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Before we look at the promised SaaS revenue models, let’s clarify a couple of definitions. We need to distinguish between three similar-sounding but very different concepts: revenue stream, revenue model, and business model.
You can think of these as a turducken of business jargon, with a revenue stream within a revenue model, which is, in turn, inside a business model.
- Revenue stream: This is a single source of revenue for a company. All but fledgling, “pre-revenue” companies have at least one revenue stream, and most have multiple streams. For example, a SaaS company might have a subscription revenue stream.
- Revenue model: This is how a revenue stream is designed and executed. A single revenue model can have multiple revenue streams. For example, your subscription revenue model might have a base fee and add-on revenue streams.
- Business model: This is your company's top-level structure. While it includes your revenue model(s) and thus revenue stream(s), it includes everything else, from marketing to developing, recruiting, and operations.
This is important to understand when we dive into the 10 revenue models below. The 10 revenue models discussed below are not mutually exclusive—you can use more than one at a time or even all of them.
The average SaaS business will use different ones over time as it becomes more established in its chosen market. You can also segment your streams to any level of specificity you wish—for example, if you have a tiered pricing model, you may want to consider each tier a separate revenue stream or combine them all into one big stream.
Related: Recurring vs. Non-Recurring Revenue
What is a SaaS revenue model?
Your revenue model is the framework you use to make money. It defines how you will monetize your product and at what price. It also helps you identify your target market and how to market it to those prospective customers. In a nutshell, you plan to generate revenue.
10 revenue models for your SaaS business
There are so many ways to monetize your SaaS product that it is hard to narrow it down to 10 options! Remember that, as mentioned above, you can use any number of these models simultaneously and nest multiple revenue streams within each one.
1. Ad-based revenue model
This one is pretty simple. You create a website or app that garners large traffic and sell ad space on the website or in your app. You sell your clients ' views to another company instead of charging money for using your product or service.
The two main ways of doing this are:
- Directly selling page space to specific advertisers
- Using a third-party ad system, such as Google AdSense, to find appropriate ads for your space
Although you can typically expect a few dollars per 1,000 page views, if your views are from key demographics and they are motivated to spend, you can get up to ten times that.
The biggest advantage of this system is that it is easy to implement. You don’t need to spend time and money doing market research, so you can monetize your product earlier.
The disadvantages, however, are obvious. On the one hand, you need many views to earn significant revenue. On the other hand, having too many ads can turn off your viewers and reduce your page views.
2. Affiliate revenue model
Similar to the ad-based revenue model, this one relies on your popularity. Instead of earning money directly from the people viewing your content, you use affiliate links to drive sales elsewhere.
This has the potential to earn more money than ads (and you can earn money in addition to ads), but you risk turning off your viewers if your affiliates do not feel authentic to your image.
Related Read: A Founder’s Guide to SaaS Revenue Forecasting
3. Channel sales (or indirect sales)
Instead of trying to sell your service yourself, if your profit margin allows it, try outsourcing this to resellers that already have a large audience. These agents will sell your services to their viewers for a piece of the pie.
This is a common method when the customers of a product or service are very specific. For example, if you sell kayak servicing for a specific kayak brand, it makes sense to work with the brand to communicate with its customers at the time of purchase.
In this example, you would consider the kayak brand the “channel” for that set of customers.
4. Direct sales
Selling your product directly to customers guarantees you will keep all the revenue. However, if you need to hire a big sales force to accomplish this, you might end up with lower profits than if you used indirect sales.
This can work best if you can automate your sales or your average price point is very high. A trip to a client’s office with the potential to earn $10,000 makes a lot more sense than sending a traveling salesperson out when earning only $100.
5. Freemium model
If you are in the B2C market, getting a prospective client to part with their hard-earned money can be harder. By offering them the chance to try your product for free, e.g., a trimmed-down version of your software package or one supported by ads, you can prove your value to them and get them to spend some cash on your platform.
6. The product is free, but the services aren’t
Sometimes, giving users full access to your product for a low price (or for free) makes sense, but charging them for all services needed to deliver the product's benefit. This happens with highly technical products.
For example, a tool may perform a specific network monitoring function well. However, using the tool is difficult. Therefore, the company might make the tool free but charge for the labor required to use it effectively.
This could also happen in a nail art shop. Many nail art shops don’t charge for nail polish, but the appointment and service will cost a lot.
In this model, there is no upfront fee for the software, but there is a maintenance or service contract. The great thing about this model is that while companies are unwilling to spend a lot of money upfront on a package, they are more than happy to pay you for years into the future as they grow to love and rely on your software solutions.
7. Retail sales
If you have a physical product to sell, sometimes a retail revenue model can provide another revenue stream and be a viral marketing tool. If you have interesting packaging, sell your products somewhere hip, or otherwise find a hook, expect people to post photos to their socials.
Some companies have unnecessarily made physical products from their product or services to capitalize on this revenue stream.
Related Read: The SaaS Financial Model You’ll Actually Use
8. Subscription revenue model
This is the classical model for a SaaS company. You build and then constantly update a software package and charge clients weekly, monthly, or yearly to use it. It can take a long time to get a subscription revenue stream up to sustainability, so this can be considered the “end game” for many businesses.
Beginning by selling ad space, transitioning through a freemium model, and landing here is an all-too-common route in the SaaS industry.
9. Transactional revenue model
This model charges customers by usage. Some clients, especially smaller ones or those not yet sure about your software's added value, might prefer this option for its transparency.
10. Web sales
This model is compatible with transactional or subscription sales but is done through a specific website. You drive visitors to your persuasive website and let it convert them.
Baremetrics can help you explore different revenue models and determine when pricing experiments work.
Sign up for the Baremetrics free trial and see more about your subscription revenues now.
Costs associated with revenue models
Different revenue models entail different cost structures. Profitability is not just about increasing revenues but also balancing your expenses. While giving away your product for free might offer long-term revenue growth from service contracts or conversions from free to premium service, you need the cash to afford those added upfront costs.
Variable costs are the per-item costs of service. This can include transaction and hosting costs. Fixed costs, conversely, are not directly tied to your products. These include rent, payroll, equipment, and development costs.
Although marketing and advertising expenses are a necessary part of any smart business plan, you must stay on top to ensure they drive sales and not just get out of hand. If your marketing isn’t targeted well, you won’t drive the right visitors to your website.
To learn more about financial modeling, check out: How to Build a Financial Model
How to choose a SaaS model for your business
Choosing a SaaS model for your business can be challenging, especially when many viable options exist. Here are a few tips to make the process easier.
Understand what influences your bottom line
You must fully view the factors influencing your bottom line, including your revenue and expenses. This is especially important if you’re attempting to switch revenue models or use multiple models simultaneously.
With a clear view of these factors, you can forecast your future financial needs and choose a model that fits your business now and as it grows.
How do you obtain that clear view? Implementing the right tools, such as a SaaS planning and forecasting platform.
Know your target market
Your chosen revenue model should fit your target market’s needs and expectations. For example, the transactional model might fit a SaaS product built for single users. However, the subscription model might be best if your product is enterprise-level.
Choose a model that scales with your costs
As your business grows, so will your expenses. The revenue model you choose should scale with these costs. Otherwise, you won’t be able to sustain the costs associated with your business needs.
Forecasting your future revenue and expenses can help you select a model that scales with your SaaS company.
Use Baremetrics to monitor your subscription revenue
Sometimes, a small pricing change can drastically influence your revenue. Whatever revenue model you choose, use Baremetrics to monitor your sales data.
Baremetrics makes it easy to collect and visualize all of your sales data. When you have multiple revenue models, each with several revenue streams, it can be difficult to calculate your MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), LTV (Customer Lifetime Value), churn, etc. Thankfully, Baremetrics can do all of this for you.
Baremetrics can monitor all the data you need to see if you have optimized your revenue model to match how your clients prefer to spend their money. Integrating this innovative tool can make financial analysis seamless for your SaaS company, so start a free trial today.
