How SaaS Business Model Works and Earns Revenue

How SaaS Business Model Works and Earns Revenue

SaaS companies provide users with fantastic software solutions that drive their businesses.

Making a SaaS purchase isn’t a one-time sale. When it comes to earning revenue, the SaaS business model works differently than a usual web business.

In this post, we’ll be explaining the ins and outs of this business model.

Let’s kick things off!

Understand Recurring Revenue

Like we said, buying a SaaS differs from other software purchase types.

You’re not buying a product or a one-off service; you’re subscribing to a service that the software will provide.

As long as you make monthly or yearly payments, you can use the SaaS solution, which will, in return, enable you to perform an essential activity.

How many businesses can you think of that use specialized software daily?

Since you’re not paying for something just once, the business model relies on recurring revenue for the company. Therefore, recurring (or continuous) uses are the backbone of SaaS business profits.

For this reason, the SaaS business model is interested in long-time revenue and retaining as many subscribers as possible.

Retention is often more important than the sheer influx of new users.

It’s the mirror opposite of a business model that sells many products to different customers. This sets a unique set of objectives for the business to become sustainable.

To calculate your returning revenue, SaaS businesses use a metric called MRR.

Your MRR will tell you how much revenue you can expect to generate in one month based on your current user base.

There are a few other metrics connected to the MRR:

  • New MRR: the revenue brought by new users. You use it to calculate revenue growth.
  • Expansion MRR: since SaaS users can often upgrade to a higher tier of services, they’ll be bringing more revenue each month. So if you’ve had 50 users that upgraded from a £100 to a £150 SaaS tier, your Expansion MRR is £2500.

There’s also the possibility of losing recurring users (and revenue), but we’ll talk about that later.

Right now, let’s focus on the target number of users.

Reach the Target Number of Users

For the SaaS business model to work, it needs to reach sustainability. And the way it does that is by securing a target number of users that will pay for it every month.

It’s helpful to look at the target number of users as the zero-grounds of your SaaS goal.

Whatever ambitious plans you have with your business, it first needs a steady user base to stay profitable. This aspect of the SaaS business model is vital.

If you’re a SaaS company and cannot secure users’ target numbers, your business will eventually run out of money and face closure.

In the SaaS business model, at first, you direct all of your outreach efforts towards reaching sustainability.

Afterwards, you focus your efforts on keeping your current clients and gaining new ones.

Notice that the user number can vary from month to month.

It’s not like reaching an X amount of users will set up your SaaS for life. To make this business model work, SaaS companies need a clear understanding of how many users they need to stay profitable and expand.

If your want to launch a SaaS business, it would be helpful to answer these questions:

  • How many users does my SaaS need to reach sustainability?
  • How much time does my business have to reach that target?
  • What is the number of users above the sustainable number that puts the company in a comfortable position?

We can now talk about the lifeblood of the SaaS business model: customer retention.

Focus on Customer Retention

Customer retention is at the core of SaaS.

You can’t have recurring revenue without keeping your current customers. Remember, your SaaS is not in the clear once users subscribe to your service.

They can quit anytime.

It’s unrealistic to think they’re going to stay subscribed forever without your encouragement and effort.

Since your business revenue relies on customer retention, you need to have strategies to keep your users satisfied. They play a crucial role in long-term customer retention and your revenue stream.

So how can you make sure you keep your customers?

Here’s the answer: you have to use a combination of marketing and user support strategies to keep them engaged.

Marketing strategies are essential for keeping up user engagement.

They consist of giving your users engaging content that will increase the value they get out of using your SaaS.

For instance, if you have an SEO SaaS, giving your customers a free webinar on SEO is a fantastic way to teach them new things, provide value and encourage them to use your SaaS more.

The second part of your retention strategy must focus on helping your users. They can struggle with your SaaS, so they need to clear out any problems.

Besides fantastic customer service, effective SaaS companies take time to do user onboarding.

According to a report by Wyzowl, a stunning 86% of users claim they’re more likely to stay loyal customers if the company invests in educational onboarding content.

New users want to be educated on how to use their new SaaS.

If you do it, you’ll make a direct impact on your customer loyalty and retention.

We can’t talk about retention without mentioning its twin metric: the churn rate.

Calculate Churn Rates

Churn rates (or attrition rates) are the rates at which your clients stop using your SaaS.

When that finally happens, you lose them as paying customers.

Staying on top of your churn rates has a profound effect on your SaaS business model’s revenue.

SaaS companies use this piece of data to derive their average churn rate. It gives them a tangible piece of info on how many users on average drop their SaaS in a period.

You need your churn rates to estimate how many new users will sign off from your service.

Better yet, tracking your churn rates gives you a percentage that you can use to measure how successful you are at retaining customers.

Here’s how you can calculate your churn rates.

First, you need to pick a specific period you want to observe. That can be days, months, yearly quarters, or a year.

Then, divide the total number of lost subscribers at the end of the period with the number of subscribers you had at the beginning. And you’ve got your churn rate for that period.

Let’s say your SaaS had 500 users at the beginning of June. By the end, you lost 20 users.

Your churn rate for June would be:

CR = (20 Lost Users / 500 Users) * 100 = 0.04 * 1

The churn rate of your SaaS would be about the same as Disney+.

If your churn rate is decreasing, it means your customer retention efforts are paying off. If it’s the opposite, it means you have to implement emergency strategies to keep customers.

We talked about retaining customers, but how about getting new ones?

Strong SEO Drives Revenue

How you handle your SEO can make or break your SaaS.

As great as your solution is, nobody will hear about it without SEO, let alone subscribe.

With a serious approach to your SaaS SEO, you can attract volumes of new visitors and potential customers.

When your ideal customers have a problem your SaaS can solve, they’ll google for a solution. By boosting your SEO, you can make sure your SaaS pops up in the search results.

Google’s search engine is the most important source for attracting new users for the SaaS business model.

According to a study of SaaS marketing, SEO drives 68% of the organic traffic they receive.

In other words, if you neglect your SEO, your organic traffic will suffer. By implementing successful pro-SEO strategies, your website’s traffic will flourish.

Your approach to SEO is closely tied to SaaS revenue growth. The more people you can attract to your website, the higher your chances are of gaining new users or subscribers.

What can you do to start boosting your SEO?

You can start using an SEO strategy that’s going to enable you for all the SEO-related activities.

One of those is keyword research.

Keyword research tells you what keywords drive the most traffic to your website and which keywords you have a strong chance of ranking for.

More traffic will bring more prospects to your website. Then the only thing you have to do is to turn them into customers.

And fantastic content will make that happen.

Create Content to Convert SEO Traffic Into New Users

Content marketing is the ticket to converting SEO traffic into new SaaS users.

Here’s why it works.

Users are sick and tired of being targeted by ads. They want value upfront and help with solving their problems.

When you create insightful content, you’re drawing potential users instead of reaching them with an outbound initiative.

Think about when you google for a solution.

The first thing you click on is blog posts and videos that can help you. Using content, you can improve your SEO ranking and turn visitors into users that trust you. The more time they spend on your website, the more they’ll be interested in your SaaS solution.

And then, you’ve created the perfect opportunity to convert visitors into clients. From there on, you’ll focus on retaining them.

Content enables you to sell your SaaS. It has a direct impact on how many new users you’ll attract to your website and convert into paying customers.

What kind of content have you been publishing lately?

If you’re having a hard time coming up with content ideas, we’ve got you covered.

Every fantastic marketing plan starts with proper research.

Before you start publishing content, first research what topics your audience wants to read about.

You can do this with just about any SEO tool.

Look for decent traffic keywords that are not difficult to rank for. Then create content pieces that cover the topics around those keywords.

You can write:

  • Blog posts
  • Whitepapers
  • Case Studies
  • PDF guides

You can also cover these topics in educational videos.

The SaaS business model relies on content to attract and keep visitors. That’s because SaaS offers solutions to specific problems. If your prospects don’t know a tool like yours exists, they can’t search for your brand name or features.

However, if you create content around solving their problem, you stand a great chance of showing up in SERPs at exactly the right moment.

By neglecting content marketing, you’re choosing to neglect your revenue stream as well.

SaaS Business Model – Conclusion

Well done!

Now you understand the basics of how SaaS companies work and earn revenue.

To have a successful SaaS company, you need to focus on the long run. When your SaaS solution scores its first clients, that’s only the beginning of your journey together.

Make use of content marketing and SEO to attract new users to your website. Once you’ve successfully converted them, your content will keep them engaged and loyal for a long time.