SaaS Economics

Software-as-a-Service Success | Monetize Creatively

It has taken almost a decade for the software industry to absorb all the ramifications of moving from perpetual license pricing to SaaS subscription pricing. The longer payback period for investors, the headaches of high acquisition costs, and the upfront pre-revenue investments in infrastructure being just a few of the issues with which SaaS entrepreneurs and VCs have had to wrestle.
So, why go out on a limb looking for new revenue and higher margins by experimenting with even more unconventional monetization models? Won’t this just make a bad situation worse?

To temporarily borrow a well known trademark, the reason is simple: it’s the network. If there is a common theme emerging from this short list of dos and don’ts then this is it. It’s the network. It’s the Web. SaaS is not software. New business value arises from the characteristic that your software-as-a-service offering, unlike licensed software, can become a network hub that can connect any business entity, user or system it touches to any other: your prospects, your customers, your partners, your customers’ customers, your customers’ vendors, your customers’ partners’ customers, and so on all the way out to the edges of the Web. Given that value is created by the network, it follows that new network-based monetization opportunities are also created. Here is a quick (and very incomplete) list of new monetization opportunities open to software-as-a-service businesses.

Network-enabled services

  • Advertising
  • Syndication (content/applications/data)
  • Benchmarking and market intelligence
  • Integration
  • Cloud services
  • Marketplaces

Revenue models beyond subscriptions

  • Referral fees
  • Transaction fees
  • Consumption-based pricing
  • Performance-based pricing
  • Reseller margin
  • Revenue sharing

The monetization opportunities open to you will depend on many factors, including the nature of your business, the attitudes of your customers and the sophistication of your product. But most importantly, it will depend on your own creativity.

In the first post in this series, I presented a somewhat trick question in the hope that anyone who digested the entire series would have no difficulty coming up with the right answer.

Quiz: What is the most successful enterprise SaaS application to date?
Hint: It’s not

For those of you who have read all 5 posts in this series, thank you for your patience. And, if you haven’t guessed it already, the answer is…

Answer: Google Adwords

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1 Comment

  • Joel you have made some excellent points in this post. As a company selling a SaaS billing and management platform I talk to allot of people from CEO’s to CMO’s, to Product Managers of SaaS companies about this topic.
    What I see is that many SaaS companies only begin to see the opportunities and conversly the complexities in the SaaS billing model after they have acquired a number of customers and have started to stumble. What I see most often is:

    1) They developed a homegrown capability to sell monthly subscriptions. Not too much time goes by before they start to see a few possibilities for enhanced revenues they cannot act on. The longer they wait, the more possibilities they see and the further behind in their monetization strategies they get.

    2) Their customers start to make demands for different payment structures, or want to negotiate pricing or want the services bundled and priced in ways that show value to them and it all becomes a manual process to manage.

    One of the advantages open to a SaaS vendor is the ease in which they can integrate with other solutions either to sell as a value added capability to their own solution or to use to help them sell and deliver their services. On the billing front there are several companies offering subscription billing and management solutions that provide far more capability than most SaaS companies could ever hope to develop in a reasonable time frame or at a reasonable cost (not to mention why would they). Companies such as Aria, Softrax, and yes my company are all providing monetization solutions and expertise for SaaS vendors.

    Cheers, Kevin Lennox

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