Data for subscriptions podcast - Episode #8
What SaaS companies need to do when their revenue growth stalls
Head of Product Marketing at DigitalRoute
Head of Product Marketing at DigitalRoute
The SaaS industry is reaching new levels of maturity, complexity and competition. This shift is pushing many SaaS companies to examine their pricing model. But which models are industry leaders using to support growth?
In this episode, host Behdad Banian speaks to Stephen Hateley about how SaaS businesses can apply usage-based billing to keep revenue growing.
The SaaS market has experienced tremendous growth for over 10 years. Back in 2017, companies reported a 33% increase in software usage.
Today, over 70% of companies have submitted that almost all of their software applications are going to be SAS based. In size, the SaaS-based software and IT industry have increased by around 500% in the past seven or eight years.
According to a report from Allied Market Research, the global SaaS market size was valued at over $121 billion back in 2020 and is projected to reach over $700 billion by 2030. This is an incredible growth of 90% in the next nine years. At the moment, SaaS is the most important tech in business.
There are several pricing models employed by SaaS companies and the choices they make are hinged on the need for company growth. Choosing the wrong pricing models can cause churn, negatively affects customer experience, and stalls growth for software companies.
It is important to understand that in the SaaS market, there is the horizontal and there is the vertical market. Vertical SAS is essentially these companies that build software services specifically for their industry.
Industries other than software in IT are now starting to move from physical products to offer their products as a service. And this is where we see the vertical solutions.
An example of this is Blackboard. They offer educational software that gives you access to learning resources and seminars when you subscribe.
Horizontal SaaS are the types of business applications that can sit across any industry. Typical examples are ERP software, and CRM software and you have companies such as SalesForce, HubSpot, and Microsoft Dynamics in this space.
The first and most common one is flat rate pricing, where you pay a monthly fee that gives you full access to the software.
Then, there is tier-based pricing that gives access to different tiers which can also be structured according to the size of the company using the software.
User-based pricing also referred to as license based is common among a lot of CRM-type companies at the moment. The licenses can also come in tiers, so it is more like a combination.
Feature-based pricing is not so common. Some SaaS companies can price their services according to individual features.
Credit-based pricing involves an upfront payment that gives a user access to tokens or credits. The tokens are deducted as you use features on the software.
Then there is usage-based pricing. Now, this is one that we talk about regularly. It is pricing based on consumption. What’s interesting about usage-based pricing is the mechanism of calculating usage and the possibility to monetize the model. Other pricing models cannot be monetized.
The final one is hybrid pricing which adheres to the expectations of customers. SaaS companies using this pricing model offer clients an array of options and allow the company to decide on which model suits the way that they operate.
These models have a similar premise even though we name them differently. This goes to show the immense complexity that companies face when it comes to combining the needs of a user versus the different kinds of pricing and services they provide.
The best way to approach these problems is through usage-based pricing. When you look at where the world is now, other pricing models are not aligned to best address customer experience.
Companies must start thinking about customer experience and contextualize it in a way that matches the pricing of their services to the needs of their customers. Otherwise, there’s a high risk of churn.
If usage-based pricing is applied effectively, SaaS companies can both serve customers better, and tremendously increase their revenue growth. The mechanisms are there to enable these companies to be agile enough to adhere to the expectations of their customers.
To serve their customers, they need to understand details about their usage patterns. And then tailor something that can best suit them.
You can’t tailor your software to every single individual customer’s needs. But what you can do is put yourself in a position where you can properly understand the customer over time. With this, you can serve them better and increase retention.