SaaS is an ever-growing market that has proven its profitability despite an ongoing crisis.
After an initial drop in revenue in March 2020, the SaaS industry recovered within months. Some startups have even grown by as much as 20%.
As more and more companies invest in cloud-based solutions, it’s time to look at how SaaS companies gain revenue and some tips on how to increase it.
Jump to section:
The SaaS Business Model Explained
The Phases of the SaaS Revenue Model
Nailing User Engagement Through the Stages
The SaaS Business Model Explained
Software-as-a-service (SaaS) is a business model that provides products through a cloud-based system and then licenses its usage to customers via a subscription plan.
SaaS companies are responsible for server maintenance, security, and data handling.
They offer one or multiple products, and their subscription plans vary based on their product and customer base.
Within those subscription plans, they charge their customers regularly (most commonly month-by-month).
As such, SaaS companies benefit from predictable recurring revenue and scale their business much quicker than traditional ones.
Another interesting factor to SaaS is heightened customer retention.
The entire business model relies on making customers pay for their subscription plans, so retaining customers is what keeps SaaS businesses afloat.
The demand for SaaS products is high, and it’s predicted that by 2025 almost 85% of business apps will be SaaS-based.
To bank on this trend and battle their competition, SaaS companies have to update their products to provide a better customer experience regularly.
Unfortunately, software is severely vulnerable, and there need to be constant security improvements as well.
SaaS prides itself on numerous benefits, and it’s one of the few industries that has proven to be recession-proof.
The Phases of the SaaS Revenue Model
The SaaS revenue model has completely changed the way we do business.
Its benefits for the customers are evident, from lower commitment and lower costs, to the opportunity to try a product before buying it.
For businesses, it means a new way of distribution, marketing, and selling software.
SaaS typically goes through three phases to gain and grow revenue: the initial phase, the growth phase, and the maturity phase. Let’s take a closer look at each of them.
The Initial Sale
The first stage is usually the hardest for any SaaS business. Your funds are limited, and you have to do most of the work on development and marketing on your own.
While you do that, you also have to make sure that what you’re building is actually useful to your target market.
Actions that you take during this phase include hiring the right people, targeting the right investors, and acquiring your first customers.
Building a Product Market Fit
If your product isn’t what the market needs, you’re doomed from the start.
Finding a good product-market fit is essential for businesses because it means being accepted by a large audience and solving real problems for the customers.
If you’re a startup, your initial customer base will be small and acquired through word-of-mouth.
But don’t worry, as your company grows, you will learn more about your niche and improve your product to better cater to your customer profiles.
The most important thing is to find out if your product fits their needs and whether there’s a possibility of scaling.
With your small group of customers, there are several ways you can find a product-market fit:
- Customer surveys
- Customer interviews
- Staff interviews
Interviews and surveys will help you identify specific problems and gather ideas.
Your staff’s opinion is also valuable because they might offer solutions you haven’t considered before.
You might be tempted to develop every feature your customers ask for, especially if you’re just starting out.
However, that would be a mistake.
Spending money on something that can only be useful to a handful of people will not make you profitable in the long run.
Therefore, conducting interviews and testing the market is a good start to find if your product has a future.
Having the Right Team
Hiring the right people with the right skills will set you up for long-term success.
Employees who know your vision and adopt your company culture will form a cohesive team, which will guarantee increased productivity and efficiency.
The majority of your team might be in-house, but you can also hire remotely to find people with skills that will benefit your projects.
Once you start hiring, you need to think about the needs of your business and the roles you need to fill.
This doesn’t just mean hiring people for development. Your SaaS needs people in sales, marketing, customer support, administration, etc.
Remember that unless you set expectations and clearly define roles for your employees, it might cause confusion and frustration.
There needs to be a clear division of duties and authority.
With clear goals and planning strategies, it will be easier for your employees to deliver the best service to your customers and help you scale your business faster.
Hire people who will fit your company’s culture and clearly define their roles and responsibilities for faster growth.
Find initial funding to get your business off the ground.
Once you see some progress and confirm the viability of your business model, you’ll need more funding to develop your ideas further.
A lot of start-ups fail in their first months because they fail to secure enough funding.
To prevent such an unfavorable outcome, this is where you’ll turn to investors and VCs (venture capital firms).
Angel investors are independent financiers who make investments in early-stage businesses.
They decide to back your company but also offer advice and mentorship for new entrepreneurs.
Getting funding from them is easier because they’re the sole decision-makers and don’t have to answer to anyone else.
Venture capital firms are another option. Such companies consist of multiple partner investors who invest large amounts of money in new businesses.
They want viable proof of your product’s market fit and expect a quick return on their investments.
To get the money you need to build your business, you have to target the right investors, who will see your company’s potential rather than try to appeal to as many as possible out of desperation.
Finance your business by finding the right people who will see your potential for further growth.
Securing the First Users
Attract your first customers with the right strategy.
Before you start your seed financing or looking for a product-market fit, you need to find the customers to back your ideas and business plans.
Otherwise, you might end up in the 20% of startups that fail within their first year.
However, don’t worry—there are proven ways to get your first customers and the first revenue stream.
Contact your friends, business partners, former coworkers, and anyone who might be or know a potential customer.
Provide them with a demo or a minimum viable product that will help you collect initial feedback.
Once you act on that feedback, it’s time to extend your search.
Use social media to create your identity and build credibility. Without a social media presence, it’s as though you don’t exist as a company.
Then, create an ideal customer profile to help you target relevant people who will become long-time users.
After that come actual viable strategies to increase your presence in the market and attract customers:
- Affiliate marketing – use other tech companies and influencers to promote your product.
- Content marketing – create blog posts to educate your audience and benefit from traction on guest posts.
- SEO – build organic traffic by targeting the right keywords
- Remarketing – follow your customers’ online activity and target them with relevant ads
After you’ve successfully found your first customers, make sure that they continue finding value in your product.
The Growth Stage
Increasing your revenue is the primary concern once your business grows.
Your expenses increase, and you need to prove to your investors their funding was well-spent.
In this stage, it’s time to stabilize your income, find more ways to gain revenue and track the right metrics for effective planning.
At the same time, think of new strategies to scale your business.
Scale your business sustainably.
To achieve sustainable revenue growth, you need to focus on acquiring more customers and establishing a repeatable sales process.
For that, you have to work on customer education and the onboarding process.
If your customers realize the value of your product in a short amount of time and learn how to use it without much trouble, their lifetime value will increase.
It will also help you convert prospects and reduce your churn.
Hiring the right people is essential for this stage, too.
For instance, hiring a professional Sales Representative will generate more revenue for your SaaS business because that person will know how to manage revenue streams and communicate with your customers.
Their strategic thinking and analytical mindset will optimize your sales funnel.
They will integrate pricing strategies that will help you scale quickly and sustainably.
Focusing on the customers and the sales process will help you grow your business in a way that is sustainable long-term.
Moving upmarket can turn you into a revenue magnet.
When you first started, you probably targeted small users that could adopt your product quickly.
The problem is that small users churn more quickly, so to replace them, you need to spend more on customer acquisition.
A straightforward solution is to sell upmarket.
Large companies pay more, and their churn rates are lower. Their LTV is also much higher than those of smaller customers.
Your first problem to solve is to build your existing product to fit the needs of a larger customer with more purchasing power.
They have different requirements in terms of security, workspace organization, and admin tools.
You might also need to reconsider your marketing and sales strategy when you target large companies.
Such companies want to talk to sales teams and see professional demos that require more time and effort on your part.
You will also have to create a customer success team to onboard and retain highly valuable users.
Moving upmarket is not that easy.
Large customers expect more from your product since they plan on using it long-term.
You need to be forward-thinking and be 10x more effective and adaptable than you were with your small customers.
Track the right metrics for effective revenue growth.
With a more extensive customer base, there’s more data to analyze.
We’ve already covered some key metrics for SaaS reporting, but when planning your revenue growth, there are extra things you should look at.
The first one is the Net Monthly Recurring Revenue Growth Rate which is a measure of added and lost MRR. It’s calculated in percentages, and it’s solid proof of how fast your business is growing.
Your next key metric is Gross MRR Churn Rate. You can’t possibly know how your business is doing if you don’t look at how many customers you’re losing.
Churn rate indicates total lost revenue due to cancellations or downgrades.
While you’re looking at lost customers, keep in mind the ones you’re currently trying to convert as well as active users.
Track Lead Velocity Rate, which will tell you the percentage of qualified leads or potential customers.
Tracking the number of your active users who are currently paying for your product is a clear indicator of where your money is coming from.
This is a better tactic than looking at your entire customer base, which includes free trials and freemium users.
The final metric you should track is the Customer Acquisition Cost Payback Period. Use it to calculate how much time you need to earn back what you’ve spent acquiring customers.
As mentioned in the previously quoted report by Openview, many startups need as much as 11 months to recover from the initial CAC costs.
Tracking the right metrics will show you your business’s trajectory, so use them to implement smart plans for future revenue growth.
Refining the Product
Focus on the right features in your product to ensure quality revenue growth.
User experience with your product is the most important thing in this stage. Improving features leads to higher user engagement which impacts your MRR.
Aim to get your customers to become regular active users.
We’ve already mentioned onboarding and customer education as essential aspects of scaling your business. But how do you do that?
Remember that people like simplicity and the segmentation of information.
You should tell them important information in intervals, and focus on teaching them how to use features that fit their needs.
During your onboarding, get your customers to their Aha! Moment quickly.
These quick wins allow for faster feature adoption because customers can see how your product is valuable for them.
Also, focus on Product-Led-Growth. This means that you allow your product to sell itself by advertising specific features, and you have a product-centric approach.
Only use this if you’re confident your product is intriguing enough for a broad customer base.
Improve your customer’s experience by refining the right features, thus ensuring quicker product adoption.
The Maturity Stage
During this late stage of your revenue model, you should focus on customer retention, improving your brand to attract new customers, and adjusting your pricing to increase revenue.
Customer retention ensures steady revenue for years to come.
The main rule of retention is this: customers that achieve their goals are less likely to churn.
You should implement a customer success program that will help you build relationships with your users.
While you’re helping them achieve their goals, you’re also creating a fruitful ground for future upsells and cross-sells.
During customer education, provide them with helpful resources they can access at any time. Create a one-stop repository of webinars, ebooks, or video tutorials they can consult if there’s some minor problem they’re experiencing.
Also, remind them of these learning opportunities regularly via email.
The best way to ensure customer retention is to provide excellent customer service.
This is different from a customer success program, because your support team focuses on specific problems and questions your customers have about your product and company, rather than devising strategies to ensure customers use the product to its maximum potential.
And finally, ask people why they are leaving.
Sending exit surveys can help you gain insight into why they weren’t able to see the value in your product.
You can use that information to bring them back or focus on getting a better experience for your existing customers.
For some more retention tips, check out one of our other articles.
Adjust your pricing to generate more revenue.
Here’s a secret: most customers don’t care about the price of your SaaS, as long as you provide genuine value.
Companies that have increased prices have seen incredible revenue growth.
For instance, Canny’s customers even asked them to raise prices.
If your customers cancel their subscription at this stage, it’s probably not down to the price itself, but the perceived value of your product. They simply weren’t the right fit.
Think of it this way. If your prices are too low, then users might think you’re not that great.
The optimal pricing strategy has to include your business expenses, competition, and customer profiles.
Your customers are an invaluable source of data about improving your company.
Therefore, when you consider changing prices, first test the waters by conducting surveys. Quantify how much value people get from your product so you can adjust your pricing accordingly.
Also, look at your competition.
How are they pricing their product? Maybe you can spot some patterns which will give you a clear picture of what your pricing strategy should look like.
Use A/B testing to find out if your plans will work.
Find out what happens if you double your prices, provide several pricing plans and see which factors resonate more with your customers.
However, price changes are a big deal, so don’t just spring them onto your existing customers. By giving them advance notice, you’re ensuring they don’t contribute to your churn rates.
If some of them still feel a bit resistant to a sudden price increase, try to compromise. For instance, offer discounts that will last for a certain period.
Your pricing should reflect the perceived value of your product, so as your business grows, adjusting that pricing will become a necessity.
Improving Your Brand
Boost your branding to attract new customers.
Your brand is how you position yourself among your competitors.
SaaS is becoming overcrowded, so it’s essential to highlight your uniqueness and communicate what you want to be known for.
Most SaaS companies rely too much on marketing and hoping that their product is good enough to satisfy the needs of their customers.
However, branding is an entirely different beast. It happens whether you work on it or not.
Boosting your brand should help you create a sense of familiarity and recognition that will get more people to opt for your product.
If you do everything right, your branding should stem from your company’s values.
You create an identity people can relate to, thus humanizing your company and making it more approachable.
First, you need to define your core values.
What are you trying to communicate about your company? Are you technology-driven, customer-oriented, collaborative, or something else?
Consider which characteristics are essential for your company’s values. You need to maintain consistency and transparency in your messaging.
Next comes creating a brand personality. While core values are tied to your beliefs and principles, personality is connected to action and behavior.
A great brand personality comes from using the tone and voice that reflects the true experience of doing business with your company.
Create a unique position in the market and give your customers reasons for buying your product to garner more revenue.
Obtaining Late-Stage Funding
Consider obtaining more funding for your business through different streams of revenue.
Late-stage funding usually means dealing with a lot more money. As a result, you have to work with banks and new private investors.
Banks are generally difficult to convince to invest in tech companies, so there are two routes: private debt capital and bank financing.
Debt capital is easier to get since business owners only need to pay a portion of their monthly revenue in exchange for unrestricted capital.
Once you pay your loans, your business is yours, and no equity is given away.
Bank financing requires more hurdles to jump over, and 99% of companies don’t ever get this type of funding.
You have to make at least $3 million in annual recurring revenue, or have a reputable venture capitalist backing your company.
However, once you get it, it can be the cheapest form of revenue.
Private equity investors are another way to get new funding. They usually target niche markets and cash-flow companies.
These investors want to fund part of their purchase and see the return on their investments quickly.
This is one of the exit strategies most mature companies take if they can’t become an IPO.
To become an IPO, you have to garner $100 million in ARR.
Investors need to believe that you can grow long-term, but you are also liable to market scrutiny and the regulations that apply for publicly traded companies once you go public.
Carefully consider your options if you require more funding as your business grows.
Nailing User Engagement Through the Stages
Through the three stages, keep your user engagement high for revenue growth.
It’s no secret that customers are your primary source of revenue because you rely on them paying their subscriptions regularly.
We’ve touched upon some ways to foster user engagement, but it is vital to underline why it’s a key to secure revenue from the start.
By correctly monitoring user engagement, you can prioritize your marketing, sales, and customer success strategies through every stage.
You’re maximizing the time, effort, and resources required to convert and retain customers.
In the initial sales phase, you have to throw several types of baits to see what reels your potential customers in, but once you gather valuable data, you can fish for the right leads.
Then it’s easier to refine your product to increase user engagement in the growth phase.
This is where you’ll get more paid accounts and active users, so you’ll have to keep an eye on their adoption rates and drops in engagement.
This will help you for the final stage, where you can track and identify expansion opportunities.
There are numerous ways to keep engagement score high:
- Make the best first impression through your onboarding
- Gather customer feedback
- Gamify product experience
- Provide rewards
- Focus on customer success
In this way, you’re ensuring they are motivated throughout their lifetime as your customer, and you’re periodically providing novelty to their journey.
SaaS is famous for providing predictable recurring revenue, but you need to carefully plan your entire business model to get to a sustainable monthly income.
Every SaaS needs to go through the three stages we’ve described in order to hopefully turn into unicorns.