With more than 15,529 SaaS companies registered on Crunchbase and 12 times growth rate since 2010, it's okay to say that SaaS is a business model of the 21st century. As a SaaS design company, Eleken works with SaaS businesses every day. Over the past couple of years, we've seen an increasing number of entrepreneurs looking to adopt this business model. Why does everyone want to be a SaaS company?
We decided to cover the most important aspects of the SaaS business model so you could better understand how it works and whether you need to be looking into it for your next project.
What is SaaS?
SaaS (Software as a Service) is a cloud-based software delivery model that provides users with access to applications over the internet without needing to install or maintain them locally. It can be accessed via an internet browser, mobile application, or desktop app. SaaS is provided to users on a subscription basis, which means they have to pay a recurring fee monthly or annually.
You know Zoom, right? It's a go-to app for group video chats today. You may hold an unlimited number of one-to-one and group meetings on Zoom as well as record these meetings, share screens, use boards, and have productive discussions without any annoying issues (hello Skype!). Zoom offers access to its video conferencing app using a subscription model.
SaaS revenue streams
SaaS companies typically have a few revenue streams in addition to subscription. Let's look at all of them.
Subscription
Recurring payments are the main revenue-generating stream of SaaS businesses. This stream is fluctuating and varies from month to month (depending on your pricing model and customer satisfaction). People continue to use the app as long as it delivers value.
Upsell
You can upsell to existing customers offering them more storage, more data, additional features, or more accounts. Going back to Zoom again (we do not promote it, but we do like it, especially in times of remote work), they have a couple of available add-ons: Audio plan and Additional Cloud Recording Storage.
With the Audio plan, you can call out your participants (like in Skype) instead of just waiting for them to join in. If you need more storage to keep your conference recordings in the Zoom account, you can pay for additional space.
Software setup
You may charge for software setup. This revenue stream not only adds to the profit of your SaaS but also enables a customer validation process. You need to approach setup fees carefully. It works better for enterprises (big clients) with a lot of data.
For example, a well-known customer relationship management platform, Salesforce, provides different integration and installation services from their in-house architects on request. They get pretty good financial returns from this offer. Salesforce has hundreds of apps and features which are useful for any business, but customers struggle to integrate them. Because the value dominates over the price, people pay for architects’ services.
Data
You may apply additional charges for creating data-driven reports based on what service you provide to your customers. It may be a feature in one of your plans or just an additional service. Make sure that these reports add value to your customers and have ROI (return on investment). One more successful SaaS player, Hubspot, a platform for sales management, marketing automation, and customer service offers their customers to get Reporting Add-on and create Custom Reports to track various metrics.
Customer support
You can develop different levels of customer support and charge for this service. Customer service is an important and expensive part of any business. And, we consider it to be part of the SaaS value proposition so it might also be included in the pricing model.
A prominent email-marketing automation SaaS, Mailchimp, offers different levels of support depending on the pricing plan. If you are signed up to the Free plan, you will only be able to use published tutorials, and email-support during the first 30 days. Standard and Essential plans will let you communicate with support representatives via live chat. And Premium Mailchimp plan users, in addition to the mentioned before support features, can get phone support and priority response.
Examples of SaaS businesses: Showcasing diversity and success
When you think of SaaS, the usual suspects like Salesforce and Zoom come to mind. But there’s a whole world of lesser-known SaaS businesses making waves by solving very specific problems. Let’s dive into some examples that show just how creative and diverse this industry can get:
1. Linear: Keeping developers happy
Linear isn’t your everyday project management tool. Built with developers in mind, it’s laser-focused on simplifying issue tracking. What’s their secret sauce? A clean interface, lightning-fast performance, and features that don’t try to do everything. They knew their audience (small, agile teams) and stuck to what they needed most—and nothing more.
2. Superhuman: Email, but make it fast
If you hate email (who doesn’t?), Superhuman might change your mind. This SaaS app turns your inbox into a productivity powerhouse with keyboard shortcuts, read receipts, and AI-powered suggestions. It’s a premium product ($30/month!) that’s all about speed and efficiency, catering to professionals who value every second of their day. We have a whole another story about Superhuman and how they reached product-market fit. Feel free to read :)
3. Klaviyo: E-commerce marketing magic
Think email marketing is boring? Klaviyo disagrees. This SaaS company helps e-commerce businesses create personalized campaigns based on customer behavior. It’s perfect for small online shops looking to turn casual browsers into loyal customers without hiring an entire marketing team.
4. Descript: Revolutionizing content creation
Podcasting, video editing, transcriptions—Descript does it all in a way that feels like magic. You can literally edit audio by changing text. It’s a niche product for creators who want simplicity without sacrificing professional results.
5. Loom: Share what you mean
Loom makes recording and sharing quick videos as easy as sending a text. It’s perfect for remote teams who want to explain things visually—whether it’s a bug fix, onboarding, or just saying hi in a way that doesn’t involve another Zoom call. We use it all the time at Eleken for asynchronous communication with clients.
6. ConvertKit: Helping creators make a living
Not every SaaS company is aiming to land huge enterprise clients. ConvertKit focuses on independent creators—bloggers, YouTubers, and podcasters—by offering tools to grow their audience and earn a living. It’s a breath of fresh air for anyone tired of marketing tools that feel overwhelming.
These examples show that you don’t have to cater to everyone to succeed. Whether it’s solving a specific problem (like email clutter or developer workflows) or serving a tight-knit audience (creators or small businesses), the key is understanding your niche and doing one thing really well.
SaaS product life cycle stages
Every SaaS product goes through its own journey, much like a living, breathing entity. Understanding the stages of this journey can help you make smarter decisions, keep your product thriving, and avoid common pitfalls. Let’s take a closer look at the four main stages of a SaaS product’s life cycle.
1. Introduction stage: Planting the seeds
This is the launchpad—the moment your product enters the world. At this stage, your primary focus is letting people know your SaaS exists and why it matters. But challenges like limited revenue and users who are still getting to know your product can make this phase feel like an uphill climb.
What to do:
- Go big on marketing—spread the word about your SaaS and its benefits.
- Pay close attention to early user feedback; it’s gold for fine-tuning your product.
- Make your go-to-market strategy simple, clear, and compelling.
2. Growth stage: Gaining momentum
Now the ball’s rolling. People know about your SaaS, and if all goes well, they’re starting to invest in it. Sales climb steadily, and so does the competition. This is the time to grow fast and stay ahead of the pack.
A key concept to guide you during this stage is the 3 3 2 2 2 rule, also known as T2D3 (Triple, Triple, Double, Double, Double). Coined by Neeraj Agrawal in his article The SaaS Adventure, this rule defines an aggressive growth trajectory for SaaS startups:
- Triple your annual recurring revenue (ARR) in the first two years.
- Double it each year for the next three years.
What does this look like in practice?
If your SaaS starts with $1M in ARR:
- In Year 1, you aim for $3M.
- In Year 2, you aim for $9M.
- In Year 3, you double to $18M.
- By Year 5, you should hit $72M in ARR if the T2D3 trajectory is followed.
What to do:
- Expand your reach by exploring new distribution channels and markets.
- Keep enhancing your product to meet evolving user needs and stand out in a crowded space.
- Use creative marketing strategies, like referral programs, to encourage your users to bring in more users.
3. Maturity stage: Holding steady
At this point, your SaaS is established, but growth may start to plateau. You’ve reached market saturation, and now the challenge is keeping what you’ve built while staying relevant.
What to do:
- Differentiate your SaaS by launching new features or targeting under-served market segments.
- Reassess your users’ needs—they might have evolved since you first launched.
- Double down on keeping your existing customers happy with retention-focused strategies.
4. Decline stage: Finding a second wind
Eventually, every product faces a decline. Sales slow, market share drops, and demand fades as newer options emerge. But decline doesn’t have to mean the end.
What to do:
- Consider redesigning or reinventing your product to meet current market needs.
- Focus on loyal customers—offer them exclusive deals or perks to keep them onboard.
- Explore new markets or use cases to breathe new life into your SaaS.
Pros and cons of the SaaS business model
The SaaS business model has revolutionized how software is delivered and consumed, offering numerous benefits and some notable challenges. Here’s a balanced look at both sides:
Pros of the SaaS business model
- Scalability and flexibility
SaaS businesses can scale effortlessly by leveraging cloud computing. Whether it's accommodating a growing user base or introducing new features, SaaS adapts seamlessly to business needs without requiring significant infrastructure investments. - Recurring revenue streams
With subscription-based pricing, SaaS companies enjoy predictable and recurring revenue. This model stabilizes cash flow and makes long-term planning more manageable. - Global reach
Since SaaS products are hosted in the cloud, they’re accessible worldwide. This allows even small SaaS businesses to serve a global audience without the logistical complexities of traditional software delivery. - Lower barriers to entry for customers
SaaS eliminates hefty upfront costs for customers, replacing them with affordable monthly or annual subscriptions. This accessibility drives faster adoption. - Enhanced customer loyalty
With ongoing updates, premium support options, and custom integrations, SaaS companies can continually improve their products, strengthening customer relationships and boosting retention.
Cons of the SaaS business model
- Capital-intensive to start
Building a SaaS product often requires a significant upfront investment in software development, cloud hosting, and marketing. This capital intensity can be a barrier for startups without robust funding. - Complex maintenance and updates
SaaS companies must continuously update and maintain their software to meet user expectations. This requires a dedicated development team and a rapid response to bugs and feature requests. - Cybersecurity challenges
Hosting sensitive customer data in the cloud makes SaaS products attractive targets for cyberattacks. Maintaining robust security measures is an ongoing and costly responsibility. - Subscription fatigue
While subscriptions offer predictable revenue, customers may experience subscription fatigue when inundated with too many services. This can lead to cancellations and increased churn rates, especially during economic downturns. - Dependence on internet connectivity
SaaS products require reliable internet access. This can be a limiting factor for customers in regions with unstable connectivity or for applications needing offline functionality.
Key metrics of SaaS businesses
SaaS is a “metrics-based” model. If you want your business to succeed in the competitive SaaS environment and scale up, you have to keep an eye on the key metrics for your business.
One metric that matters (OMTM)
It is also called the Northstar metric. It helps you figure out whether your product is succeeding or not. Northstar metric is unique for every SaaS business and defines the goal for your entire product team. For example, Slack aims to 2K messages per user. Airbnb has bookings per night as OMTM.
Monthly Recurring Revenue (MRR)
MRR is the most important financial metric. As SaaS is a subscription-based business, you need to count how much money you get every month. This metric doesn’t include upsells or profit from additional revenue streams. You should only take into account the number of subscriptions.
Lifetime Value (LTV)
LTV is the amount of money you receive from your customer during the whole period of using your software. This number helps you predict profit and allocate resources wisely. Companies that have a good LTV focus on improving the user experience of their existing customers. It's cheaper to keep an old client that attracts a new one.
Customer Acquisition Cost (CAC)
CAC is a marketing metric that indicates how much money you spend to acquire new clients. Watching LTV and CAC of your SaaS will help you keep a healthy balance and growth.
Net Promoter Score (NPS)
NPS helps you identify how satisfied your users are with your product. NPS is based on a simple question: How likely are you to recommend our product to your colleague or friend from one to ten? This metric is related to the quality of product features, customer services, and user interface.
Churn rate
It is a percentage of clients you have lost during a defined period of time (week, month, quarter). SaaS businesses are based on a subscription model which means you have to keep track of current clients and make sure they continue to use your service from month to month. Trying to find the reasons of why they churn may help you improve your product.
How to optimize your SaaS revenue
In SaaS, success hinges on finding the right balance between what it costs to acquire a customer and the revenue they generate over their lifetime. This is where David Skok’s “SaaS Golden Ratio” comes into play: your customer lifetime value (LTV) must be at least 3x greater than your customer acquisition cost (CAC). Let’s break down how to improve your LTV/CAC ratio and optimize revenue.
1. Master the CAC payback model
The CAC payback model illustrates how you start deep in the red (spending heavily to acquire customers), then recover as they pay for subscriptions. The goal is to reach your CAC payback point (a 1:1 ratio) as quickly as possible and turn a profit as long as they remain customers. Keeping your CAC in check is critical. If acquisition costs spiral, like in the infamous case of Pets.com, the business can collapse under unsustainable spending.
2. Lower customer acquisition costs (CAC)
Reducing your CAC not only improves profitability but also accelerates your path to a sustainable business. Here are a few ways to cut costs:
- Eliminate friction in user experience: Ensure that your landing page is intuitive and your onboarding process highlights value immediately. Even a small hiccup in the journey—like confusing pricing or unclear features—can cause users to drop off.
- Optimize marketing efforts: Focus on channels that provide long-term value, like content marketing and organic traffic. Unlike PPC campaigns, which stop delivering results as soon as the budget ends, SEO and content offer compounding returns over time.
- Target the right audience: Use data to focus acquisition on customer segments with the best LTV/CAC ratio. For example, Superhuman succeeded by narrowing its focus to early adopters who loved their product, cutting wasted efforts on uninterested segments.
3. Boost lifetime value (LTV)
If lowering CAC isn’t enough, you can still improve your LTV/CAC ratio by increasing how much customers spend over time. Here’s how:
- Upsell and cross-sell effectively: Offer premium features, higher-tier plans, or complementary add-ons that provide value. For instance, Zoom boosts revenue with paid storage and audio call upgrades.
- Reduce churn: Keep customers engaged and satisfied to ensure long-term retention. A better customer experience, combined with personalized support, can go a long way in preventing churn.
Will every business evolve into a subscription business model?
According to a 2020 survey, the average growth rate for startups with less than $1M ARR is 144%. For companies with more than $5M ARR, the number decreases to 60%, which is still rather significant growth. The business model is lucrative and thus luring entrepreneurs to build new products. Still, there are dozens of other industries that generate the same or even bigger revenue. What do so many entrepreneurs want to build a SaaS?
We have been living in the “subscription economy” long time before SaaS became popular. We used to rent and lease housing, cars, offices, even outfits, and pay a monthly fee for using them. SaaS is another service that offers stuff "for rent," the only difference is that the stuff is digital.
Software as a Service business model is a win/win for customers and businesses. For businesses, SaaS scales fast, generates recurring revenue, and gets managed easily. For customers, it offers convenience and reduced investments.
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Customer demand is changing. They are more willing to pay for access to the product or service in smaller amounts rather than paying lump sums up-front. Customers enjoy not only lower costs but also constant upgrades of the software and easy access to new features and cutting-edge technologies.
There is a luring opportunity for every business to evolve into a subscription business model. If you want to keep your product viable and generate constant profit, regardless of where you are, you should start considering this option.
The transition may be expensive at first, but you can reap benefits very fast as soon as you choose the right pricing model and set up your metrics.
Tien Tzuo, in his book “Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It” makes a point that the subscription business model is about freedom, easy access, cutting edge technologies, and easy financial management.
