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Understanding The SaaS Revenue Model: How Does It Work?

Considering the SaaS revenue model for your business? Here’s what you need to know.

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Most people still remember the days when software applications were distributed mostly through CD-ROMs and floppy disks. While some companies still maintain CD distribution methods, it’s safe to say that the SaaS distribution model has taken over.

SaaS (Software-as-a-Service) is a software delivery model where users pay recurring fees at regular intervals to access cloud-based software applications. In the SaaS model, the software provider typically hosts the application and all of its data in the cloud.

The SaaS model grew out of the fact that once software was on demand, it could be updated continuously, companies no longer needed to deliver a physical good. So, software companies needed to establish a model that was scalable and allowed them to profit from the applications they develop for as long as they remained valuable to other businesses or people.

Why Is The SaaS Revenue Model So Popular?

Most software companies are moving toward a SaaS-based revenue model. For those that haven't switched to SaaS, it's often a matter of time, more than anything else. Below are some of the benefits of a SaaS business model.

Continuous and reliable revenue stream

This is perhaps the most important benefit. By adopting a SaaS model, software vendors can receive payments throughout the lifetime of the product instead of a one-time fee from a physical product. Therefore, it’s easier to predict revenue and to focus on growing your product.

Scalability and ease of distribution

The traditional model of printing CDs or installing software physically required an entire operational component, including purchasing of CDs, printing, managing physical distribution networks — the whole works.

With a SaaS model, vendors no longer have to worry about these complex components. Instead, they can channel all efforts into developing and improving the existing tool. Users simply need their login credentials and an internet connection to use the software.

In addition, vendors no longer have to develop for different operating systems and devices, since the product can be accessed through any web browser irrespective of device type. This makes it even easier to scale and distribute applications to end-users.

Frequent updates to the user experience

Because users expect ongoing value in exchange for their subscription, software vendors need to provide an ongoing top-notch user experience. A regular income stream from SaaS revenue provides the funding for companies to continually invest in improvements and always deliver a relevant product.

For users, a SaaS model offers the following benefits:

Continuous updates

A user always has access to the latest version of a SaaS product because the software is regularly updated and maintained. Unlike other software, they often don’t need to install updates, since they’re accessing it live via a web browser.

Many tools also have publicly available roadmaps or community forums where users can upvote their most desired features and report bugs, so the overall development objectives are always in line with users’ needs.

Lower prices and upfront costs

With on-premise applications, users had to pay a lump sum for the tool upfront and maintain servers to support the software. With SaaS, users do not have to worry about maintaining any underlying infrastructure, which can often be less costly in the long run.

Testing before use

One of the biggest selling points of the SaaS model is that it allows users to try a tool first before they fully commit to it from a cost perspective. Some tools even operate on a freemium model where users have free access to basic features of the product as long as they maintain an account.


For the user, there’s no complicated software to install. All they need is a username and password to access an always up-to-date tool. They don’t need to take time to install every new update or read through pages of technical manuals to figure out how to install the software.

The onboarding process is also smoother compared to traditional methods. Since the software is completely web-based and independent of the user’s operating system, onboarding directions are clearer and easier to follow.

Most tools also have dedicated customer service teams available to guide users in real-time if they run into any trouble.

Components Of The SaaS Revenue Model

If you’re considering the SaaS revenue model for your business, below are the components you need to be aware of.

Access, authentication, and tiering

In a SaaS model, people pay for access to the software/product. So each user requires authentication before they gain access to the tool. Their access is also usually limited to the features covered by their monthly subscription package.

Tiering packages and the authentications required can be a substantial engineering lift. These three variables are central components of any SaaS platform.

Cloud technology

The development of cloud technology was instrumental to the success of the SaaS model. It’s a lot harder to charge a subscription for a CD that users buy to download a program onto their computer.

With the advent of the cloud, users can access the software remotely and conveniently so it’s easier to control access and charge a monthly rate.

Continuous value

The ability of the software to continuously provide value is a key component of SaaS. Consider a company that uses AR technology to rebuild a factory floor so that factory managers can optimize their space usage for production.

Since the service is probably a one or two-time affair for which the company charges implementation fees, the business is not continuously providing value. However, if the vendor re-architects the software so that factory managers can remotely access the tool and work with it on a regular basis, then a SaaS model could apply.

Types Of SaaS Pricing Models

Adopting the right SaaS pricing model is key to profitability when switching to a SaaS revenue model. Here are some of the most popular pricing models:

1. Tiered pricing

Most SaaS businesses operate a tiered model where they offer different packages of the product at different price points. The goal is to appeal to more customer segments and provide more options for the user.

There are usually three broad tiers: entry-level, mid-level, and enterprise-level tiers. Examples of businesses that adopt this model include Hubspot and Google Workspace.

2. Per-user pricing

This is by far the most popular pricing model adopted by SaaS businesses. In this model, each user pays to access the software, so the price of the product increases as users increase.

The benefit of this model is that both the end-user can keep track of cost while the business can reliably predict revenue. The downside is that this model can become expensive as the customer’s user base grows so they may be more likely to churn.

To curtail this, companies usually offer incentives to customers with a large user base, such as offering a discount per specific number of users or only charging per active user.

3. Per-feature pricing

In this model, users are charged based on the features they access, so the price of the product is tied directly to the value provided to the user. The advantage is that users only pay for what they need.

This can be a great option if your users have a variety of different needs. They can pick their own set of features.

4. Usage-based pricing

This model is also called pay-as-you-go pricing because usage of the service correlates directly with cost. Most cloud providers such as Amazon Web Services offer cloud services using a pay-as-you-go model.

Examples of usage-based metrics include the number of emails sent, API calls made, or server resources used. The higher the usage, the higher the price the user pays. This model works best for products with flexible demands and very low costs.

5. Flat-rate pricing

In this model, companies charge a flat rate irrespective of user numbers or usage level. An example is Basecamp, which charges $99 per month for organizations of all sizes no matter their usage levels.

The advantage of this model is that it’s easy to understand and cuts down decision-making time for prospective buyers. The downside is that users with custom needs are left out and you forfeit any upselling opportunities.

You may need to combine two or more pricing models to create one that works for your business.

For example, tiered pricing is often paired with per-user or per-feature pricing. So, each tier may be limited to a specific number of users and the price per user will differ between tiers.

Tips For Choosing A SaaS Revenue Model For Your Business

Get crystal clear about your bottom line

Do some self-discovery to uncover the value that your business brings to your customers, and the cost of delivering that value. Work backwards from there and choose a model that aligns with your product.

The goal is to ensure your chosen model scales with your costs and the value you deliver. So, the more it costs you to deliver a particular feature, the more the customer pays. And the more value your customers get, the higher price they pay.

Be careful not to discourage the behavior you want to create

For example, charging per user could discourage organization-wide adoption because the cost of the tool could increase exponentially as the customer’s user base increases. So, if your goal is to have as many users as possible, you may consider a feature or usage-based model since usage patterns may vary per user.

Understand your unit costs

This could be your cost per feature, customer, or other important metrics. This will help you choose a pricing model that scales with your costs. For example, if you’re a payment platform, understanding your cost per transaction is critical to ensure profitability.

Prioritize Profitability With CloudZero

The cloud is an essential component of SaaS, and your cloud costs make up a significant portion of your total costs.

Therefore, understanding your the cost to run your products and features, as well as unit costs, when operating in the cloud is important for building a profitable business. CloudZero’s cost intelligence platform helps you gain business-relevant visibility into your cloud cost, so you can .

CloudZero helps you make better decisions about everything from pricing and packaging to maximizing renewals by giving you granular visibility into your costs per feature or customer.

As your cloud bill goes up — as it should when your business grows — CloudZero adds the business context you need to understand why this is happening, empowering your engineering and finance teams with the information they need to build a competitively priced and profitable product.

Request a demo today to learn more about how CloudZero can help you better understand your cloud costs.


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