Expected to reach $720.44 billion by 2028, the global software-as-a-service (SaaS) market continues to experience unprecedented growth. What’s behind this phenomenon and why have SaaS subscription management business models taken the world by storm? To start, this business model is in complete sync with today’s subscription economy, where consumers and organizations are transitioning from ownership to access. This hassle-free, economically sound business model provides subscribers with premium software without the outlay of expensive up-front costs. In addition, it frees them from ongoing, time-consuming, and costly maintenance and upgrades.
From the business side of the equation, SaaS subscription management companies are moving from one-time sales to focusing on building long-term customer relationships. It’s through these loyal relationships that SaaS companies receive predictable cash flow and are provided the opportunity to upsell and cross-sell offerings.
What is a SaaS Subscription Management Business Model?
A subscription business model is centered around the idea of selling a product or service where customers pay at regular intervals (weekly, monthly, quarterly, or annually), providing the business with recurring revenue. While one-time sale business models focus on new customer acquisitions, the emphasis for subscription-based companies is on customer retention.
Typically, customers are provided the option to renew their subscription at the end of the contract, however, some SaaS subscription management models automatically renew the contract. Either way, the subscription model enables customers to choose the length of their subscription contract and provides them with the ability to cancel or temporarily halt a subscription at any time.
Essentially, the focus of SaaS subscription management is on how revenue is made. For example, a single customer pays on a recurring basis for ongoing access to products or services, instead of paying a large up-front price.
The Benefits of SaaS Subscription Management
When it comes to benefits, the SaaS subscription management model delivers. Here are some of the key advantages for businesses and subscribers.
SaaS subscription business benefits include:
- Revenue predictability: While revenue is never 100% predictable, SaaS subscription management provides for more predictability due to its recurring revenue stream.
- Increased customer loyalty: Not a one-off sale, contracts signed by customers afford SaaS businesses the opportunity to build a loyal customer base.
- Reduced piracy: Since SaaS providers don’t sell software licenses, the risk of software piracy is greatly diminished.
- Cost-effective international expansion: With software accessed via the cloud, offshore resellers aren’t needed when you’re ready to go global.
- Innovation inspiration: With numerous ways to adopt and deploy a SaaS subscription business model, SaaS businesses have more of an opportunity to be creative than their traditional business model counterparts.
Subscriber benefits include:
- Cost predictability: Whether the customer is billed monthly, quarterly, or annually, invoice predictability enables them to manage expenses and budgets more efficiently.
- Pricing options: From flat-rate and tiered to per user/per unit and freemium, there’s a variety of pricing models that fit virtually any need or budget.
- Scalability: As a customer’s usage increases or decreases, they benefit from the ability to quickly scale without the need to purchase new hardware/software, acquire more storage, etc.
- Cost-effectiveness: The cost of hardware, software, testing, etc. is shared across the customer base, minimizing CAPEX and OPEX.
- Simplicity: Removes the need for onsite hardware and software which require installation, upgrades, and support. Additionally, adoption and usage of most SaaS offerings is relatively straightforward.
- Work flexibility: SaaS enables employees to work from anywhere, at any time, and from virtually any device.
- Enhanced security: The level of security that most SaaS companies implement and maintain would be cost-prohibitive for the average company to replicate.
While the benefits are plentiful, customer churn (voluntary and involuntary) can and does happen. To lessen churn rates, SaaS subscription management should be a priority. SaaS subscription management covers a broad range of processes, including managing trials, issuing refunds, and making changes to subscriptions – basically, it is the entire subscription lifecycle, from acquiring a customer to subscription cancellation and everything in between.
The Subscriber Lifecycle Explained
While the subscriber lifecycle can be described in great detail, we’re going to highlight the key components of SaaS subscription management processes.
- Customer acquisition phase: Includes activities such as developing pricing, packaging and bundles, marketing campaigns, promotions such as free trials, quotes and contracts. At this point, you need to do everything within your power to capture new customers and thus new recurring revenue. Key to the onboarding process is in having the agility to bring new products and pricing schemes to market faster than the competition.
- Subscription phase: Many of your activities and processes take place during this phase. It covers billing, invoicing, taxation, payments, accounts receivable, revenue recognition, and reporting, as well as enabling your subscribers to upgrade/downgrade, change pricing tiers, add features, etc. The most efficient way to do this – not to mention a proven way to improve the customer experience – is by allowing customers to serve themselves.
- Retention phase: Since this process begins the moment you acquire a new customer; some may argue that retaining subscribers is a component of the subscription phase. Given that the SaaS subscription business model is built around growing and retaining a loyal customer base, we believe it needs to be emphasized. Reducing churn requires you to take different measures depending on whether churn is voluntary or involuntary.
- Voluntary churn – Occurs when a subscriber chooses to end the relationship with your organization. To combat this type of churn, be sure that you’re constantly monitoring your offerings and pricing models, and modifying them to provide customers with the software and pricing options they desire. In addition, you can encourage customer engagement by offering incentives, communication tools, and exceptional service.
- Involuntary churn – Passive churn typically occurs due to a glitch in the payment process. For instance, an expired credit or debit card will result in payment failure. Tackling this type of churn requires exceptional dunning processes.
The ability to effectively manage the entire subscription lifecycle is an ongoing task that requires a billing system that provides the automation and flexibility needed to quickly react to changing market and customer dynamics.
Exceed SaaS Revenue Expectations
You want and need to drive profitability. However, in an industry where competition is fierce you need to do everything possible to claim significant market share. While achieving this isn’t impossible, it does take some planning, as well as ongoing tracking and tweaking.
First, be sure to have specific and measurable goals that are realistic and achievable within a certain time frame. While some goals may take years and others are achievable by reaching shorter-term milestones, the important thing is measuring your performance against the documented goals. Some key performance indicators you need to measure to ensure you reach your goals include monthly recurring revenue (MRR), annual recurring revenue (ARR), churn rate, customer lifetime value (CLV), customer acquisition costs (CAC), months to recover CAC, and customer health (satisfaction) scores.
Although the SaaS subscription management model is focused on customer retention, you still need to expand your customer base. What better way to entice new customers to try your software than by offering free trials! This type of incentive plan has been proven to provide potential customers with first-hand experience with your software, is easy to promote, and eliminates the fear of a long-term commitment. For best results, be sure your freemium plans only run between 2 weeks and one month. What sort of conversion rates should you expect? For opt-in, the conversion rate is about 25% and for opt-out plans, it is about 60%.
Finally, it may sound like a given, but your SaaS business needs to be 100% customer-focused. This needs to be a corporate-wide initiative focused on retaining customers and expanding your customer base. Expanding your customer base shouldn’t be geographically or offering limiting. There are two primary ways to expand – grow existing revenue through cross-selling and up-selling to your current customer base, and growing new revenue by offering new products, entering new lines of business, and expanding both domestically and internationally.
If your SaaS subscription organization already has a loyal customer base and has reached $2 million in ARR, there’s a method to help you fast-track business growth. Known as T2D3, it stands for ‘triple, triple, double, double, double’ and is a revenue growth guide for SaaS companies that want to achieve a billion-dollar valuation in five years. Basically, this method involves two years of tripling your annual revenue growth, then three years where revenue growth is doubled.
Is Your Billing System Hindering Your Financial Growth?
The subscription economy is constantly evolving, and to surpass revenue forecasts you need a cloud-based billing system that is agile and cost-effective. With so many billing solutions on the market, how do you know which one will provide the flexibility needed to help you take your SaaS subscription management business to the next level of profitability?
When comparing billing systems be sure the system you choose has the ability to easily and without additional cost charge and bill customers for actual usage/consumption; support any business model and any pricing scheme; automate the entire collections process; allow customers to manage their own accounts; includes a workflow for the automation of business processes; and has an adaptable architecture that enables no-code, point-and-click configurability.
BillingPlatform provides all the above and more! Our cloud-based billing system eliminates technological constraints, enabling you to support any type of monetization model, rapidly innovate, and profitably grow your SaaS business. Are you ready to join a growing number of BillingPlatform customers that are bringing new products and services to market 30% faster, reducing operational spend by nearly 50%, and exceeding revenue goals? Contact us today to learn more!