SAAS Models in the eyes of the Company and its CFO

In these three parts articles I want to highlight the essence of using SAAS for selling of Software focusing on the financing and the accounting side. In the eyes of the CFO there is a high importance in choosing the best pricing models that will guarantee the highest return on Investment (ROI) and highest revenue growth.

There is also an expenses side to that issue while the company should examine the discounts and rebates as well as the optimization of cloud usage costs (FinOps).

Since SAAS analysis has many dimensions, I will focus on the finance side of it and examine it in the perspective of the following aspects:

Valuation of the company.
Cash flow and Accounting.
Strategic sales models.

In the end of each part I am also attaching links to in-depth articles and YouTube videos.

Part 1: Using the SAAS model and the different pricing models.
Part 2: Commissions for salespeople and discounts and refunds on sales - in accounting evidence.
Part 3: FinOps cloud cost savings.

Introduction: Constant cash-flow and Valuation

Why using the SAAS model and not a model of permanent licenses? - the Valuation perspective.

When we examine the main reasons software companies switching to a SAAS model, we identify that companies prefer a constant and continuous monthly cash-flow (using SAAS model) over a one-time cash-flow (usually an annual payment). The company's valuation is higher when they have a constant Y/Y ARR (Annual Recurring Revenue) growth then companies with permanent yearly licenses.

Part 1: Using the SAAS model and the different Pricing models.

The Advantages of a Subscription Revenue Model

Although almost any product or service can be turned into a subscription revenue model, when your SaaS company seamlessly meshes with a subscription model, the advantages are substantial.

1. Subscription Revenue Provides a Recurring Payment Cycle

Unlike a traditional business model, where you sell to a customer and move on, a subscription revenue model gives you recurring payments from the same customer. This can allow you to offer a lower upfront price to clients, while setting up your business to receive a stable and consistent cash stream.

2. Subscription Revenue is Easier to Scale

Every time you onboard a customer, you need to create an invoice, get their payment information, and provide some immediate customer service. For a traditional business, this happens for each payment, whereas a subscription revenue model only deals with this once per customer. That frees up your effort to work on expanding your services suite or finding new clients.

3. Better Customer Relationships

Since your SaaS company can maintain long relationships with clients, you can see what products they are using, and listen to what they are looking for. This gives you the opportunity to tailor your offering to the benefit of the client. This makes it easier to retain clients, better position yourself in the market for new clients, and even upsell your existing clients with new add-on features.

What are pricing models?

Pricing model is how you package the pricing of your product or service. It is how you determine what the best price for your product or service is. There are various ways to package your SaaS pricing, and each model has pros and cons. Let’s look at some of the SaaS pricing models.

Types of SaaS Pricing Models

Flat-rate pricing model:

In flat-rate pricing, the product is offered with a set of features at a predetermined price. There are no pricing options or features to choose from. The method is based on the “one size fits all” pricing strategy, and you charge your customers the same amount monthly/annually regardless of how many users or their usage is.

Tiered pricing model:

The tiered pricing model is based on the tiered pricing strategy for the real-world pricing scenario. Both terms are used interchangeably, leading to potential confusion. This post spells the difference between the two. In the tiered pricing model, different versions of the product are offered at varied prices. These can be based on features, a number of users, or usage and are decided by the business based on its product.

Usually, 2 to 5 tiers are created, and your customers can choose from the same based on their needs. Using this pricing model, you can upsell to your customers incrementally, including features as they scale. The pricing tiers should be carefully constructed with an appropriate strategy failing which your customer will end up getting confused.

Usage-based pricing model:

The usage-based pricing model is also touted as the “pay as you go” model. In this pricing model, the customer is charged based on their usage of the product. If they use more, they’re charged more, and if they use less, they’re charged less. The usage can be charged based on various factors such as the number of Emails being sent, per API, per call, per transaction, etc. Some variants of usage-based SaaS models are purely usage-based, and some have a base subscription fee and then will be charged according to usage.

Per user-based pricing model:

Pretty self-explanatory, per user-based pricing model allows businesses to charge based on the number of individuals using the product. In this model, the revenue scales with the product’s adoption by the users in the company. Every account is charged, which makes it easier to predict revenue.

Per feature pricing:

The product is priced based on the features and functionality which is offered to your customers. The more features, the more your customers pay and vice versa. The pricing tiers are separated based on the functionality available for each tier. In feature-based pricing, your customers scale along with the product as they expand. They might need new solutions to their problems during growth and hence upgrade to the next level. As per the feature pricing model, you’re tying the price directly to the value offered by you to your customers.

Freemium pricing model

Freemium is a widely adopted pricing model which allows businesses to lure users to signup for a free but limited version of your product. The idea is to hook users to your product and nudge them later to upgrade for the paid version. In Freemium, certain features are offered for free, and a paid upgrade is available when they want to access more functionality the product has to offer. In the Freemium model, you usually keep your potential customers in the free product incubator and target sales and marketing campaigns exclusively for them so that they can upgrade.

Per active user pricing model:

In a per active user pricing model, you charge your subscribers only based on how active they’re. In other words, you only charge the users who use the product. Teams can enroll as many users as possible to buy the product, but they will be charged only based on those who use them. This means that no money is spent on vacant places.