How To Successfully Monetize SaaS Applications: Building A Software Monetization Approach With The Future In Mind
By Nicole Segerer, Revenera
The easy path isn’t always the right path.
This is sometimes the case when an enterprise software company identifies its strategy for implementing entitlements and license enforcement for software as a service (SaaS) applications. Rather than building something quickly that works for an immediate need, product leaders should approach entitlement management and enforcement with scale, flexibility, and future business models in mind.
Over the last years, customer adoption held back the pace of launching SaaS offerings. That changed for good after a global pandemic blew away the last hesitancy of end customers who had their concerns about SaaS. Now, research and development (R&D) teams are pressured to innovate, replace legacy on-premises applications with SaaS applications, and move licensing and pricing to subscription and usage-based models.
Software companies are racing toward SaaS deployments and subscription pricing models faster than ever—driving the growth of SaaS as “the largest market segment” of public cloud services, according to Gartner, which predicts that worldwide public cloud end user spending will be $122.6 billion in 2021 and $145.4 billion by 2022. Pausing to evaluate SaaS monetization strategy is essential for business growth.
A Win-Win Situation For Software Producers And Their Customers
The move to SaaS deployments and subscription licensing is here to stay. As found in the Revenera Monetization Monitor: Software Monetization Models and Strategies 2021 report, 59% of survey respondents expect that their use of the SaaS deployment model will grow in the coming 12–18 months. This trend brings numerous benefits for software producers and their end customers. Producers can offer better services, update and innovate faster, and offer more agile approaches to doing business and supporting customers. Customers benefit by not having to maintain local applications, not getting stuck on old versions, and not taking on the burden of day-to-day application management themselves.
Except for some industries that have software running in air-gapped environments, SaaS deployments and subscription pricing will dominate the market soon, making perpetual licenses and locally deployed software a thing of the past. The subscription model also means that end customers get closer to only paying for what they need, reducing the shelfware that was once purchased and never used.
Questions To Ask When Monetizing SaaS
When building out monetization strategies for SaaS applications, companies should ask themselves strategic questions ahead of time, making sure that their strategy and tooling support current and future needs. Typical questions include:
- Who in your business owns monetization and entitlements?
Just like most product management activities, monetization strategies are a team sport. Product management, the team that usually owns the monetization approach and implementation, must collaborate closely with sales, finance, accounting, and internal IT and business systems teams. Product managers are strongly advised to build a pricing board and to review the monetization approach with these peers—and potentially with customers. Product and pricing adoption should be analyzed on an ongoing basis. The product management team, as the ultimate owners of these decisions, should be able to adjust and tweak the monetization model without too much dependency on other teams. Agility requires that the leading team can rely on a system for entitlements and enforcement. Anything that’s hardcoded into the application itself becomes hard to track, hard to manage, and impossible to change over time.
- How flexible should the model be?
Companies should try to predict how many changes they expect in their monetization model once the product is launched. Simple models, often suited to low-cost products, are straightforward; changes to the price points, but not the underlying strategy, are to be expected. Business software monetization, however, often requires more iterations, change of metrics, and even customer-specific pricing.
- What are the monetization metrics?
Monetization models can be tied to users, devices, usage (consumption), customer size, revenue, or any mix of any of these. The golden question behind the metrics is: What model is reasonable for customers and profitable enough for the producer? Teams will be most successful in answering that question when they prepare by investing time to analyze their existing (or anticipated) customer base and the expected use.
- What is the customer journey?
Customers often start small as they test a new SaaS product, then grow their usage of it as they recognize the value of the offering. (Many SaaS solutions are even offered as a freemium or try-before-you-buy model, which comes at no cost for basic functionality.) A customer journey map that outlines the expected customer journey is essential to ensure that customers can easily move from one model to another—without disruptions—as their entitlements change when they move through cross-sell and upsell activities.
- What are the sales channels?
Many technology companies rely on multiple channels: direct sales, partners, and increasingly online shops or app stores. Often, producers don’t own the relationship; instead, partners are managing entitlements for their end customers. In online stores, the customer expects all options to be available immediately and through a self-service mechanism. Any monetization system should support these self-service options in a simple, yet auditable, way. Teams should analyze who initially creates customer entitlements and who has a right to change them during the life cycle.
The Need For Professional Monetization Solutions Grows With Business Maturity
The questions above, and many more, lead full circle back to the initial statement: The easy path isn’t always the right path. While simple homegrown solutions often do the job initially, they become hard to maintain and adjust as the business grows and matures. While teams might not spend too much time thinking about entitlements and monetization when building a new product, or even a company, the need grows with the customer base.
The reasons why homegrown systems fail at some point are usually threefold:
- Engineering time. In just about every software company, engineering resources are rare and often stretched thin. Companies that rely on their own development team to manage entitlements and enforcement will ultimately hit a conflict of interest between making changes to the entitlement implementation vs spending time on new product features.
- Business agility. For any SaaS company, pricing and packaging is a competitive advantage. Hence, the product management and operations team should clearly hold the reins on packaging change; they should be able to add and remove features from certain product editions, without requiring engineering time. A dedicated system for entitlement management will help make sure that packaging changes can be achieved in days or weeks—not months.
- Futureproofing. Just like everything else in the industry, monetization models change. An off-the-shelf solution for software monetization will automatically offer new models as they find broader market adoption, making it easy to stay up to speed on industry trends and innovation.
Putting SaaS Monetization Functionality Into Place
As an enterprise software company addresses these questions, it will need to evaluate how to manage entitlement and enforcement work most efficiently. Whether building a homegrown tool or adopting a complete software monetization platform, SaaS monetization functionality must:
- Support business growth and operational excellence, drawing on industrywide best practices for differentiated pricing and practices.
- Provide clear systems of record for items including customer relationship management (CRM; used for quoting, converting to orders, managing customer contacts, and account relationships), billing (with billing data flowing into finance and accounting), and entitlement (managing who can access what, measuring usage, and managing the enforcement process).
- Minimize effort to build and maintain entitlement management and support, without taking on technical debt or overloading engineering teams with demands for feature enhancements and bug fixes, on top of their core engineering responsibilities.
- Streamline the provisioning process, including providing mechanisms to add or remove product features simply, minimizing manual interventions and human error, and guardrails to prevent the delay of revenue recognition.
- Protect revenue, guarding against leakage that’s often associated with the inability to deprovision (take features away from a user or an account), the lack of direct coupling between subscription terms and the entitlement, or leaving access open after a subscription ends.
Competitive advantages await those software companies that can scale their use of SaaS applications. Creating an effective strategy may take a bit of extra effort, but it will be worth it in the long run.
About The Author
Nicole Segerer is vice president of product management & marketing at Revenera. Nicole drives growth and awareness of Revenera’s solutions for software suppliers, guiding product vision, strategy, and roadmap plans, along with go-to-market planning, positioning, and marketing for Revenera’s solutions.