Did you know Slack reported $400 million in revenue in 2018 even though only 15% of its customers at the time paid anything for the service? By 2022, the SaaS company generated more than $270 million in revenue in a single quarter—still with a large number of free users.
Some keys to Slack’s success include understanding its customer base and a tried-and-true business model that aligns with the product and customer needs.
As a financial and business decision-maker of a tech company, you need that same understanding of your own product, customers, and business model; that starts with seeing good SaaS business model examples, then choosing who you want to emulate.
The SaaS Business Models
Slack’s business model isn’t necessarily the right choice for your startup or growth company. No one-size-fits-all model exists for all organizations because each product and customer base is unique.
For example, customer acquisition costs can range from a few dollars to hundreds or thousands of dollars depending on the product, and with CAC ranging so widely, marketing and pricing models should also differ greatly.
Learning more about various SaaS business models is a good step in determining which might be right for you.
Understanding Which Business Model To Use
Your business model helps determine other critical factors, including your pricing model. Most entrepreneurs start with a business model that makes sense in the early growth stages, but as your business grows or you add other SaaS products, your model may not continue to support growth.
Now you have a decision to make. Do you continue with your current business model or change it to respond appropriately to internal and external factors? For example, DocuSign began as a B2B business. But Andrea Dixon, the company’s Senior Marketing Director, noted in 2022 that the business was entering the B2C market because anyone who needs to sign digital documents is a potential customer.
Types of SaaS Business Models
Choosing the right business model supports everything from your pricing strategy to your sales team. Some common SaaS business models are summarized below.
Ad-Based Revenue Model
This model bases revenue primarily on ad dollars. You create a website or app likely to draw large numbers of users, but you don’t charge those users for the service. Instead, you drive revenue by selling ad space.
This model requires a specific dynamic:
- You must provide something valuable and distinct enough to entice users to choose you
- You must have enough users that advertisers will pay for space
- Your platform or technology must deliver ads in a way that is beneficial for advertisers without driving away users
Social media platforms and mobile gaming apps are common examples of this model - though it can’t be understated that most consumers low-key hate products with this pricing model.
Affiliate Revenue Model
In this model, you also don’t earn revenue from your customer base — the people you directly serve with your product. Instead, you earn commissions when you connect your followers with new products and services and they make purchases through your referral links or using your referral codes.
Some SaaS businesses use this model in addition to other strategies, including ad and subscription models. Others are entirely based on affiliate revenue.
Some common examples include review and calculator sites or apps that help people calculate the cost of loans or big projects and include links to relevant products.
This is an indirect sales model wherein you partner with resellers or agents to sell your product for you. They get the benefit of a valuable product to offer their customer base and you get the benefit of their existing audience and the fact that they may be experienced and have their own resources, such as CRM tools. In the SaaS industry, channel sales are often managed through methods such as white labeling and B2B2C partnerships.
With this model, you sell products directly to your customers. If you can handle lead generation via inbound strategies like content marketing and automate your sales funnel — as Dropbox does, for example — direct sales can be lucrative even for a lower-cost product.
If you need to get a sales force involved to connect with consumers and massage the sales pipeline, direct sales becomes more expensive. This type of model may work better for SaaS products that are complex or have a high price point.
Freemium models offer new customers the chance to try a free version of your product before they purchase a package in your tiered pricing structure. The free version might not include all of the functionality of the paid versions or may come with ads.
For example, monday.com offers a free-forever version of its project management and collaboration solution. However, you only get two seats, three boards, and limited access to storage and features. The goal is to make freemium users see the benefits of, and upgrade to, paid versions.
Subscription Revenue Model
By charging a subscription fee, you can ensure monthly recurring revenue and keep your products affordable in the short term for customers. This is a common model for traditional SaaS companies. Products ranging from Marco Polo and Spotify to Microsoft 365 and Dropbox are supported with subscription revenue methods.
Obviously, customer relationship management is critical to the success of such businesses. If you don’t have a strong customer service strategy, you might struggle to grow subscriber bases — and stable revenue streams.
Business Financing Structure
When considering a model for your Software-as-a-Service business, you must also factor in funding. Your access to working capital and where your capital comes from have a direct correlation to which model you might use.
For example, a freemium model such as Slack’s is pretty much impossible to launch and maintain without an infusion of capital from investors to create a financial buffer for the business as it waits out its CAC payback period.
Many SaaS startups were bootstrapped, so you know this financial structure can work. Success does require the right business model — typically one that starts generating regular revenue quickly so you don’t have to keep putting your own funds into growth.
Common SaaS business models that align with this financial structure include subscription models that base the pricing on tiers, users, or usage. Bootstrapped SaaS businesses often launch as soon as they have a minimum viable product and build from that point.
When you have venture backers, you may have more upfront capital to play with. This means you can invest more in software development and other resources. You might even delay the launch until you have more than a minimum viable product. It also means you may be able to support freemium models or invest in channel or direct sales to support more complex or expensive products.
An established SaaS firm looking to change its business model might already be cashflow positive. If you’re in this boat, you may have enough cash resources to support any business model, which means you can choose the one that best aligns with your product or customer base.
Successful SaaS Company Examples
Now, the really good stuff: a look at some successful SaaS businesses and what models worked for them. We’ve selected businesses with a wide range of SaaS revenue models, from one-time purchase products to monthly subscription services.
Let’s dig in to find out what’s worked in the past, what’s working now, and what you can learn from these SaaS success stories.
Example 1: Slack
Business Model: Freemium, subscription
Financing Model: Slack was originally funded by angel investors and venture capitalists (and, interestingly enough, pivoted from creating a video game to being the company we know now!). It went public in 2019 and is funded now by shareholder investments.
Slack is an example of a cloud-based SaaS business that has truly rocked the freemium model. Without ads or mandated per-user pricing, Slack manages to drive hundreds of millions of dollars in revenue every quarter. The majority of its revenue comes from a tiny percentage of its user base.
One thing Slack does right is that it provides a product some users — mostly businesses — value enough that they will foot the bill for other users — employees, customers, and business partners.
Example 2: Mailchimp
Business Model: Freemium, subscription
Financing Model: Mailchimp was bootstrapped in 2000 and during its early growth phase. In 2021, the business was purchased by Intuit. At that time, it was cash flow positive.
This SaaS solution helps businesses and individuals manage email subscribers and communications. The freemium version offers plenty of functionality while being limited enough that any growing business will eventually stumble into paid subscriptions, which is why this model works well for Mailchimp.
Mailchimp has also worked hard to become a top-tier name and thought leader in email marketing. Business owners and marketers of all types recognize and trust the name.
Example 3: GoDaddy
Business Model: Direct sales; subscriptions
Financing Model: GoDaddy was originally bootstrapped with money from the sale of other businesses. Since its start in 1997, GoDaddy has gone through numerous financial models, seen venture capital injections, and is currently publicly traded.
Early on, GoDaddy was a household name related to hosting services. Its aggressive marketing tactics have a lot to do with its success, venture capital funding and plenty of working capital supported those efforts. Today, GoDaddy continues to add functionality and services to remain a relevant contender in an increasingly crowded market.
Example 4: Shutterstock
Business Model: Channel and direct sales, subscription
Financing Model: Shutterstock was bootstrapped. During growth phases, the owner went through a small funding round. Even today, however, the founder maintains around 50% ownership.
Shutterstock offers subscription model pricing for users, but it also conducts sales through a number of channels. Numerous e-commerce platforms and web development tools offer Shutterstock integrations for business owners and others using those services, for example. This multichannel model has made Shutterstock the go-to for stock photos.
Example 5: Hotjar
Business Model: Freemium and subscription
Financing Model: From its inception through its acquisition by Contentsquare in 2021, Hotjar was primarily bootstrapped.
Hotjar provides heat mapping and user behavior analytics for website owners. The product offers a fairly complex service wrapped up in a package that doesn’t require extreme technical know-how, which is one of the reasons it’s so successful. Hotjar also relies on a freemium model to let people try this complex technology and see how easy it is to get value from it.
Example 6: DocuSign
Business Model: Channel and direct sales; subscriptions
Financing Model: DocuSign was funded with venture capital through numerous Series A and B financing rounds before going public via an IPO in 2018.
DocuSign provides a much-needed product in an age when going paperless is a common goal for businesses. Corporate and other business users were originally DocuSign’s target audience, but as the company grows, it has realized that B2C and B2B2C markets also require digital signature tools.
Like Slack, DocuSign is a product that larger businesses champion to partners or clients because it supports efficiencies across all types of processes.
Choose Your Business Model Wisely
Whether you’re helping to launch a SaaS startup or want to guide an existing company into a new SaaS market, your business model is the foundation for your effort. Choose wisely and you might see success similar to some of the SaaS business model examples highlighted above.
Ready to seek venture capital funding to support your new business model? Check out our list of investors writing checks to SaaS companies now.
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