For SaaS companies, successful monetization requires far more than just pricing products appropriately. Monetization has to not only achieve a good rate of customer acquisition but also retain customers and keep them loyal.
Monetization is a driving force for growth among SaaS companies
Data from Price Intelligently shows that among over 500 SaaS companies surveyed, monetization had a bigger impact than acquisition and retention at improving growth.
Interestingly, they also found that the majority of 10,000+ blog posts on the topic of 'SaaS growth' were about acquisition - not monetization!
This demonstrates that there is a mismatch between the data and the marketing tactics currently employed by many organizations in the sector.
So, here are some top tips on how to successfully monetize your products:
Offering free trials
Customers have full or partial access to your product for a limited period, like 30 days.
Once that period has ended, the customer must pay for the product to continue using it and/or to have full access to the product's features.
This is a popular monetization strategy in the SaaS sector
The financial services and software firm Stripe says that many SaaS companies selling low-touch products have ‘customer success' teams whose priority is to get more users of free trials to onboard and convert to paid-for models.
After all, SaaS business revenue is based on the number of customers acquired times the (average) total revenue of each customer.
If your free trial includes full access to your product, your customers get a hands-on experience of all the features of your service. This differs from a freemium model, in which you won’t have access to all the product’s features unless you pay for the premium model.
Studies have found that free trials with credit cards are an excellent way for B2B SaaS companies to monetize. Free trial to paid conversion rates hover somewhere between 10-25%, but this figure can go as high as 50% with the right payment model.
Most B2B SaaS companies offer a free trial. Those that don’t stand to lose customers who want to de-risk their purchase by trying before they buy. As a SaaS company, offering a free trial is no skin off your back and it could be a money-spinner.
The freemium model
Unlike free trials or demos, freemium models are always free.
However, the customer will not have access to the full suite of services available to those paying for premium versions.
For example, for the home market, Microsoft OneDrive provides up to 5GB of storage in its freemium model, but up to 6TB of storage for its premium Microsoft 365 Family model, which, as of 2021, costs £79.99 a year.
That means the most-premium model offers 1,200 times more storage space than the freemium option, for only about £6.67 a month.
Freemium to paying conversion rates generally hover somewhere between 2-5%. These figures are based on research by Harvard.
That low conversion rate figure can be increased by giving Freemium customers access to premium features for a limited time only, such as 48-hours. It works because people don’t know how much they need and enjoy something until it’s gone!
Freemium models are particularly effective for people who are unsure whether your product is right for them
With a freemium model, customers can start experimenting with your product for free, then if they like it, they can upgrade to your paid model.
When that happens, your conversion rate will increase.
But in the absence of a freemium model, those users might not have taken the gamble of paying for a product they were not sure they would benefit from - or they might have signed up for a free trial that didn’t give them enough time to decide if your product is right.
Freemium models can lead to high conversion rates
Slack is one of the most successful examples of how a freemium model can help a SaaS business grow. By 2014, its free-to-paid conversion rate was 30% - far higher than the 2-5% average conversion rate for all freemium services!
However, if your customers are so satisfied with your freemium service that they have little incentive to upgrade, then that will translate to a much lower conversion rate. In which case, you will have to determine whether a freemium model is sustainable.
Your pricing strategies should also reflect the stage of your company's growth
If you are in the early stage of growth, you may have yet to define your ideal customer/buyer personas. This is when you should focus on building trust and reaching out to as many market segments as possible, rather than focusing on one.
As your business continues to grow, you'll need to pay more attention to pricing and monetization. For example, you can determine the ratio of Lifetime Value to Customer Acquisition Cost to figure out how efficiently you acquire customers and how much total return you get for each acquisition.
Later, you'll need to adjust your prices to different markets and keep a close eye on your customers' habits and changes in the market landscape.
How much are your customers costing you?
To work this out, simply divide the total cost of your sales and marketing by the number of customers acquired. This is referred to as the customer acquisition cost formula (CAC).
Remember that higher-spending customers, like large businesses, will have a higher CAC than smaller companies spending far less on your products.
Other monetization strategies to consider for your SaaS business
- Sponsorships: brands that are related to your business could sponsor your product
- Service fees: similar to those charged by PayPal, Upwork, etc
- One upfront payment: which may offer more value for money to the user than a pay-monthly/quarterly model
- Ads: These may be more appropriate for a freemium model, in which customers might expect ads. However, advertisements in a premium model may need to be far less intrusive and more relevant to the customer (or it may not be appropriate to have ads in a premium service at all)