What's Your SaaS Revenue Model?

You're a SaaS company with a hot product everyone wants, but you need to make money.

What's Your SaaS Revenue Model?

You re a SaaS company with a hot product everyone wants, but you need to make money.  You have great options, but you need to make the right choice for your business - paid, freemium, free trial or free forever. How to decide?

First off, your model is dependent upon who will be using your product.  Secondly, you need to decide if your goal is to maximize adoption or revenue.  Third, when you do a good job of segmenting your audience, you can successfully manage multiple revenue models.

Which model works best for which kind of company?  Let's run through the advantages and disadvantages of each option.

Paid
When a vendor offers a paid version of its software, it charges from the first user.  An application that is available only as a paid version typically involves some configuration and set-up.

Workday follows the 'paid' model.  Workday's Human Capital Management software, for instance, connects to third-party software: payroll systems such as ADP, time-tracking products like Kronos and onboarding tools like E-Verify.  Integrating third-party software programs take time and resources, yet Workday's program won't be fully functional without connections to these separate software programs.
A free trail won't work for companies such as Workday because a user needs to buy the software for the integration to take place.

For the vendor, charging each user for its product is the most lucrative approach.  But, getting customers to sign on and adopt the software requires marketing and direct sales teams, both are major cost areas - especially for a startup.  A company considering the paid model will need to decide if the eventual revenue trumps the slow and expensive pace of adoption.

Free Trial
Sometimes, you want to give prospective customers a chance to try the product before they buy.  In a free trial, a customer can use the software free for a set timeframe.  You hope that, during the trial period, she becomes dependent on it, and signs on.

Free trials work best when the customer must make a "considered purchase" — she's determined the software solves an immediate and critical need.  The downside? Free trials invite a lot of "looky-loos" —prospective customers who check out the software but don't make a purchase.

This is a smart option for high-growth companies that have an easy-to-use product that doesn't require hardware or technology integration. This approach also helps a company find qualified leads and provides an entry point for sales.

Freemium
A Freemium software vendor offers its software at no cost, initially, but upsells a paid version.  This approach works best for vendors, who want to maximize reach and generate leads. Often the first users are individuals, who like the free features but want more - what's available in the paid version. At the same time, the company's IT department wants and interface it can access for user support. These two mechanisms move companies toward the paid version. Two of our portfolio companies - DocuSign and Box — and SurveyMonkey are establishing solid, fast-growing businesses with the freemium product approach.

The primary challenge with pursuing a freemium model is determining what users get for free and what features are only available in an enhanced or premium version.

Free Forever
Finally, a vendor can offer a product free — forever.  It's easy to acquire users with this method, but to survive a company must have both a large number of users and alternative revenue streams.  Advertising revenue alone won't cut it.  A free product can introduce another product that the vendor collects revenue on.  Spiceworks, for instance, offers free network management software but has other revenue sources with advertising, marketing services and co-selling other products. Similarly, LinkedIn's service is free but the company sells advertising, premium services, and recruiting tools.

 

Case Study: DocuSign, Free Trial to Freemium
DocuSign, a provider of cloud-based electronic signature technology initially offered its solution via a freemium product. The company's goal was broad adoption.  It felt a freemium approach was the best approach was to get DocuSign into the hands of as many users as possible.

DocuSign's pushed its freemium offering online and was, as Robin Joy, VP Online and Mobile at DocuSign, explains, "very generous" — to a fault.  The freemium version gave users almost everything that they needed; users felt no need to upgrade to a paid version.

DocuSign realized that to push customers towards a purchase, users needed have skin in the game and be motivated to use the product.  The company changed course and decided that all paid search-related marketing efforts would lead the consumer to a free trial.  DocuSign wanted motivated buyers.  As Joy explains, "People who search for our product have an immediate need and are easy to convert. The expiration date puts them at a decision point".   These users are much more motivated to pay for the product when the trial ends.

Although free trials are now the biggest revenue driver, DocuSign still offers a freemium version. This method takes advantage of Docusign's "amazing viral element and helps grow adoption", remarks Joy.  When someone receives a DocuSign request to provide an electronic signature, the company offers to set up an account to store the signed document.  Since the signer doesn't necessarily have an immediate need for the product, DocuSign doesn't time-limit the trial.  The conversion rate from the freemium version isn't as high as that of the free trial offered online.  However, these freemium offers have generated millions of new accounts that DocuSign then nurtures through email and other marketing tactics eventually converting them to paying customers.

DocuSign has succeeded in managing two revenue models: one for reach and one for revenue. Joy admits that perfecting the revenue model is "A never-ending process. We can continually improve and reevaluate". Her advice to vendors that need to determine a revenue model is to focus first on the target customer segment and understand its needs and propensity to buy.

What we're seeing in the market is a focus on a free trial approach rather than a freemium model.  While the freemium model gives the user a lot of flexibility, vendors struggle to determine which features should be free and for which features they should charge.  Free trials, on the other hand, when directed at users at the right time, lead to engaged and loyal users.