SaaS Revenue Modeling:Details of the 7 Revenue Streams
Draft 2
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MonthlySubscriptionsSaaS
SaaS is not a Revenue Model or Pricing Strategy!
If you only leverage “subscriptions” youare leaving money on the table
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ConsumersProducers Scalable Revenue Streams
The goals in SaaS are different than in Legacy Software
Understanding why* allowsfor proper Revenue Modeling*business scalability, increased CLV, leveraging multi-tenancy, etc.
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Pricing StrategyRevenue ModelDecouple
Pricing Strategy must be decoupled from Revenue Streams
Pricing Strategy is applied to Revenue Model
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Pricing StrategyRevenue Model
Understand where each piece fits into the overall SaaS Business Architecture
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Architecture Marketing
Decouple
Pricing StrategyRevenue ModelDecouple
How can you apply Pricing Strategy withoutknowing what Revenue Streams you’ll leverage?
Use Pricing Strategy to drive users toScalable Revenue Streams
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Legacy Software
Customers Developers
Channels
Three basic elementshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Customers Developers
Channels
Software-as-a-Service (SaaS)
Same elementshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Producers Consumers
Ecosystem
Software-as-a-Service (SaaS)
Different approachhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Producers Consumers
Ecosystem
NetworkEffect
Software-as-a-Service (SaaS)
Very different approachhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Producers Consumers
Ecosystem
NetworkEffect
Keydifferentiators
Software-as-a-Service (SaaS)
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Legacy Software Business Structure
Marketing Intellectual Property
Business ModelTechnology
Loosely-coupled, at besthttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
NetworkCentricity
SaaS Business Architecture
MarketingIntellectual Property
Business ModelTechnology
All aspects are tightly coupledhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Revenue Model
NetworkCentricity
Marketing Intellectual Property
Business Model
Technology
Business Model contains Revenue Modelhttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
RevenueModel
Revenue Streams
Revenue Model consists of Revenue Streamshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
RevenueModel
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
7 SaaS Revenue Streams
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Subscriptions Ecosystem
Ancillary
NetworkEffect
Less Scalable Revenue Streams
Products
AdvertisingServices
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
Scalable Revenue Streams
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Revenue Metrics
Each revenue stream contains metricshttp://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
Metrics
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Metrics are built into the application
Revenue Metrics
Metrics from any or all revenue streams that are represented in the application are bundled during
Pricing Strategy based on marketing goals
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Metrics
Pricing Bundle #1
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #2
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #3
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Decoupling Revenue Model & Pricing Strategy improves flexibility and allows pricing to be aligned with market requirements; critical when entering
adjacent markets
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Metrics
Pricing Bundle #1
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #2
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #3
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Revenue Metrics
Different bundles for different markets
But what are these metrics? How are the pricing bundles determined?
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Metrics
Revenue Metrics
Pricing Bundle #1
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #2
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Pricing Bundle #3
Modules Users Storage
CPU Units Reports
Transactions Files etc.
Different bundles for different markets
Move any repeatable processes common to
all clients into the SaaS application
SaaS is about Rules, not Exceptions
Key Concepts in SaaS Business Architecture
Critical to focus as much on revenue
streams beyond the application as within
the core product
Be aware of all revenue streams when
architecting system even if they will only be used in the future
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Symbol Definition
Scalable Revenue Stream
Less-scalable Revenue Stream
Not Scalable in most cases
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Revenue Stream Scalability Index
Subscriptions
-Examples -Per User, Per Month
Per TransactionUsage-based
Capacity-basedPre-paid Credits
Pros Cons
1-Infinity Scaling Revenue Recognition
Captive Audience for upsell High initial CAC
Recurring Revenue Churn / Customer Retention
Flexibility in pricing for different markets No large up-front payments
Downside guarantee on CLTV
Cannot be idle; must focus on CLTV/ARPU growth
Products
AdvertisingServices
Ecosystem
Ancillary
NetworkEffect
Subscriptions
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
EcosystemProducts
AdvertisingServices
Subscriptions
Ancillary
NetworkEffect
Ecosystem
-Examples - Affiliate Sales
APIsWhite Label
LicensingChannels
Pros Cons
1-Infinity ScalingUnwanted
interdependencies can grow if unchecked
Improved value for ecosystem partners
Lack of visibility into value chain for clients
Exposure to ancillary & adjacent markets
Need to market to end-users to create demand in front of channel partners
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
AncillaryProducts
AdvertisingServices
Subscriptions Ecosystem
NetworkEffect
Ancillary
-Examples -Processing Fees
Setup FeesOther FeesDiscounts
Float
Pros Cons
Super marginsSome options are complex
and not applicable early
Often not tied to any underlying cost
Overuse of add-on “fees” can hurt other revenue
streams
Discounts / Float are tied directly to the proxy
nature of the SaaS vendor in a Multi-tent
environment and have no direct exposure to the
clients
You can really turn away clients by nickel & diming clients with fees that have
no underlying value associated with them
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
Network Effect
-Examples -Anonymized/
Aggregate DataReports
BenchmarksAPIs
Pros Cons
Fully leverages data collected in multi-tenant environment
Privacy concerns require disclosure of intentions by vendor
An asset that increases exponentially in value as usage of
the system grows linearly
Requires planning up front an execution early on data collection
otherwise value is lost until capture begins
Leverage ecosystem partners to develop reports or add value to
data through APIs
Vendor must be diligent in adhering to regulations,
governance, and privacy laws
Does not require a “critical mass” of users as many think for
network effect data to be valuable
Careful planning to determine when network effect data
becomes valuable & to whom required
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Products
AdvertisingServices
Subscriptions Ecosystem
Ancillary
NetworkEffect
Products
-Examples -Equipment
DevicesAppliancesHardware
Pros Cons
Can be high margin Requires capital to produce
Can produce vendor lock-in 1-1 or 1-few on each transaction
Can develop ancillary revenue streams
Support costs are high
Will improve value of Network Effect Data through automation
Logistics, supply chain management, returns, support, etc. add to overhead in dealing
with hardware
Inbuilt support for channel relationships can allow the
hardware partner to integrate (OEM) the product w/SaaS
Installation & support are difficult
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
ServicesProducts
Advertising
Subscriptions Ecosystem
Ancillary
NetworkEffect
Services
-Examples -ProgrammingInstallation
Content CreationTraining
Pros Cons
Core-competency for professional services companies moving to
SaaS1-1 or 1-few
High price Exception, not rule-based
Often high-marginHuman-centric and humans don’t
scale efficiently
When more repeatable processes are inbuilt to SaaS application,
services in less demand, but can be more expensive since they are
more specialized
Takes away resources from more working on more scalable revenue
streams
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
AdvertisingProducts
Services
Subscriptions Ecosystem
Ancillary
NetworkEffect
Advertising
-Examples -ContextualPay-per-clickAd Networks
TextDisplay
Pros(mostly tongue-in-cheek)
Cons(all serious)
You don’t have to convince people that your product has value
Ads for SaaS products are part of a hope-based strategy
You don’t have to manage cash flow
De-values core product
Clients don’t have to pay you to use the product you built
Difficult to plan and forecast sales (impressions? clicks?)
There are close to 3B sets of eyeballs, if you only get 1% of
those to click...
Too much inventory (each screen) and not enough demand
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