Revenue models: Software as a service (SaaS) and subscription-based models

The software as a service (SaaS) revenue model is associated with regular, ongoing payments over a defined time period, in exchange for the use of a software application or other tool.

Applicable businesses/products

Within the information and communication technologies (ICT) industry, access to web-hosted software applications is the most common manifestation of SaaS. Other subscription-based enterprises include the regular delivery of media properties, as well as ongoing services such as mobile phone carrier service and bank account management services. The SaaS/subscription model is also frequently applied to the use of advanced medical equipment and medical devices on a per-seat or tiered pricing basis.

Customer relationships

In the SaaS revenue model, customer relationships are based on the ongoing delivery of customer value.

Marketing issues related to the SaaS/subscription model

Marketing strategies focus on growing subscribers through lead generation, branding, goodwill activities and other efforts to create interest in the product or service.

Operational implications of the SaaS/subscription revenue model

Companies employing the SaaS/subscription revenue model should focus primarily on delivering cost-effective customer value.

Financial and strategic implications

In most cases, successful SaaS/subscription companies build up their subscriber base over a long time period. In the interim, they require financing to develop delivery capacity as well as to support efforts to increase the user base.

Key metrics

SaaS/subscription companies consider key metrics to be customer retention and net new growth in subscriber numbers.

Modalities

While SaaS/subscriptions are most commonly thought of as single sales to individual subscribers, the SaaS/subscription model also works with bulk sales. Rather than selling one subscriber one subscription, a company can sell subscriptions in larger increments for a reduced per-user rate. See our related article on licensing for additional variations.

Costs and benefits of the SaaS/subscription model

The SaaS/subscription revenue model usually works best when a company is servicing ongoing and continuous customer needs. This means that customer relationships may span several years. It is often challenging to convince new customers to commit to long-term contracts, especially in the case of companies offering novel products or services.