7 SaaS Revenue Streams With Details [full version]

SaaS Revenue Modeling:Details of the 7 Revenue Streams

Draft 11/09

http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved

http://saasrevenue.com


ConsumersProducers Scalable Revenue Streams

The goals for a SaaS vendor should be different than a Legacy Software vendor

Understanding why* allowsfor proper Revenue Modeling*business scalability, increased CLV, leveraging multi-tenancy, etc.




Legacy Software

Customers Developers

Channels

Three basic elementshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



Customers Developers

Channels

Software-as-a-Service (SaaS)

Same elementshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



Producers Consumers

Ecosystem


Different approachhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



Producers Consumers

Ecosystem

NetworkEffect


Very different approachhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



Producers Consumers

Ecosystem

NetworkEffect

Keydifferentiators





Legacy Software Business Structure

Marketing Intellectual Property

Revenue ModelTechnology

Loosely-coupled, at besthttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



NetworkCentricity

SaaS Business Architecture

MarketingIntellectual Property

Revenue ModelTechnology

All aspects are tightly coupledhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved



Revenue Model

NetworkCentricity

Marketing Intellectual Property

RevenueModel

Technology

Revenue Model consists of Revenue Streamshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved

Products

AdvertisingServices

Subscriptions Ecosystem

Ancillary

NetworkEffect



MonthlySubscriptionsSaaS

SaaS is not a Revenue Model or Pricing Strategy!

If you only leverage “subscriptions” youare leaving money on the table




Pricing StrategyRevenue Model

Understand where each piece fits into the overall SaaS Business Architecture


Architecture Marketing

separate



Pricing Strategy must be separated from Revenue Streams

Pricing Strategy is applied to Revenue Model


Pricing StrategyRevenue Model separate



How can you apply Pricing Strategy withoutknowing what Revenue Streams you’ll leverage?

Use Pricing Strategy to drive users toScalable Revenue Streams


Pricing StrategyRevenue Model separate



Pricing StrategyRevenue Model


Architecture Marketing

separate

Revenue Model + Vertical Specific Pricing = Agility

Agile Revenue Generation is key...




Subscriptions

Agile Revenue Generation...

NetworkEffect

Ecosystem ServicesProductsAncillary Ads

Adj

acen

t Ver

tical

Anc

illar

y M

arke

t

applies to Subscriptions & the other 6 Revenue Streams

Anc

illar

y M

arke

t



Products

AdvertisingServices


Ancillary

NetworkEffect

7 SaaS Revenue Streams





Ancillary

NetworkEffect

Less Scalable Revenue Streams

Products

AdvertisingServices




Products

AdvertisingServices


Ancillary

NetworkEffect

Scalable Revenue Streams




Revenue Metrics

Each revenue stream contains metricshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved

Products

AdvertisingServices


Ancillary

NetworkEffect

Metrics

Modules Users Storage

CPU Units Reports

Transactions Files etc.

Metrics are built into the application



Revenue Metrics

Metrics from any or all revenue streams that are represented in the application are bundled, along with

timeframes (monthly, annual, etc.), during Pricing Strategy based on marketing goals


Metrics

Pricing Bundle #1


CPU Units Reports


Pricing Bundle #2


CPU Units Reports


Pricing Bundle #3


CPU Units Reports




Separating Revenue Model & Pricing Strategy improves agility and allows pricing to be aligned with market requirements; critical when entering adjacent

markets


Metrics

Pricing Bundle #1


CPU Units Reports


Pricing Bundle #2


CPU Units Reports


Pricing Bundle #3


CPU Units Reports


Revenue Metrics

Different bundles for different markets



But what are these metrics? How are the pricing bundles determined? These are tied to your company

and your market!


Metrics

Revenue Metrics

Pricing Bundle #1


CPU Units Reports


Pricing Bundle #2


CPU Units Reports


Pricing Bundle #3


CPU Units Reports


Different bundles for different markets



Move any repeatable processes common to

all clients into the SaaS application

SaaS is about Rules, not Exceptions

Key Concepts in SaaS Revenue Modeling

Critical to focus as much on revenue

streams beyond the application as within

the core product

Be aware of all revenue streams when

architecting system even if they will only be used in the future




Symbol Definition

Scalable Revenue Stream

Less-scalable Revenue Stream

Not Scalable in most cases


Revenue Stream Scalability Index

Scalability refers to margins per revenue stream; the more a revenue stream can benefit from economies of scale & improve margins with growth, the more “scalable” the revenue stream. Its not possible to eliminate all of the non-scalable streams (nor should you), but their value should be improved and the price charged should reflect that.



Subscriptions

-Examples -Per User, Per Month

Per TransactionUsage-based

Capacity-basedPre-paid Credits

Pros Cons

1-Infinity Scaling Revenue Recognition

Captive Audience for upsell High initial CAC

Recurring Revenue Churn / Customer Retention

Flexibility in pricing for different markets No large up-front payments

Downside guarantee on CLTV

Cannot be idle; must focus on CLTV/ARPU growth

Products

AdvertisingServices

Ecosystem

Ancillary

NetworkEffect

Subscriptions




EcosystemProducts

AdvertisingServices

Subscriptions

Ancillary

NetworkEffect

Ecosystem

-Examples - Affiliate Sales

ChannelsAPIs

White LabelLicensing

Pros Cons

1-Infinity ScalingUnwanted

interdependencies can grow if unchecked

Improved value for ecosystem partners

Lack of visibility into value chain for clients

Exposure to ancillary & adjacent markets

Need to market to end-users to create demand in front of channel partners




AncillaryProducts

AdvertisingServices


NetworkEffect

Ancillary

-Examples -Processing Fees

Setup FeesOther FeesDiscounts

Float

Pros Cons

Super marginsSome options are complex

and not applicable early

Often not tied to any underlying cost

Overuse of add-on “fees” can hurt other revenue

streams

Discounts / Float are tied directly to the proxy

nature of the SaaS vendor in a Multi-tent

environment and have no direct exposure to the

clients

You can really turn away clients by nickel & diming them with fees that have

no underlying value associated with them




Products

AdvertisingServices


Ancillary

NetworkEffect

Network Effect

-Examples -Anonymized/

Aggregate DataReports

BenchmarksAPIs

Pros Cons

Fully leverages data collected in multi-tenant environment

Privacy concerns require disclosure of intentions by vendor

An asset that increases exponentially in value as usage of

the system grows linearly

Requires planning up front an execution early on data collection

otherwise value is lost until capture begins

Leverage ecosystem partners to develop reports or add value to

data through APIs

Vendor must be diligent in adhering to regulations,

governance, and privacy laws

Does not require a “critical mass” of users as many think for

network effect data to be valuable

Careful planning to determine when network effect data

becomes valuable & to whom required




Products

AdvertisingServices


Ancillary

NetworkEffect

Products

-Examples -Equipment

DevicesAppliancesHardware

Pros Cons

Can be high margin Requires capital to produce

Can produce vendor lock-in 1-1 or 1-few on each transaction

Can develop ancillary revenue streams

Support costs are high

Will improve value of Network Effect Data through automation

Logistics, supply chain management, returns, support, etc. add to overhead in dealing

with hardware

Inbuilt support for channel relationships can allow the

hardware partner to integrate (OEM) the product w/SaaS

Installation & support are difficult




ServicesProducts

Advertising


Ancillary

NetworkEffect

Services

-Examples -ProgrammingInstallation

Content CreationTraining

Pros Cons

Core-competency for professional services companies moving to

SaaS1-1 or 1-few

High price Exception, not rule-based

Often high-marginHuman-centric and humans don’t

scale efficiently

When more repeatable processes are inbuilt to SaaS application,

services in less demand, but can be more expensive since they are

more specialized

Takes away resources from more working on more scalable revenue

streams




AdvertisingProducts

Services


Ancillary

NetworkEffect

Advertising

-Examples -ContextualPay-per-clickAd Networks

TextDisplay

Pros(mostly tongue-in-cheek)

Cons(all serious)

You don’t have to convince people that your product has value

Ads for SaaS products are part of a hope-based strategy

You don’t have to manage cash flow

De-values core product

Clients don’t have to pay you to use the product you built

Difficult to plan and forecast sales (impressions? clicks?)

There are close to 3B sets of eyeballs, if you only get 1% of

those to click...

Too much inventory (each screen) and not enough demand




Free is a tactic and is part of marketing (try not to ruin your brand value in the process)

By definition, free is not a “revenue

stream”

Wait... what about Free?

If no one is willing to pay for your offering, perhaps there is no

market for it!?!

Free trials are fine, and expected, but free in

perpetuity (i.e. Freemium) is not

good




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7 SaaS Revenue Streams With Details [full version]

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