Cover by Benjamin Yoskovitz, Alistair Croll

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Chapter 9. Model Two: Software as a Service (SaaS)

A SaaS company offers software on an on-demand basis, usually delivered through a website it operates. Salesforce, Gmail, Basecamp, and Asana are all examples of popular SaaS products. If you’re running a SaaS business, here’s what you need to know about metrics.

Most SaaS providers generate revenue from a monthly (or yearly) subscription that users pay. Some charge on a consumption basis—for storage, for bandwidth, or for compute cycles—although this is largely confined to Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) cloud computing companies today.

Many SaaS providers offer a tiered model of their service, where the monthly fee varies depending on some dimension of the application. This might be the number of projects in a project management tool, or the number of customers in a customer relationship management application. Finding the best mix of these tiers and prices is a constant challenge, and SaaS companies invest considerable effort in finding ways to upsell a user to higher, more lucrative tiers.

Because the incremental cost of adding another customer to a SaaS service is negligible—think of how little it costs Skype to add a new user—many SaaS providers use a freemium model of customer acquisition.[29] Customers can start using a free version of the service that’s constrained, in the hopes that they’ll consume all the free capacity and pay for more. Dropbox, for example, gives subscribers a few gigabytes ...

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