Imagine owning a business with high-profit margins, monthly reoccurring revenue, and the ability to expand rapidly—sounds like a dream, right? Some of the greatest companies in the world utilize the software as a service (SaaS) model, and for good reason.
Entrepreneurs and developers pour countless hours into perfecting a useful software product but might skip the planning required to promote it. Unfortunately, having a good product isn’t enough.
In this guide, you’ll learn what an enterprise SaaS business model is, different model types, metrics to measure, and a deep dive into what advantages you’ll gain with the right strategy.
What Is an Enterprise SaaS Business Model?
Enterprise software as a service (SaaS) business model is a strategy used to sell cloud-based software to customers on a reoccurring basis.
There are countless iterations of SaaS business models that use different strategies to attract customers, such as:
- Freemium (Spotify)
- Storage Amount (Microsoft One Drive)
- Per-User (Asana)
- Processor Time & Data Transferred (AWS)
- Advertising (Google w/ Google Ads)
- Broker Fees (Robinhood)
- Project-Based (Basecamp)
- And many more…
Each highlights a different use case that can be tailored to suit the target audience.
Recurring payments are the foundation of enterprise SaaS business models—which is why customer loyalty is worth its weight in gold. Reoccurring payments ensure SaaS business models are repeatable, scalable, and profitable growth machines.
Customer Acquisition Models for Enterprise SaaS Business Models
SaaS companies use several models to attract and grow their customer base—some with upfront costs and others that forgo profitability to boost their subscriber count. Each of these models can potentially lower the cost of acquisition with the hopes of converting customers later.
Here are the most popular customer acquisition models SaaS companies are using today:
Acquiring customers without dumping cash in marketing and sales is obviously beneficial. But the opportunity cost of getting paying subscribers from the start is a head-scratcher that leaves SaaS companies asking, “Will free users choose a premium offering down the road?”
In a perfect world, the freemium model brings customers into the ecosystem and upgrades them to a premium tier once they try the product.
A company that has mastered this SaaS business model (for B2C and B2B) is Canva. Canva offers a free platform with thousands of customizable templates to design and create graphics online. But their premium service gives unparalleled customization and studio-quality imagery perfect for creatives of any sort.
Business customers, those who need more than promises, rely on free trials to align decision-makers on the usefulness of a product. The cost of acquiring customers for this model is low due to the low barriers to entry (free) and the minimal effort it takes to educate customers on how to use the product.
Amazon has mastered the art of the free trial with Amazon Prime. They’ve periodically offered a month for free (usually $119/annually) to get their customers hooked. Once you’ve subscribed, Amazon’s universe of free shipping, faster delivery times, video, and more is immediately available to your account. And if they raise the price tomorrow? Most people wouldn’t blink.
While it’s tough to compare any SaaS company to Amazon’s Prime membership, there are a few themes to consider:
1. Free trials should bring immediate value to the customer
2. Free trials work better with simplistic onboarding
3. Free trials can help sell expensive or “sticky” services because customers can preview the value
When hunting upmarket in the SaaS business—trying to acquire high-value customers—free trials and freemium models aren’t the most effective acquisition method. Many companies trying to sell their software to so-called “whales” of industry need sales demos to help them understand product fit and expectations.
These sales demos shouldn’t show how a SaaS product works; there’s a website for that. Instead, they put all parties involved in the purchase (typical of larger businesses) at ease. Demos should address customer pain points and provide a resolution through context.
One company with an epic track record of bringing in large companies is Salesforce. And while their sales demos used are likely proprietary, they’ve landed customers like Amazon Web Services, T-Mobile, and Spotify.
Key Performance Indicators (KPIs) to Watch
Launching an enterprise SaaS company and promoting it feels like trying to hit a moving target. Many companies discover they’re using the wrong model, mispricing the offering, or not providing enough value. In the discovery phase, measuring key performance indicators is essential. As Peter Drucker says, if you can’t measure it, you can’t improve it.
Here are a few metrics SaaS companies need to measure:
Lifetime Value (LTV)
Customer lifetime value is the projected amount of revenue received from a customer throughout the lifetime of a professional relationship. It can help companies envision future profitability and determine how much to spend on acquiring customers.
Cost of Acquiring Customers (CAC)
The cost of acquiring customers is the amount spent on marketing and sales divided by the number of customers acquired. This formula is compared with LTV to determine budget and profitability.
Monthly Reoccurring Revenue (MRR)
This metric is a combination of all predictable revenue every month. SaaS companies rely on MMR to show the growth of the business.
Churn is the percentage of customers who cancel their reoccurring revenue subscriptions. Breaking this KPI down into gross and net churn can provide different perspectives on the trajectory of growth.
Retention rate is how many customers sign up and continue using a SaaS platform. The higher the retention rate, the more predictable the revenue. Small increases in retention signify customers are happy with the product and can lead to upselling opportunities.
Pros of Having an Enterprise SaaS Business Model
Touted by some as one of the most lucrative business models in the world, SaaS companies have three distinct advantages:
1. Reoccurring Revenue
Guaranteed sales every month is a dream in every industry. SaaS companies gain transparency and predictability because of consistent cash flow.
2. Easy to Scale
All the predictable revenue generated from subscription services makes expansion a breeze. SaaS companies tend to have high margins, which allows them to funnel profits into expansionary marketing and sales.
3. Sticky Products
When businesses move onto a platform that accomplishes one or many daily processes—switching to another isn’t easy. Because SaaS services integrate with data and other software, they’re time-consuming and expensive to replace.
Enterprise SaaS Business Models Grow Your Business
It’s easy to see how entrepreneurs who master the enterprise SaaS business model can rapidly grow their business with the right tools and metrics. And while it’s tough to choose which model is best, making an informed decision then gathering data will lead to results. If you’re looking to take your SaaS company to the next level, consider getting the right tools to drive growth. Chargify is the #1 subscription and billing platform for companies that need precise accounting, in-depth business analytics, and agile subscription management. Take our software for a spin and see how we can deliver results with a Guided 30-day trial today!