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Draft

03/10.9

SaaS Revenue Modeling:


Details of the 7 Revenue Streams
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Legacy Software

Customers Developers

Channels

Three basic elements


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Software-as-a-Service (SaaS)

Customers Developers

Channels

Same elements
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Software-as-a-Service (SaaS)

Producers Consumers

Ecosystem

Different approach
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Software-as-a-Service (SaaS)

Producers Consumers
Network
Effect

Ecosystem

Very different approach


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Software-as-a-Service (SaaS)

Producers Consumers
Network
Effect

Key
differentiators
Ecosystem

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The goals for a SaaS vendor should be different than a
Legacy Software vendor

Producers Scalable Revenue Streams Consumers

Understanding why* allows


for proper Revenue Modeling
*business scalability, increased CLV, leveraging multi-tenancy, etc.

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Legacy Software Business Structure

Intellectual
Marketing
Property

Technology Revenue
Model

Loosely-coupled, at best
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Integrated Business Architecture

Intellectual
Marketing
Property

Network
Centricity

Revenue
Technology
Model

One core piece of technology must be able to support


multiple revenue streams with different pricing and
distribution methods for multiple market segments.
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Revenue Model

Products
Marketing Intellectual
Property Recurring Ecosystem
Network Network
Centricity Effect
Services Advertising
Technology Revenue
Model Ancillary

Revenue Model consists of Revenue Streams


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SaaS is not a Revenue Model or Pricing Strategy!

SaaS
≠ Monthly
Subscriptions

If you only leverage “subscriptions” you


are leaving money on the table

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Architecture Marketing

Revenue Pricing
separate
Model Strategy

Understand where each piece fits into


the overall SaaS Business Architecture

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Pricing Strategy must be
separated from Revenue Streams

Revenue Pricing
separate
Model Strategy

Pricing Strategy is applied to customer-facing portions of


the Revenue Model

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How can you apply Pricing Strategy without
knowing what Revenue Streams you’ll leverage?

Revenue Pricing
separate
Model Strategy

Use Pricing Strategy to drive users to


Scalable Revenue Streams

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Agile Revenue Generation is key...

Architecture Marketing

Revenue Pricing
separate
Model Strategy

Revenue Model + Vertical Specific Pricing = Agility

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7 SaaS Revenue Streams

Products

Recurring Ecosystem
Network
Effect

Services Advertising

Ancillary

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Less Scalable Revenue Streams

Products

Recurring Ecosystem
Network
Effect

Services Advertising

Ancillary

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Scalable Revenue Streams

Products

Recurring Ecosystem

Network
Effect

Services Advertising

Ancillary

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Traditional Marketing Mix

Revenue Intellectual
Model Property Product Price
Network
Centricity Marketing Mix

Technology Marketing Place Promotion

Price is a function of Marketing, which is


applied to in-built Revenue Models

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Revenue Model
Primary Revenue Stream can be any of the
available seven and depends upon a
multitude of factors including market
alignment & level of funding

Marketing Intellectual
Property Primary Revenue
Network
Stream
Centricity

Technology Revenue Secondary


Model Revenue Streams

Revenue Model consists of


Primary & Secondary Revenue Streams
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Revenue Metrics

Modules Users Storage

CPU Units Reports


Products
Transactions Files etc. Metrics
Recurring Ecosystem

Network
Effect
Services Advertising
In SaaS, metrics are built into the application;
This is a key differentiator from Legacy or ASP Models Ancillary

Each revenue stream contains metrics


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Revenue Metrics

Metrics

Pricing Bundle #1 Pricing Bundle #2 Pricing Bundle #3


Modules Users Storage Modules Users Storage Modules Users Storage

CPU Units Reports CPU Units Reports CPU Units Reports

Transactions Ads etc. Transactions Ads etc. Transactions Ads etc.

Metrics from any or all revenue streams that are


represented in the application are bundled, along with
timeframes (monthly, annual, etc.), during Pricing
Strategy based on marketing goals

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Revenue Metrics

Metrics
Different bundles for different market segments

Pricing Bundle #1 Pricing Bundle #2 Pricing Bundle #3


Modules Users Storage Modules Users Storage Modules Users Storage

CPU Units Reports CPU Units Reports CPU Units Reports

Transactions Ads etc. Transactions Ads etc. Transactions Ads etc.

Separating Revenue Model & Pricing Strategy improves agility


and allows pricing to be aligned with market requirements;
critical when tightly focusing on a target market segment or
when entering adjacent markets

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Revenue Metrics

Metrics
Different bundles for different market segments

Pricing Bundle #1 Pricing Bundle #2 Pricing Bundle #3


Modules Users Storage Modules Users Storage Modules Users Storage

CPU Units Reports CPU Units Reports CPU Units Reports

Transactions Ads etc. Transactions Ads etc. Transactions Ads etc.

But what are these metrics? How are the pricing


bundles determined? These are tied to your company
and your market!

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Key Concepts in SaaS Revenue Modeling

Move any repeatable


SaaS is about Rules, processes common to
not Exceptions all clients into the SaaS
application

Critical to focus as Be aware of all revenue


much on revenue streams when
streams beyond the architecting system
application as within even if they will only
the core product be used in the future

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Revenue Stream Scalability Index

Symbol Definition

Scalable Revenue Stream

Less-scalable Revenue Stream

Not Scalable in most cases

Scalability refers to margins per revenue stream; the more a revenue


stream can benefit from economies of scale & improve margins with
growth, the more “scalable” the revenue stream. Its not possible to
eliminate all of the non-scalable streams (nor should you), but their
value should be improved and the price charged should reflect that.
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Products Recurring
Recurring Ecosystem

Network

Pros Cons
Effect

Services Advertising

Ancillary

1-Infinity Scaling Revenue Recognition

-Examples - Captive Audience for upsell High initial CAC


Subscriptions
Per User, Per Churn / Customer
Predictable revenue stream
Month Retention
Per Transaction
Flexibility in pricing for
Usage-based different markets
No large up-front payments
Capacity-based
Pre-paid Credits Downside guarantee on Cannot be idle; must focus
CLTV on CLTV/ARPU growth

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Products Ecosystem
Recurring Ecosystem

Network
Effect

Services Advertising

Ancillary
Pros Cons

Unwanted
1-Infinity Scaling interdependencies can
-Examples - grow if unchecked
Affiliate Sales Improved value for Lack of visibility into value
Channels ecosystem partners chain for clients
APIs
White Label Exposure to ancillary &
Need to market to end-
Licensing users to create demand in
adjacent markets
front of channel partners

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Products Ancillary
Recurring Ecosystem

Network
Effect

Services Advertising Pros Cons


Ancillary
Some options are complex
Super margins
and not applicable early
Overuse of add-on “fees”
-Examples - Often not tied to any
can hurt other revenue
underlying cost
Processing Fees streams
Setup Fees Discounts / Float are tied
Other Fees directly to the proxy You can really turn away
Discounts nature of the SaaS vendor clients by nickel & diming
in a Multi-tent them with fees that have
Float environment and have no no underlying value
direct exposure to the associated with them
clients

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Products Network Effect
Recurring Ecosystem

Network
Effect

Pros Cons
Services Advertising

Ancillary

Fully leverages data collected in Privacy concerns require


multi-tenant environment disclosure of intentions by vendor

-Examples - An asset that increases


Requires planning up front an
execution early on data collection
Anonymized/ exponentially in value as usage of
otherwise value is lost until
the system grows linearly
Aggregate Data capture begins

Reports Leverage ecosystem partners to


develop reports or add value to
Vendor must be diligent in
adhering to regulations,
Benchmarks data through APIs governance, and privacy laws

APIs Does not require a “critical mass”


Careful planning to determine
when network effect data
of users as many think for
becomes valuable & to whom
network effect data to be valuable
required

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Products Products
Recurring Ecosystem

Network

Pros Cons
Effect

Services Advertising

Ancillary
Can be high margin Requires capital to produce

Can produce vendor lock-in 1-1 or 1-few on each transaction

-Examples - Can develop ancillary revenue


Support costs are high
Equipment streams
Logistics, supply chain
Devices Will improve value of Network management, returns, support,
Appliances Effect Data through automation etc. add to overhead in dealing
with hardware
Hardware
Inbuilt support for channel
relationships can allow the
Installation & support are difficult
hardware partner to integrate
(OEM) the product w/SaaS

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Products Services
Recurring Ecosystem

Network
Effect

Pros Cons
Services Advertising

Ancillary

Core-competency for professional


services companies moving to 1-1 or 1-few
SaaS
-Examples - High price Exception, not rule-based
Programming
Installation Often high-margin
Human-centric and humans don’t
scale efficiently
Content
Creation When more repeatable processes
are inbuilt to SaaS application, Takes away resources from more
Training services in less demand, but can working on more scalable revenue
be more expensive since they are streams
more specialized

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Products Advertising
Recurring Ecosystem

Network
Effect Pros Cons
Services Advertising (mostly tongue-in-cheek) (all serious)
Ancillary

You don’t have to convince people Ads for SaaS products are part of
that your product has value a hope-based strategy

Ads only work when they You don’t have to manage cash
are the main revenue De-values core product
flow
stream and not an
afterthought. When ads
work, the main customers Clients don’t have to pay you to Difficult to plan and forecast sales
of the company are the use the product you built (impressions? clicks?)
advertisers and the revenue
generated is part of the There are close to 3B sets of
Too much inventory (each screen)
recurring revenue stream eyeballs, if you only get 1% of
and not enough demand
those to click...

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Wait... what about Free? If you have to ask...

Download the Reality of Freemium in SaaS paper (PDF) today!

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Appendix A:
Case Studies in SaaS Network Effect &
Ecosystem Revenue Modeling

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Quick Start Sessions
SaaS Case Studies

SaaS Product Description of the SaaS offering

End-Customer Description of the SaaS vendor’s end-customer

Who did the end-customer buy from, listen to, etc. that the
End-Customer’s
SaaS vendor could leverage, and help, in an effort to secure the
Trusted Advisors
end-customer relationship

What benefits the clients derived from the network centricity


Network Effect
of the SaaS solution, including aggregate data

How the Vendor derived value from, and added value to, its
Ecosystem
ecosystem, including VARs, SIs, Distributors, etc.

Revenue Streams How the Vendor makes money

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SaaS Case Study #1 - SCM/EDI Vendor
SaaS Product Retail Supply Chain / EDI

End-Customer Small to Medium Consumer Packaged Goods manufacturer

•Big Box Retailers


End-Customer’s •Freight Brokers
Trusted Advisors •Third-party Logistics Providers
•Manufacturers reps

Benchmarks on retail category performance available to all of


Network Effect
the end-customers’ Trusted Advisors

Pre-built EDI maps, access to discounted & expedited shipping,


Ecosystem
visibility for intermediaries and interested parties

Recurring (monthly & per-transaction), Ecosystem, Network


Revenue Streams
Effect Data, Services

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SaaS Case Study #2 - Pharmaceutical Distributor

Vendor Managed Inventory Control System (internal product


SaaS Product
re-architected & exposed as SaaS)

End-Customer Fragmented network of small independent pharmacies

•Pharma Distributor that created the SaaS product


End-Customer’s •Industry Association
Trusted Advisors •Product Suppliers (whom the Distributor buys from; value-
pull)

Sophisticated inventory system allows distributor to aggregate


Network Effect
order history and current inventory for all pharmacies

Use aggregate data to predict restocks, share that w/ vendor


Ecosystem
to get better terms for the pharmacy client
Ancillary (float interest), Ecosystem (distributor commissions),
Revenue Streams improved margins), Network Effect Data (suppliers pay),
Services, Products (hardware device)

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SaaS Case Study #3 - Healthcare Revenue Cycle Mgmt
SaaS Product Revenue Cycle Management

End-Customer Fragmented network of small independent hospitals

•Hospital Industry Associations


End-Customer’s •Independent Consulting Firms
Trusted Advisors •Complementary Software Vendors
•Insurance companies and Government Payors

Revenue & Collection Benchmarks against similar-sized


Network Effect
Hospitals (per-bed)

Medicare, Medicaid, and Commercial Payer clearinghouse,


Ecosystem Channel partners
(visibility into their customers’ usage of system)

Recurring (per-transaction, % collected), Ecosystem, Network


Revenue Streams
Effect Data, Services, Products

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SaaS Case Study #4 - Restaurant Menu Management

SaaS Product Managed Care Menu Management (ancillary market)

End-Customer Small Assisted Living Facilities

End-Customer’s •Food Distributors


Trusted Advisors •Industry Association
•Assisted Living Management Companies

Aggregate menu item usage data to help negotiate better deals


Network Effect
for end-clients (through channel partners where applicable)

Directly monetized relationship with Food Distributor


Ecosystem (channel) to salvage unprofitable existing relationship w/o
getting in front of partner or negatively affecting end-client

Recurring (Annual per-location), Ecosystem (Distributor


Revenue Streams
visibility), Network Effect Data, Services, Products

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SaaS Case Study #5 - Mail Center Management

SaaS Product Mail Center Management & Package Tracking

End-Customer Large Corporate & Fortune 500 mailrooms

•Mailing Industry Associations


End-Customer’s •Shipping Carrier Auditors
Trusted Advisors •Industry Consultants
•Complementary Software and Hardware Vendors
Most Mail Center managers are in a position to justify their
existence so benchmarks against other Mail Centers helped
Network Effect
prove operational efficiency, Complementary vendors and
industry associations found data useful, too
shipment tracking, spend management & procurement, carrier
Ecosystem
audits

Recurring (per-transaction), Ancillary (carrier audits),


Revenue Streams
Ecosystem, Network Effect

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SaaS Case Study #6 - Treasury Management

SaaS Product Treasury & Cash Management

End-Customer Large Corporate & Fortune 500 mailrooms

•Industry Associations
End-Customer’s •Anti-Money Laundering Groups
Trusted Advisors •Banks
•Consultants
Aggregation of transactional details across industries, locales,
Network Effect etc. Benchmarks on interest, float, sweeps, etc. against similar
industries
Anonymous Aggregated (A/A) data used by Anti-Money
Laundering groups to “teach” their software patterns, Banks
Ecosystem
and Consultants leverage A/A of their clients & others in the
system to judge performance and offer guidance, upsell, etc.
Recurring (per user, per-transaction), Ancillary (float,
Revenue Streams brokerage/forex commissions), Ecosystem, Network Effect
Data

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SaaS Case Study #7 - Bank Spend Management

SaaS Product Bank Spend Management

End-Customer Local and Regional Banks & Credit Unions


•Industry associations
End-Customer’s •Local & Regional Printing Companies
Trusted Advisors •Complementary Software Vendors
•Office Supply vendors
Aggregate orders across bank branches allows vendors to
aggregate order history and current inventory for customers,
Network Effect
customers get group purchasing power through aggregation
under one SaaS vendor in addition to core product value
Office Supply vendors gain visibility into the buying behavior of
specific target market, complementary software vendors gain
Ecosystem
visiblity into transaction history of customers for inclusion in
their product
Recurring (per branch, vendor visibility), Ancillary, Ecosystem
Revenue Streams
(vendor commissions, API), Network Effect

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Appendix B:
Seven SaaS Revenue Streams Worksheet

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Seven Revenue
Streams Worksheet

Consumers Original Other Stand-Alone


Producers Producers Consumers

Recurring

Ecosystem

Network Effect

Ancillary

Products

Services

Advertising
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