The Impact of SaaS on the Business Model

Things change and times change.  The business world is certainly no exception.

How a business sells its goods, and how people receive and pay for those goods have shifted dramatically over time.  The business model (below), by Winning by Design, provides an excellent illustration of this.

The SaaS Business Model Overview

This vertical agnostic, B2B-centric business model exists on a continuum.  Within that continuum, your business will fit into one of three categories:  

(Perpetual) Ownership Model

• Utilizes large, upfront payments
• Payments made years apart
• The buyer owns the product

Subscription  Model

• Relies on monthly and/or yearly renewals

Consumption Model

• Only pay for what you use
• No cure/no pay or “freemium” services
• Sales teams not necessary
  
  

The Evolution of the Business Model

Because the business model exists on a continuum, there will be small, almost imperceptible, differences within a given model, but the opposite ends of the business model itself (perpetual ownership and consumption) will represent polar extremes. 

On the far left side is the (perpetual) ownership model and on the far right, the consumption model.  The subscription model is in the middle and serves not only as a model itself, but also as somewhat of a transition stage on its outermost edges.  

For example, when a business that exists as an ownership model begins to shift from selling a product/service every five years or so to every two years, it moves closer to the edge of the subscription business model.  Likewise, when a business that exists as a subscription model slowly transitions from selling their product yearly/quarterly to monthly, they begin to move to the edge of the consumption model.  

The (Perpetual) Ownership Model (1980s-1990s)

The ownership model was a product of the times it existed in.  In the early 1980’s, both the Internet and business accounting software systems like NetSuite were still years away.  Because of this, there were essentially no other options or model types.  

The first ownership model was on-premise hardware.  This entailed selling large pieces of hardware to industries such as manufacturing and healthcare.  These were purchases that were being made once every five years or so (think MRI machines in the healthcare industry) and came in extremely large bursts.

The ownership model evolved slightly in the 1990’s with the arrival of perpetual software.  In this instance, you would buy a software license (e.g. Microsoft Office) and have access to some form of software for a given amount of time, usually a year or so.  This began a subtle shift toward the subscription model that took off with the rise of the Internet.

The Subscription Model (early 2000’s-2010)

In the early 2000’s, SaaS came to dominate the landscape.  SaaS companies offered a new way to go to market by selling subscriptions where you could pay annually, quarterly, or even choose to be on a monthly contract.  

Hence, the subscription model.  A far cry, to say the least, from spending tens of thousands of dollars four or five years apart as what was dictated by the on-premise hardware ownership model.  Not surprisingly, this became extremely popular.  

The Consumption Model (2010-2020’s)

Subtle shift after subtle shift culminated in the birth of the consumption model right around 2010.  This model had not even been possible up until this point, but with the arrival of enterprise resource planning systems, the ability to track usage (and payment accordingly) on a weekly, daily, hourly, or even by-the-minute basis made it a reality.  This model often employs product-led growth as a GTM motion for sales.

Effect of the Business Model on Metrics

Each of the above models has an effect on metrics.  Because the business model exists on a continuum, the greatest differences in these metrics will be seen on the opposite ends of the arc, which are represented by the (perpetual) ownership and consumption models.  The contrasts will not be as pronounced within a given model or in adjacent models. 

Sales Cycle & Average Contract Value (ACV) 

Ownership Model 

Bottom line up front:  if you work in sales in an ownership model-type business, it’s time to put your workin’ boots on! 

The Ownership Model, which operates primarily through large, upfront payments, has a sales cycle typically ranging anywhere from nine to eighteen months (this is, in contrast to other models, very long).  With reference to ACV, these are typically very large accounts that already have budget approval.  

These factors will have a dramatic effect on sales team structure and approaches to sales ramp time.  When a deal takes a year or longer to close, decisions related to how you decide to ramp and pay your sales team can be precarious at best.  

Subscription Model 

The diverse payment structures (multi-year, annually, quarterly, or monthly) employed by the subscription model are reflected in the wide ranges of the sales cycle and ACV.  The sales cycle can range anywhere from six months to two weeks, correlating to multi-year contracts and monthly subscriptions, respectively.  When it comes to ACV, how people are buying and how large those contracts are will often be totally different.

Consumption Model 

Because the consumption model has a sales cycle that can literally be in the seconds range (coupled with a virtually non-existent ACV), a sales team is not even necessary.  This model employs product-led growth where your product quite literally is the sales team.

In summation, your business model dictates what set of instructions you’re going to give to your sales team, your CS team, and your marketing team and what GTM motion you’re going to choose. 

Win Rates

The rate at which a deal closes can vary considerably from one model to the next.  This can be due to a variety of factors, but the result is a win rate that decreases as the length of the sales cycle also becomes shorter.   

Ownership Model 

In the ownership model, the deals are quite large (in the millions) because the purchases are typically being made years apart.  As such, a buyer is often required to have a budget secured before they even begin the buying process.  In fact, many of these deals are requests for proposals, where a project has already been announced, described, and had bids solicited.  Due to these factors, the win rate is quite high, 1:3.  

Subscription Model 

The win rate drops to 1:5 in the subscription model.  The primary reason for this is that the shorter contract lengths make it easier to buy, resulting in generally less qualified customers.  To help ensure the win rate doesn't dip below 20% on a consistent basis, better discovery calls and sophisticated qualification metrics are needed.

Consumption Model 

Due to the vast array of free services that the consumption model offers, it has the ability to attract many potential customers.  The issue is many of these potential customers remain just that, potential customers.  When you offer a free service and sometimes only charge when an upgraded version is requested by the customer, many will not choose to pay.  This results in a very low win rate (1:8) in this model.

Risk

When it comes to business models and risk, there is a wild swing from one side of the model to the other.  Whoever is assuming the risk in the purchasing relationship (the buyer or the seller) obviously has much more to lose in the transaction.  The concept of risk helps a business prioritize their time and zero in on where they should be focusing their efforts.

Ownership Model 

In the (perpetual) ownership model, all of the risk is assumed by the buyer.  A bad purchase (yes, sometimes even million dollar products don't work) can result in the firing or a demotion of the buyer, as these purchases can’t be returned.  

In contrast to this, the seller assumes literally no risk and is celebrated for securing a huge deal.  High fives and champagne all around.  In addition, there is virtually no work on the back end for the seller.  The seller does not need to worry about upselling or renewals, because they sold a product that typically is a once-in-a-five-year purchase.  

Subscription Model

The subscription model changes this dynamic.  In this model, the buyer can walk away and get out of a contract, there are small termination fees, and there are frequently non-binding contracts (month-to-month) with opt out periods.  Subscription model businesses often will have to wait six to twelve months before realizing a profit from a customer.

Consumption Model 

Taking it one step further in the direction of seller-associated risk is the consumption model.  In a complete reversal of the ownership model, the seller is now assuming all risk and the buyer, who can stop at any time, is taking on virtually none.  While deal velocity is accelerated in this model, sellers are constantly under pressure to get more users.

Focus

Each of the business models requires focus in different areas.  For example, the need to secure recurring revenue will require a huge amount of time and effort to be expended in that area as opposed to a model where there is no need for it. 

Ownership Model 

In the ownership model, the focus is entirely on selling and closing deals.  Period.  Very little needs to be done in the realm of post-customer as the products being sold won't need to be renewed for another five to ten years.  Meaning:  all sales, no customer success (CS).

Subscription Model 

For the subscription model, it’s a different story.  In these businesses, you don't make money on selling contracts, but rather on the ability to secure recurring revenue.  It’s less about the number of customers, and more about how long you've kept them.  This means you must focus on both sales and CS.  

Consumption Model 

Once again, the consumption model turns the concept and focus of the ownership model on its head.  This model utilizes product-led growth and has very little to do with the sales function.  This model essentially relies on two things:  driving an immense amount of deals and having a good product.  CS drives all of the revenue here.  

Retention

Each model demands tailored approaches to retention, reflecting their core revenue-generation mechanisms.  Monitoring the right metrics and developing strategies aligned with these models is key to ensuring sustained growth and customer loyalty.

Ownership Model 

While retention is important for long-term profitability, it generally won’t affect immediate cash flow to a significant degree.  Retention strategies include focusing on post-sale engagement to maintain customer loyalty and brand affinity, and encouraging word-of-mouth and customer advocacy to attract new buyers.

Subscription Model 

Here, revenue stability hinges on retaining subscribers over time.  Retention strategies include maintaining a strong customer success and support infrastructure to ensure satisfaction, troubleshoot issues, and enhance onboarding, and continuously delivering value to subscribers through new features, personalized content, and tailored recommendations.

Consumption Model 

In this model, revenue is directly linked to usage levels and optimizing customer engagement.  Retention strategies include monitoring usage patterns closely; providing varied pricing tiers based on usage to prevent overpayment; and promoting customer engagement through educational content, tutorials, and usage optimization.

In Review

It’s vital for each business to recognize which model they are operating under as each presents its own advantages and disadvantages.  A firm understanding of where your business sits on the business model arc allows you to better allocate your company’s resources when considering the sales cycle, ACV, win rates, risk, focus, and retention.  A business also needs to be aware of how seamless or potentially difficult a movement toward a different model may be.