Imagine you need software.

In the old days, you’d buy a shiny CD, install it on your computer, and pray it doesn’t crash. Fast forward to today—welcome to SaaS, or Software as a Service. 

If you’ve ever used Slack, Mailchimp, or Shopify you’ve experienced the power of a SaaS product. They’re simple, flexible, and always up-to-date because instead of lugging around CDs (or downloading hefty files), SaaS delivers applications over the internet. 

They’re delivered over the cloud to any device with internet access while traditional software is stuck on your computer. Because of that, it opens up businesses to new cost models (they can get you to pay monthly for Netflix vs. buying Blu-rays at a one-time cost). But that’s because with SaaS, the business handles all the constant heavy lifting—updates, security patches, maintenance—while you get to kick back and enjoy the flexibility of accessing your tools from anywhere, anytime.

As a Product Manager, understanding the SaaS terrain is crucial. Let’s explore the common SaaS business models, each with its unique strengths and pitfalls.

The Subscription-Based Model is probably what you’re most familiar with. It’s simple: users pay monthly to access the platform. For businesses this is great because it offers steady, predictable revenue, so it's easier to manage the cash flow. But businesses that use this model are under a lot of pressure because if they don't provide value every month they will lose customers rapidly. 

Then there's the Freemium Model which has a lower barrier to entry and it has potential for a massive user base because who doesn't want anything for free. Users sign up to use your product for free, and after you get people in the door you try to upsell them. But that's where the tricky part is. If you have tons of free users then you have to cover their cost of using your platform and converting them to paying users can be very difficult.

The Pay-As-You-Go (PAYG) model is very flexible and aligns costs with actual usage. Instead of paying a fixed fee, users only pay for what they use, which is ideal for users that might have fluctuating or unpredictable needs. On the downside, revenue can be unpredictable for the business since it depends entirely on customer usage. 

The Tiered Pricing Model offers different pricing levels or "tiers" that provide varying features or services. This model is excellent for targeting multiple customer segments with different needs and it’s great for upselling because users can move up to higher tiers as their needs grow. However, it can sometimes confuse customers. It can be tricky conveying the clear value differentiation between each tier. 

Lastly, there’s the Per-User Pricing Model. This is when you charge customers based on the number of users accessing the software. It's straightforward and scalable. The cost simply increases with each additional user. The main downside is that the model heavily relies on the customer’s user expansion for revenue growth, which can be a slow process depending on the customer’s growth rate.

Honestly, some companies combine multiple models. One I hate the most is Intercom. They seem to have a freemium-multiple tiered pricing with subscriptions for each feature and then per-user pricing under different segments of the business. It gets confusing…but hey, works for them.

The ideal SaaS handles recurring billing, renewals, upgrades, downgrades, and cancellations seamlessly. They use tools like Stripe, Chargebee, or Zuora to automate these processes and provide customers with self-service portals for a smooth experience, freeing the business to focus on growth.

But the question is: what do you charge?

When it comes to price discovery, there’s a few lenses to look through as you do your experiments:

1. Value-Based Pricing: Price aligns with the value you deliver. Requires deep customer insight and constant validation.
2. Cost-Plus Pricing: Add a markup to your costs. Simple but might ignore what customers are willing to pay.
3. Competitive Pricing: Set prices based on what competitors charge. Good for market penetration but beware of price wars.
4. Penetration Pricing: Start low to gain market share quickly, then hike prices gradually. Perfect for startups looking to make a splash.
5. Feature-Based Pricing: Different tiers based on feature sets. Flexible and caters to diverse customer segments.

Congratulations! You’ve just built the foundation of your SaaS knowledge. Understanding what SaaS is, its key differences from traditional models, the various business models, and the essentials of subscription management and pricing strategies are your first steps toward SaaS mastery.

But wait – there’s more! Stay tuned for Part 2, where we’ll dive deeper into the metrics that matter and strategies to acquire and retain customers like a pro. Until then, keep those gears turning and get ready to elevate your product management game!

Stay creative,

Way Walker