Business Models for a Calm SaaS Business — TBF #150

Dear founder,

Wow, is this already issue #150? Incredible. It's also the first episode that is being sent out to over 5000 founders, creators, makers — and even several shakers!

I'm very grateful for this.

This week, we continue the journey towards building a calm SaaS business with the third instalment, Business Models for a Calm SaaS Business.

Please feel free to check out this week’s sponsor, The $100 MBA Show.

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There are a few proven ways for SaaS businesses to make money. And all of them revolve around subscriptions.

Most SaaS businesses have a central success metric: their Monthly Recurring Revenue, MRR for short. It’s calculated by adding up all the monthly fees paid by your subscribers.

There are a few vectors that impact how the subscription model will work in a SaaS business: the pricing model you choose, the kind of business you run, and the reality of your target market.

Pricing Model

Pricing is generally a very hard-to-solve problem within a business. Every day, someone will tell you to “charge more” while someone else will suggest that you should lower your prices. Advice is plentiful and often completely irrelevant to your unique challenges.

Instead of looking for generic guidance, let’s look at what other businesses have successfully done and how it works.

The first important metric to look at is called the LTV, or Lifetime Value for short. It’s the amount of money you can expect a customer to pay —on average— from the day they sign up to the day they cancel. A few things stand out here. To increase the LTV of any given customer, you can either charge a higher monthly fee or ensure the customer sticks around longer. Someone who pays $100 a month for three months is just as interesting as someone who pays $25 a month for a year. But every month, a customer has a non-zero chance to “churn,” to stop using your service. If your product delivers enough value for a fair price, customers will stay. If they feel diminishing returns, they’ll likely cancel.

So several factors go into your pricing model calculation, but here’s the most common approach. Most low-touch SaaS businesses offer between two and three tiers of membership. There’s a beginner tier for low-usage customers, a middle tier for most customers, and a high tier for professional users. Generally, the middle price is around $10 to $50 a month, but this depends heavily on the industry. Tiers allow customers to self-select into a pricing range they’re comfortable with

High-touch businesses tend to have custom pricing that scales with the expected usage of the product, and it tends to start at $50 and can go into the thousands of dollars. That’s why many high-touch SaaS businesses start with a request for a demo: you can’t tell people what their price will be if you don’t know how much and which parts of your service they’ll be using. Generally, high-touch pricing is higher per customer as there are fewer customers overall that a business can manage compared to a low-touch SaaS that can efficiently serve thousands with all their automation and documentation.

Another important aspect of your pricing approach is along which dimension you will charge. Most SaaS businesses price along something called the value metric, the core number that goes up for your customers when they become more successful. If you help publishers, charge more when they sell more books. If you help a beauty salon, charge per appointment made. Sometimes, that means increasing prices when your customer wants more of their employees to use your product, and sometimes you don’t care how many people log into your software but how many projects they work on.

Common subscription types are:

• Freemium. This type offers the basic functionality of the product for free and charges for professional use. Notion is a great example of this: the note-taking app is free in its basic functionality, and if you want to upload larger files, fine-grained permissions, or have version history, you need to start paying. SaaS businesses like this usually have limits in place to prevent abuse of the free tier.
• Fixed fee. This is your basic SaaS: one price fits all. Basecamp offers its product at $99/month. While they also provide a free version, what is significant about this pricing is that it doesn’t scale with usage. No matter if you’re a 5-person shop or a 500-employee company, you pay $99 a month. The more you use it, the more you save. This can be very enticing to your prospective customers, but it also means you need to be able to pay your operating expenses from your single fixed price.
• Tiered fixed fee. Most SaaS businesses offer tiers, because they allow them to offer different levels of service to different kinds of customers. Even if you have a very well-defined customer, you can offer them a choice and accommodate different budgets. This is a very flexible pricing model that you can easily adjust by introducing new plans and retiring old ones.
• Pay-per-seat. Instead of paying a fixed price, your customer pays for every person using the software. This scales well with businesses that make more money the more employees they have, like call centers or sales divisions. For prospective customers with a value metric independent of headcount —consider that WhatsApp only had 35 engineers when they sold to Facebook and only has 50 engineers today, serving a billion users— you might go better with another pricing scheme.
• Pay-as-you-go. This model works best with usage-centric value metrics. The more your customer uses your product, the more you charge them. Every time they use your SaaS to render a marketing video, they incur a small cost. They can pay via credits or end-of-month variable invoices.
• Custom. Finally, there are outliers that either combine the models above or use a different model entirely. Some SaaS offer tiers that have limitations, which turn into pay-as-you-go for anything above the threshold. Other SaaS businesses have tiered per-seat pricing, like Figma, that offers different sets of features and charges for every user within that organization along those tier prices. There are document verification businesses out there that require a minimum payment per month and then charge a small amount per document beyond that as pay-as-you-go. Everything is possible.

Finding that value metric and the right subscription type for it is essential to understand how much value you can deliver and how much to charge for it. It will involve quite some experimentation to get it right, but it’s usually a good bet to start with a simple fixed three-tier pricing model. You can always complicate it later, but this is the most flexible starter option.

Target Market

The industry you serve also plays a huge role. The rule of thumb is that your prices should fit within the expectations of the people in your field, which usually means charging similarly to the existing competition.

Now, not all competitors are businesses just like you own. Sometimes, you compete with more general solutions like Google Sheets or regular old pen & paper. It will require a lot of time-saving functionality at a no-questions-asked price to convince someone who has been using (mostly) free tools all their professional lives to switch to your paid solution.

Most markets inherently understand that a good solution to a problem is worth paying money for. But other markets are hesitant to pay for anything due to financial pressure or lack of positive experiences.

As a podcast host, I have no trouble paying hundreds of dollars monthly in SaaS fees for all my hosting, marketing, and production needs. I know it’ll come back ten-fold in book sales and sponsorship deals. But when my partner and I built FeedbackPanda, a productivity SaaS for online teachers, we learned that charging more than $15 a month would not work, as most online teachers were already working a second or third job and couldn’t afford such an expense.

Budget and purchasing agency differ wildly between markets and actors within them. Who you want to serve and what they expect will heavily impact your pricing model.

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The Kinds of SaaS-able Businesses

​John Warrillow wrote about nine kinds of businesses that lend themselves to a subscription model in his book “The Automatic Customer,” and most of them are great candidates for a SaaS approach:

• 1) The Membership Website Model. When you offer exclusive knowledge, resources, and services that people need on an ongoing basis, you can turn your service into a membership-based platform. A considerable part of this kind of service is the community within and the information they collect and curate, usually in a highly-defined niche. Several professional fitness coaching associations revolve around a monthly membership payment and facilitate access to guides ranging from building a coaching business down to individual exercises. SaaS businesses will want to offer more than mere membership in a community. With the fitness coaching business as an example, consider offering both a vibrant and insightful community as well as software tools that help them with booking clients and organizing their workouts—that kind of unique value proposition is where SaaS shines the brightest.
• 2) The All-you-can-eat Library Model. Think Netflix or Spotify. You offer a subscription to an almost unlimited amount of potential content or services, and your customer pays a fee for access. Whenever your offering is heavy on content, consider this model. This works particularly well for content marketplaces and platforms: most online teaching services such as Skillshare create no content of their own but connect those who teach with those who learn. Skillshare charges a flat monthly fee for access to all lectures on the platform and pays out creators by how much their work was watched. Their product is a discovery, hosting, and consumption platform for video content delivered through a browser. You’ll find plenty of opportunities for a software platform such as this.
• 3) The Private Club Model: Similar to the membership website, the private club model focuses on creating a paid community. But unlike the membership site, private club businesses are often very high-touch and create a highly exclusive offering. This makes them less interesting for SaaS businesses, but they can be great customer funnels for high-value SaaS offerings through partnerships and affiliate deals.
• 4) The Front-of-line Model: Usually as part of a larger offering, SaaS businesses allow customers to pay a premium monthly fee to receive priority support or generally a better service than regular customers. Fixed-tier pricing models often include this as a differentiator. Regular customers get an email response within a work day; premium subscribers get it within the hour. SalesForce, Amazon Web Services, Google Cloud: all these SaaS companies offer front-of-line plans for their support and implementation services. This won’t be enough to build a standalone SaaS business, but it can be a crucial component in your monetization strategy.
• 5) The Consumables Model: Some people out there are still reading newspapers. And many of them get them delivered to their home on a daily or weekly basis. This is one of the oldest subscription models, and it has prevailed to this day. eCommerce is big on subscription purchases, and giants like Amazon push subscriptions for consumable items like paper towels or toothpaste whenever you visit their stores. While this model isn’t very compatible with Software-as-a-Service as most SaaS businesses don’t sell tangible items, it’s still fascinating to study the companies that thrive on it: the Dollar Shave Club used a membership model combined with delivering high-quality consumables so efficiently that they got acquired by Unilever for a billion dollars in 2016 — 5 years after founding the company. The lessons about customer retention, a clear focus on their most profitable customers, and genuinely creating community among their users are worth learning and applying to your own business.
• 6) The Surprise Box Model. Similar to consumables, surprise boxes deliver tangible things to people regularly. Many puppy owners have new toys and treats delivered to their homes every month, keeping their dogs entertained and happy without having to go to the pet store and pick from the many options. Again, this might not be the most SaaS-friendly model as it involves items, packaging, and logistics, but it hints at another deeply-seated human need: we will pay someone to make hard choices for us. There are thousands of toys for puppies out there. I’d rather have someone pick and choose for me than spend hours doing “research” on something my pup will gnaw through within a few days anyway. In the surprise box model, you pay as much for the box as you pay for the surprise. Curation is the key to retention, and that’s something you can use in your content marketing efforts: your SaaS will be extra sticky with your customer if you keep delighting them with hard-to-source insights and impactful tactics and strategies to get their work done better.
• 7) The Simplifier Model. This is the most likely candidate for a SaaS. Whenever you see a commonly shared problem that people experience all the time, there’s a chance that they’ll spend money to make it easier for them. I pay for dozens of such services because they make my work life bearable: Descript speeds up my video editing, Notion keeps track of my thoughts, and Hypefury schedules my tweets while I sleep. Each of these tools makes a daily task more manageable and less time-consuming. I have a very clear budget for this, as it’s affecting how much content I can reliably produce. That’s all there is to the simplifier SaaS: if you can create more value for your customer than you charge by solving a validated problem for a validated audience, you have a business. Most Software-as-a-Service companies work like that.
• 8) The Network Model. The network effect can be incredibly powerful: the more people use a system, the more interesting it becomes for a new prospect to join it. Consider the phone network: if there were only 20 people around the world owning a phone, getting one wouldn’t make much sense. But if everyone on the planet can be reached, it’s a no-brainer. Setting up such a networked system can be a great business model. WhatsApp is such a business: the more people have their messenger app installed, the more their network can do. While it’s unlikely that your calm SaaS will explode in popularity like WhatsApp, it can definitely contain features that generate network effects: allow your customers to collaborate and teach each other. Building a community around empowerment and exchanging resources can turn your Simplifier SaaS into a robust Networked Simplifier business. Networks can leverage word-of-mouth marketing very effectively because it can reliably create win-win situations: existing customers know that inviting new prospects makes their network better, and those new potential users get immediate access to all the accumulated knowledge of those who invited them.
• 9) The Peace of Mind Model. Finally, let’s look at a version of the Simplifier Model: the “insurance” SaaS. Instead of solving a critical problem that occurs all the time, you make sure that when something critical happens, your customer knows that it’s being taken care of. Backblaze is a cloud backup service that allows you to stream fully encrypted backups of your computers onto their servers. You pay a monthly fee to know that whenever you need to reinstall your operating system or find an old file, you know that Backblaze will make it possible for you. You don’t have to organize hard disks or ensure your backups are complete: Backblaze takes care of that for you and allows you to sleep soundly. I run a similar service for authors who want to prevent link rot in their books. PermanentLink monitors the URLs writers put into their books, alerts them when they break, and automatically redirects readers to an archived version. I built this SaaS solution because I needed it for my own work. Many other writers have similar issues and will pay for peace of mind.

Not all of these models are prime suspects for a successful SaaS, but they are all compatible with a software-enabled business. A community can have a SaaS product attached or vice-versa. For example, Hypefury, a Twitter scheduling SaaS tool, has a community of like-minded marketers exchanging tips and tricks on how to build an audience. MicroAcquire is a business acquisition marketplace with software tools for a successful due-diligence process. It generally pays off to mix and match these business models.

Any model you can successfully implement into your SaaS will strengthen your value proposition. If you can simplify someone’s life while also offering them peace of mind should things go wrong, your product moves one step closer to becoming a critical tool that people will pay for for years.

For a calm SaaS business, I recommend focusing on building something that:

• simplifies your customers’ lives because it solves a recurring problem reliably,
• builds a sense of community and allows customers to exchange resources and empower each other —either within the product or outside of it—,
• and promises reliability and stability that gives peace of mind to your customers.

All these slightly different models of subscription businesses show that you can build long-term relationships with your customers for many reasons and in many ways.

Your job is to find the right mix of problem, solution, and business model to make it a viable business.

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