7 SaaS Revenue Streams

Draft
03/10.9
SaaS Revenue Modeling:

Details of the 7 Revenue Streams
http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved
Legacy Software
Customers Developers
Channels
Three basic elements

Software-as-a-Service (SaaS)
Customers Developers
Channels
Same elements
Producers Consumers
Ecosystem
Different approach
Producers Consumers
Network
Effect
Ecosystem
Very different approach

Producers Consumers
Network
Effect
Key
differentiators
Ecosystem

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.

Legacy Software Business Structure
Intellectual
Marketing
Property
Technology Revenue
Model
Loosely-coupled, at best
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.
Revenue Model
Products
Marketing Intellectual
Property Recurring Ecosystem
Network Network
Centricity Effect
Services Advertising
Technology Revenue
Model Ancillary
Revenue Model consists of Revenue Streams

SaaS is not a Revenue Model or Pricing Strategy!
SaaS
≠ Monthly
Subscriptions
If you only leverage “subscriptions” you

are leaving money on the table

Architecture Marketing
Revenue Pricing
separate
Model Strategy
Understand where each piece fits into

the overall SaaS Business Architecture

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

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

Agile Revenue Generation is key...
Architecture Marketing
Revenue Pricing
separate
Model Strategy
Revenue Model + Vertical Specific Pricing = Agility

7 SaaS Revenue Streams
Products
Recurring Ecosystem
Network
Effect
Ancillary

Less Scalable Revenue Streams
Products
Recurring Ecosystem
Network
Effect
Ancillary

Scalable Revenue Streams
Products
Recurring Ecosystem
Network
Effect
Ancillary

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

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
Revenue Metrics
Modules Users Storage
CPU Units Reports

Products
Transactions Files etc. Metrics
Recurring Ecosystem
Network
Effect
In SaaS, metrics are built into the application;
This is a key differentiator from Legacy or ASP Models Ancillary
Each revenue stream contains metrics

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

Revenue Metrics
Metrics
Different bundles for different market segments

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

Revenue Metrics
Metrics
Different bundles for different market segments

But what are these metrics? How are the pricing

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

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

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.
Products Recurring
Recurring Ecosystem
Network
Pros Cons
Effect
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

Products Ecosystem
Recurring Ecosystem
Network
Effect
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

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

Products Network Effect
Recurring Ecosystem
Network
Effect
Pros Cons
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

Products Products
Recurring Ecosystem
Network
Pros Cons
Effect
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

Products Services
Recurring Ecosystem
Network
Effect
Pros Cons
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

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...

Wait... what about Free? If you have to ask...
Download the Reality of Freemium in SaaS paper (PDF) today!
http://saasrevenue.com Copyright© 2009 Sixteen Ventures / Lincoln Murphy. All Rights Reserved
Appendix A:
Case Studies in SaaS Network Effect &
Ecosystem Revenue Modeling

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

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

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)

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

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

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

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

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

Appendix B:
Seven SaaS Revenue Streams Worksheet

http://sixteenventures.com
Seven Revenue
Streams Worksheet
Consumers Original Other Stand-Alone

Producers Producers Consumers
Recurring
Ecosystem
Network Effect
Ancillary
Products
Services
Advertising
Copyright© 2010 Sixteen Ventures. All Rights Reserved
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Strategy, Distribution or other SaaS Business Strategy
issues contact Sixteen Ventures and get started today!
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Draft

SaaS Revenue Modeling:

Three basic elements

Very different approach

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Producers Scalable Revenue Streams Consumers

Understanding why* allows

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

One core piece of technology must be able to support

Revenue Model consists of Revenue Streams

If you only leverage “subscriptions” you

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Understand where each piece fits into

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Pricing Strategy is applied to customer-facing portions of

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Use Pricing Strategy to drive users to

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Revenue Model + Vertical Specific Pricing = Agility

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Technology Marketing Place Promotion

Price is a function of Marketing, which is

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Technology Revenue Secondary

Revenue Model consists of

Modules Users Storage

CPU Units Reports

Each revenue stream contains metrics

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

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

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

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

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

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

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

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

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Move any repeatable

Critical to focus as Be aware of all revenue

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Scalable Revenue Stream

Less-scalable Revenue Stream

Not Scalable in most cases

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

1-Infinity Scaling Revenue Recognition

-Examples - Captive Audience for upsell High initial CAC

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Services Advertising Pros Cons

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved

Fully leverages data collected in Privacy concerns require

-Examples - An asset that increases

Reports Leverage ecosystem partners to

APIs Does not require a “critical mass”

http://sixteenventures.com Copyright© 2010 Sixteen Ventures. All Rights Reserved