Monetization Strategies for SAAS Companies!

SaaS, or software as a service, is a delivery model in which centrally hosted software is licensed or given access to customers via a subscription plan. So companies that provide access to their centrally hosted software through cloud system can be said to be SaaS company. There are different SaaS models but the few important types are i) public cloud ii) private cloud and iii) license plus hosting models. Most of the SaaS companies operate between these three models.

Hosting Partners: The SaaS companies have hosting partners through which the software is hosted. Some of the major hosting partners around the world are Microsoft Azure and Amazon Web Services. But few SaaS companies who have the infrastructure and bandwidth to provide such hosting facilities to its customers invest in the vertical expansion so that it can host the software and provide the access to the customers. In the onpremise model the software is installed and hosted at the customer location. Globally the companies are moving more and more towards the cloud model of business as it is only paybyuse method and all the pains of managing the software rest with the software vendors.

Benefits under SaaS model: The clients have multiple benefits by adopting to a SaaS model. 1) Lower upfront fees as the client is only required to pay the fees month on month. 2) They are not required to host the software in their premises and manage it. 3) In the SaaS model the client is also not required to pay for maintenance as the SaaS pricing is bundled for maintenance too. 4) The client is not required to maintain a separate infrastructure for hosting the software.

The SaaS companies also benefit from the SaaS model. 1) They have recurring revenue month on month. 2) The software being hosted in public cloud reduces the cost of hosting substantially. 3) The implementation time is reduced and the SaaS companies can take advantage inprior experience of such cloud implementation.

Pricing Strategy: The pricing strategy or the monetization of cloud models is very critical. It has been ascertained that SaaS companies on an average relook at the pricing strategy every quarter. It is understandable since there is an overwhelming number of monetization strategies and tactics available and SaaS companies are always on the lookout for the best monetization strategies.

Flat pricing model: This is usually the simplest and most acceptable model. The SaaS companies, which are mostly startup company, usually have a single solution with limited modules. The flat pricing bears a lot of similarities to the software licensing model with the major difference being that it is billed monthly. So the SaaS companies usually charge a fixed charge say $500 per month and grants access to all the modules of the company's products. This is usually an enterprise model or an Unlimited user model.

Per User Pricing: Per-user pricing is a common SaaS monetization strategy, where clients pay different amounts depending on the number of people using the service. However, SaaS companies try to fix minimum number of users so that they can recognize revenue in their books for at least the minimum amount assured as per the contract. This pricing strategy has its own pros and cons which gave birth to the Tiered user Pricing Strategy.

Tiered User Pricing: In this strategy, the number of permitted users increases in bands rather than single digits. So the pricing will be the same say up to 10,000 users and will differ between 10,001 to 20,000 users and so on.

Per Storage Pricing: Few SaaS companies charge based on the storage offered to clients. For instance, Google Mail offers upto 15 GB of free storage space and then the users have to pay for anything used above it. Similarly, Dropbox also charges based on the storage space used.

There are also other pricing models like feature pricing, module pricing etc. However, some of the critical points that SaaS companies should keep in mind while trying to monetize their models are:

1) Upfront Enablement Fees and Subscription fees from the first month: There should be an enablement fee that should be charged to the client to enable the software in the cloud. The SaaS company should also keep in mind that subscription fees should start from day one of providing the access to the software. There should not be any warranty period or cool off period provided to the client. This way, initially, the entire enablement fees can be taken into the books of accounts as revenue. The Subscription fees should be charged yearly in advance or six monthly in advance.

2) Hosting Fees: Hosting fees should be charged in blocks of 3 years or 5 years. This way the SaaS company will also stand to benefit even if the client sticks on for 2 years or 4 years.

3) Additional licenses in blocks: Additional licenses should only be offered in blocks of thousands or so. It becomes difficult to calculate every single increase in licenses. Further the contract should clearly state how additional licenses should be charged.

4) Suspension rights: If a client misses out on payment of subscription fees, then the SaaS company should have the right to suspend access to the client. Once the client pays the missed subscription fees, the SaaS company should charge fees for the revival of access. This should be clearly stated in the Agreement.

5) Country-specific and company-specific access: The access provided to the client should be restricted to specific geography or specific company. Its expansion of geography or its affiliates should be separately charged.

6) License and Hosted Model: This is one of the preferred models of monetization for many companies. Here the concept is that Software is given as a license to the client but the SaaS company will be hosting it. In this model the entire subscription fees for say 5 years is calculated and divided by two. Half of the value is taken as fees for support services @20% of license value year on year for each year and the balance 50% is taken as license value. So the entire license value will be taken into the books as revenue upfront. However, the cash outflow for the client remains the same as in the Subscription model wherein the monthly fees is paid by the client. This way the DSO is not affected but the unbilled revenue increases in the books of accounts. The SaaS company also gets benefits of legally booking higher license revenue than it would be booked under the SaaS model.