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.
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.
In the SaaS revenue model, customer relationships are based on the ongoing delivery of customer value.
Marketing strategies focus on growing subscribers through lead generation, branding, goodwill activities and other efforts to create interest in the product or service.
Companies employing the SaaS/subscription revenue model should focus primarily on delivering cost-effective customer value.
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.
SaaS/subscription companies consider key metrics to be customer retention and net new growth in subscriber numbers.
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.
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.