Using the SaaS Recurring Revenue Model to Your Advantage

Planning your business strategy around an SaaS recurring revenue model requires thinking in a certain way from the beginning, but, also, about thinking of aspects to your SaaS that you may have overlooked at the same time. Using this model to ensure calculable results that can enable accurate fiscal forecasting is very effective, if somewhat of a proposition to accomplish.

With an SaaS recurring revenue model, you’re working around fully predictable recurring income from existing customers, as well as variable predictions from other revenue sources that are likely but not guaranteed. It’s not super easy to do this, but if you can pull it off, then you’ll do well with this kind of model.

For starters, you can’t depend entirely on ads or one time use customers if you want to base around recurring revenue. This kind of forces you into one of two kinds of sales and marketing philosophies, those being freemium adoption, or going pay only across the board.

As for a freemium model, where you have a free version, and a paid upgrade version, recurring revenue factors include things like sales from upgrades, renewals and any support ads that are in place to offset the overhead freemium brings with it.

However, the trick of that is, the freemium model’s ads are just that – ablation of overhead being passed onto customers. So, it’s best to not rely too much on that metric even here.

Now, with your model, you undoubtedly have a period of time a subscription is upheld, not a month to month plan (which is a defining point of recurring revenue). This means that, freemium or not, renewals and new sales are still constant variables.

The best thing to do is to encourage this mentality of long term contracts, so that users become dependable sources of revenue for a period of time. Sales and upgrades are not one hundred percent dependable, but are real factors to consider. These unpredictable variables are something which you target and set goals based around when dealing with marketing, loyalty initiatives and other such things.

Now, there are negative revenue issues to consider too, like churn. If you’re not yet familiar with the idea of churn, rest assured, you will be. Churn is the gradual loss of return customers (contracts not being renewed, or contracts being closed or canceled) that happens over a fiscal period of time. Abating churn, and overcoming incremental churn are major problems for growth of a service industry.

All metric-based models like this must contend with positive and negative influences, the yin and the yang, as it were. Where you have renewed subscriptions, upgrades and new sales, you have those who do not continue to renew, do not upgrade. These are also more dangerous factors because on top of being a quantifiable loss in a recurring revenue model, they can also boost competition as they take their business to competitors, in cases where churn wasn’t a direct loss of need.

So, it’s challenging to implement an SaaS recurring revenue model, but the dependability of it and the out of the box sets of metrics and factors it brings in more than make it up for it, if you do it right.

bnr4

Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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