-end and back-end offers, but what if we approached the entire SaaS product as part of a funnel that had a front-end and back-end, too?

The first problem we would encounter is that in SaaS, we only typically sell one product. We should sell more products. The SaaS product can only be the front-end or back-end of an offer. Our offer might consist of multiple things: a course, a consulting practice, another SaaS, affiliate deals, you name it!

I’ve done this in the past. For example, I run a SaaS called FastLien where the front-end offer is a course, and the back-end is the actual SaaS product. That gives me the ability to market the course (front-end) and make a profit with the SaaS product (back-end).

Typically, to present the other products, you would use what marketers call “bump orders”. You’ve probably seen this done in e-commerce, where right before your checkout page, the store presents you with another similar product that you could add to your cart with just one click. You can do that in SaaS, too but I am also experimenting with SaaS co-registration (again, this idea was presented to me by Joe).

For example, here’s one of my SaaS products, Treendly.com, where we present a one-click sign-up to other tools that might be relevant for the user.

Whether you use bump orders or co-registration, this works best if the products you offer are extensions of your original product.

Interchangeable entry points

One of the benefits of using multiple business models and having different products, it’s that any product can be a front-end or a back-end offer to your other product(s).

In the example above, if I were to market the SaaS product, I could cross-sell the course in the back end. And, if I were to market the course, I could cross-sell the SaaS product in the back end.