The way companies sell software has drastically changed over the past two decades.
Gone are the days of one-time licenses and physical CDs. Today, software-as-a-service, or SaaS, has taken the center stage.
With its flexible, subscription-based model, SaaS offers a revenue structure that benefits both software vendors and customers. Companies can now focus on building strong, long-term customer relationships, while users enjoy a seamless and constantly updated experience.
The SaaS revenue model has made software more accessible, scalable, and dynamic, transforming how we think about software ownership and engagement.
What is a SaaS revenue model?
The SaaS revenue model is a transformative approach to software delivery, where users access cloud-based applications over the internet by paying recurring fees—often in a pay-per-use or subscription-based setup.
Unlike traditional software models that require installation on a local device, SaaS allows customers to access software instantly, anytime and anywhere. This model operates entirely online, with the vendor responsible for maintenance, updates, and data storage, which significantly lowers the technical burden on users.
The SaaS approach brings unprecedented convenience. Vendors are freed from the logistics of physical delivery and from crafting patches for individual installations. With SaaS, all users can get updates instantly.
Furthermore, SaaS companies are structured around predictable revenue streams from recurring subscription fees, offering financial stability.
Why is the SaaS revenue model so popular?
Reliable revenue stream
One of the biggest attractions of the SaaS model is the steady, predictable revenue it generates.
In traditional software sales, vendors relied on one-time sales, often leaving revenue projections uncertain. However, SaaS customers pay monthly or annually, giving companies a continuous revenue stream that allows for more accurate financial forecasting. This stability allows companies to invest confidently in product improvements, marketing, and customer support without waiting for sporadic revenue boosts.
Scalable and easy to distribute
The SaaS model has done away with the logistical challenges of physical software distribution.
Gone are the days of burning CDs or creating USB drives for software installation. With SaaS, vendors only need to focus on maintaining and scaling a cloud-based platform accessible through a web browser.
As a result, companies can reach a global audience effortlessly.
For example, a business team working on Windows, macOS, or even mobile can collaborate seamlessly on Google Docs or Sheets in real-time, no installations required. This ease of distribution makes SaaS the go-to choice for companies aiming for wide, international reach.
Regular product updates keep customers engaged
Customers today expect continuous value from the services they pay for, and SaaS enables companies to deliver exactly that.
Regular revenue from SaaS subscriptions empowers companies to fund ongoing improvements and maintain a product that evolves with user needs. In a traditional model, users would need to purchase an entirely new version to enjoy new features.
But with SaaS, vendors can push updates in real time, ensuring every customer is using the most up-to-date version. This creates a sense of constant value for customers, who know that their feedback and feature requests may be implemented in future updates.
Lower costs and flexibility for users
SaaS models offer users lower upfront costs and more payment flexibility than traditional software models.
Instead of requiring a hefty initial investment, SaaS provides an affordable monthly or yearly subscription, making it accessible to a broader range of users, including small businesses and startups.
Additionally, since SaaS products are hosted online, users don’t have to invest in costly infrastructure or worry about maintenance—everything is managed by the vendor.
The convenience of instant access and simpler onboarding
One of the most user-friendly aspects of SaaS is the simple onboarding process. There’s no need to download extensive files, no complex installations, and no compatibility concerns across devices. Users only need a username, password, and internet connection to start using the software instantly.
Additionally, many SaaS products offer dedicated customer support to guide users if needed, making onboarding a breeze.
Examples of SaaS revenue models
Ad-based revenue model
In the ad-based revenue model, SaaS companies allow their apps or websites to generate income through advertisements. Instead of charging customers directly, companies sell ad space to advertisers or integrate a third-party system, like Google AdSense, to display targeted ads.
The idea is simple: attract a substantial user base and monetize through ad revenue. For example, think of a free budgeting tool that displays ads for investment platforms or credit score services. Users can access the budgeting features at no cost, while advertisers pay for the exposure.
The main advantage of this model is ease of implementation. SaaS companies can start generating revenue without asking users to commit financially.
However, ad-based revenue can be a double-edged sword. To generate meaningful income, the platform must amass significant traffic, which isn’t always easy. Plus, an overload of ads can detract from the user experience, turning potential long-term customers away.
Affiliate revenue model
Affiliate revenue is closely related to the ad-based model but has a performance-based twist. Instead of simply displaying ads, SaaS platforms embed affiliate links that drive users to other services or products. When a user clicks on an affiliate link and completes a purchase, the SaaS company earns a commission.
Affiliate models can be lucrative, especially when paired with niche markets where users seek targeted solutions.
However, as with ads, it’s crucial to maintain authenticity. Mismatched affiliate products can erode user trust, which is essential for SaaS companies. If the recommended products feel out of place, customers may perceive the app as prioritizing profit over genuine value.
Channel sales (indirect sales)
The channel sales model relies on partners or affiliates to sell the SaaS product indirectly, leveraging existing distribution networks or audience reach.
For SaaS companies, this approach can be highly effective when targeting a specific customer segment that might already be engaged with another brand or service.
Channel sales can help SaaS companies access large customer bases efficiently. However, this model requires a revenue-sharing agreement with partners, which reduces overall profit margins.
This model works best for products with high customer acquisition costs or those that benefit from credibility boosted by partnering with well-known brands.
Direct sales
In the direct sales model, SaaS companies market their software directly to customers, often via dedicated sales teams. This model works particularly well for high-ticket products, where the cost of acquiring each customer is justified by the potential revenue.
While direct sales allow companies to retain full control over revenue, the approach can be costly, especially if it involves a large sales force.
However, automation in lead generation and streamlined digital sales processes has helped SaaS companies reduce costs. Direct sales can be especially profitable if the average customer lifetime value (CLTV) is high, making up for initial expenses through long-term subscriptions.
Freemium model
The freemium model offers users a basic version of the software at no cost, with the option to upgrade to a premium, feature-rich plan.
Many SaaS companies, like task management apps, adopt the freemium model to grow their user base rapidly. Users who start with the free version are exposed to the platform’s core features, and over time, some convert to paying customers as their needs grow.
This model helps SaaS companies establish a customer base without significant upfront costs. However, the challenge lies in balancing free and premium features effectively. Offering too much in the free version may reduce the incentive to upgrade, while offering too little may drive users away.
Free product, paid services
This revenue model involves providing the software for free, while charging for related services. In a SaaS context, this could mean offering a free tool but charging for advanced customer support, setup assistance, or custom integrations.
The model benefits SaaS companies whose customers may be less tech-savvy or those who need high-touch guidance. This approach removes barriers to entry for customers but offers revenue potential through essential services. The model can scale well in industries where expertise and technical support add unique value.
Subscription revenue model
The subscription model is the classic SaaS approach where users pay on a recurring basis—monthly, quarterly, or annually—for access to the software.
Companies like Netflix and Adobe utilize this model, allowing them to benefit from consistent, predictable revenue. For customers, the subscription model offers flexibility, with options to adjust or cancel services as their needs change.
Although setting up a sustainable subscription base takes time, this model fosters a long-term relationship with customers, ensuring retention through ongoing product updates and customer support.
SaaS companies typically begin with other models, such as freemium or direct sales, and transition to a subscription-based model as they gain a stable user base.
Transactional revenue model
In the transactional revenue model, users are charged per usage or per transaction rather than on a flat-rate basis.
This model is ideal for products with variable usage patterns. For instance, a cloud storage service might charge clients based on data usage. Smaller clients benefit from low costs when they use the service sparingly, while larger clients pay more as their storage needs increase.
The transactional model is ideal for services where usage may vary significantly across customers, allowing them to pay based on their specific needs.
Retail sales model
Though less common for SaaS, the retail sales model can be an effective way to generate additional revenue and increase brand visibility.
This model works well when there’s a physical or branded component to the software that customers find engaging or visually appealing.
Physical products also create tangible connections with users, transforming a purely digital experience into something users can hold. However, creating and managing physical products requires an upfront investment and doesn’t suit every SaaS business.
Retail sales are most effective for companies with strong brand loyalty and a target audience that values unique, branded experiences.
Transactional web sales
The web sales model focuses on driving users directly to a dedicated website where they can learn about, sample, and purchase the software.
This model can be paired with transactional or subscription-based revenue models and involves optimizing a website for conversions. SaaS companies create landing pages, product demos, and other digital assets to guide users smoothly through the purchase process.
This model works especially well with effective digital marketing strategies, such as content marketing, search engine optimization (SEO), and targeted ads. By attracting potential customers directly to the website, SaaS companies have full control over the user experience and brand messaging.
Types of SaaS pricing models
Tiered pricing
Tiered pricing is one of the most flexible and popular models in the SaaS landscape, allowing companies to appeal to multiple customer segments by offering different levels of service at different price points.
Typically, a SaaS provider offers three to four tiers: entry-level, mid-level, and enterprise.
The benefit of this model lies in its scalability and accessibility. Small businesses can start at the lower tiers to try out the software, while larger companies or growing teams can upgrade to more comprehensive plans as their needs expand. However, creating the right balance for each tier can be challenging.
Offering too much at lower tiers might dissuade customers from upgrading, while limited entry-level options could deter potential users from trying the product. Many SaaS companies solve this by including a free or discounted trial period for premium features, allowing users to sample what’s available at higher tiers before committing.
Per-user pricing
Per-user pricing is one of the simplest and most commonly used SaaS pricing models.
Here, companies charge customers based on the number of users accessing the software. This model is particularly effective for tools that are meant to foster collaboration, such as project management or CRM platforms, where more users directly increase the software’s value to the organization.
One of the primary advantages of per-user pricing is predictability. Both the SaaS company and its clients can anticipate costs as team sizes fluctuate. However, this model can become costly for organizations as their teams grow, potentially leading to SaaS churn if users feel they’re paying more than they’re getting in value.
To mitigate this, many SaaS providers offer discounts for large teams or base pricing only on active users rather than the total number of accounts. This balance between usage and cost helps retain large clients who want the flexibility to add or remove users based on demand.
Per-feature pricing
Per-feature pricing aligns the cost of the software directly with the specific functionalities a customer needs, making it a great option for companies with highly customizable offerings. In this model, the software is divided into feature packages, and customers are charged based on the features they select.
This approach ensures that users pay only for what they need, making it ideal for businesses with diverse requirements. For instance, a CRM platform might offer basic features like contact management in the core package, while more advanced analytics or automation tools are available at higher prices.
The main advantage here is flexibility. Users who only need fundamental features aren’t forced to pay for extras they won’t use. On the flip side, this model may limit some SaaS providers’ ability to upsell if users are content with the basics.
Companies that employ this model typically ensure they retain upselling opportunities by offering bundled features or adding exclusive, must-have features at higher price points to entice users toward premium plans.
Usage-based pricing
Usage-based pricing, also known as pay-as-you-go, ties the cost of the software directly to how much it’s used. This model is particularly popular among infrastructure-based SaaS providers, such as cloud storage or API services.
Amazon Web Services (AWS) is a prime example of usage-based pricing, where users pay for cloud resources based on metrics like storage space used, number of API calls, or hours of processing time.
Usage-based pricing benefits companies with unpredictable or fluctuating needs, as they’re charged only for what they use. This model can be attractive to startups or smaller businesses with tight budgets, who appreciate the low initial costs and flexibility to scale. However, if usage spikes unexpectedly, costs can increase significantly, which may discourage users with limited budgets.
SaaS companies employing usage-based pricing can manage this by offering caps or custom usage packages to give customers more predictable spending options.
Flat-rate pricing
Flat-rate pricing is one of the simplest SaaS pricing models, with a single fixed fee for all users, regardless of their company size or usage levels. This approach can be appealing for customers because it removes decision fatigue—no need to figure out the cost per feature, user, or amount of usage.
Flat-rate pricing works particularly well for SaaS products that cater to a wide audience and don’t have significant variations in usage patterns. However, this simplicity has its downsides. Without the opportunity to add upsell features or customizations, SaaS companies may find it difficult to scale revenue as customers’ needs evolve.
It is best suited for companies whose value proposition is consistent across users, or as a starting point for SaaS businesses that want to attract customers without overwhelming them with pricing decisions.
Important SaaS sales metrics to track
Naturally, there are a lot of metrics that directly and indirectly come into play when it comes to SaaS revenue models.
Check out one of our previous posts to learn more nitty-gritty details on SaaS sales metrics you should track. And here is the quick breakdown:
Monthly recurring revenue (MRR)
Tracks the monthly revenue generated from subscriptions, providing a clear view of financial health and cash flow predictability.
Formula: Average revenue per user (ARPU) x Number of monthly subscribers.
Customer churn rate
Measures the percentage of customers who leave over a given period, indicating customer retention health.
Formula: (Customers lost during the month ÷ Starting customers) x 100.
Revenue churn rate
Shows revenue lost from churned customers, helping identify if higher or lower-paying clients are leaving.
Formula: (MRR lost ÷ Starting MRR) x 100.
Annual recurring revenue (ARR)
Projects yearly revenue from subscriptions, crucial for long-term growth tracking.
Formula: Total contract value ÷ Contract years.
Customer acquisition cost (CAC)
Calculates the cost to acquire a new customer, helping manage marketing and sales spend.
Formula: Total acquisition costs ÷ New customers acquired.
Customer lifetime value (CLV)
Estimates revenue from a customer over their relationship with the company, assisting in pricing and retention strategies.
Formula: (ARR x Expected contract years) – CAC.
Months to recover CAC
Measures the time needed to break even on customer acquisition costs, crucial for ROI calculations.
Formula: CAC ÷ (Gross margin x Average revenue per account).
Lead velocity rate (LVR)
Shows the growth rate of qualified leads month-over-month, signaling future revenue potential.
Formula: ((Current month’s leads – Previous month’s leads) ÷ Previous month’s leads) x 100.
Improve SaaS revenue using interactive demos
Interactive demos can significantly boost SaaS revenue by enhancing the user experience, creating personalized and memorable engagements that convert prospects more effectively.
With an interactive demo solution like Walnut, SaaS companies can create customized, bug-free demos that highlight key features and benefits.
These interactive demos offer potential customers a hands-on understanding of the product’s value, making them more likely to convert and remain engaged. Plus, demo analytics provide insights into user behavior, enabling teams to optimize sales strategies and increase revenue predictability.
By leveraging these tools, SaaS companies can streamline the sales process and elevate customer satisfaction from the start.
