6 Ways Experts Choose Their SaaS Financial Model (And You Can Too)

Analytics Jul 21, 2022 13 minutes read

Table of contents

    Choosing a SaaS financial model can be anything but easy.

    After all, you’ve got to leverage a financial model that satisfies your users as well as generates profits — all while convincing investors to fund your tool.

    But to make this decision easy for you, we talked to 13 SaaS companies to learn about how they chose their SaaS financial model and how it worked for them in terms of securing investments.

    And to double the value for you, we also talked to SaaS investors to ask them what they look at when investing in a SaaS tool. This way, you’ll learn what works well for getting an investment from both lenses — the businesses who get the funds and the people who give the funds.

    Here’s what we’ll cover:

    Stripe (MRR & Churn) Dashboard Template

    Popular SaaS Business Tools

    First things first, which tool can you use to get a financial model overview? We asked people who’ve been down in the trenches and learned that Spreadsheets are the most used tool.

    Some 45% also use Excel and 30% use centralized dashboards like the ones that Databox creates to visualize their financial performance.

    Popular SaaS Business Tools

    On to the meaty part next.

    6 SaaS Businesses Share How to Choose the Right Financial Model for Your SaaS

    From focusing on the end-user to understanding your industry’s cost culture, the experts that we talked to have a lot to share on choosing the right SaaS financial model.

    The majority, 69.2% of these folks speak from their experience coming from 2-3 years of starting their SaaS business. 23.1% started their business 4-5 years ago and they share their insights based on this experience. The remaining, 7.7% have been in business for over 5 years.

    when did you start your SaaS business?

    Here’s what SaaS companies say about choosing the right financial model in summary:

    1. Understand your own revenue model
    2. Understand your industry’s cost culture
    3. Build your own financial model from scratch
    4. Experiment with different business scenarios
    5. Keep end users in mind, not investors
    6. Choose the right tool

    Dive in.

    1. Understand your own revenue model

    “Understanding my revenue model proved to be the most decisive attribute when choosing the right financial model for my SaaS business,” shares Haroon Sethi of Proqura.

    “There are two well-known revenue models: Transactional and Subscription,” observes Sethi. But for Proqura, Sethi says the subscription financial model has been helpful.

    “Since we work in a scalable environment, subscription models suit us better as it gives a detailed analysis of sales and helps in growing the consumer lifetime value. Multinational companies which have long relied on the transactional models are now shifting to subscription-based models as well. Your SaaS setup should have a subscription model, to begin with.”

    Benefit of this approach: encourages more funds

    Wondering how this decision helped Proqura? We asked Sethi about it.

    “My investors have relied heavily with the decision to shift to subscription-based models. As a result, I have been getting more funds and the level of trust has increased dramatically from last year,” Sethi explains.

    “I have noticed that many investors only care about their fair share of returns rather than understanding the business models and that has helped me with increasing my company’s revenue.”

    2. Understand your industry’s cost culture

    “When choosing the right financial model for your SaaS business, you must understand your industry’s cost structure,” advises Aqsa Tabassam from Apps UK.

    To this end, Tabassam recommends you ask yourself the following questions:

    • “How much does it cost to create a SaaS product or service?
    • How much does marketing your SaaS product or service?
    • What do customers pay for comparable services from your competitors?”

    “Answering these questions helps you understand the cost and pricing structure of the SaaS industry. In turn, this helps you choose the suitable financial model for your firm,” Tabassam adds.

    Having the answers to these questions also gives you a high-level overview of your business costs. As a result, you can choose a financial model that saves you from loss and gets you profit.

    Benefit of this approach: builds more trust and better relationship with investors

    “By finding the answers to these questions and choosing the right financial model for my company, I was able to build a better relationship with my investors,” Tabassam comments.  

    “They started trusting me more. Previously, they didn’t believe in my abilities to deliver for them, but that’s no longer the case.”

    This makes sense because knowing your business costs inside out gives you a better grip on them. You’re also able to understand how you can best drive profit and can communicate the same with investors effectively — getting them on your side.

    3. Build your own financial model from scratch

    This is a helpful approach to meeting your SaaS business’s financial requirements.

    “Choosing a financial framework developed by a third party is always an option but in our case, we believed that a model tailored to our company’s needs was a more logical option and hence I chose to build a financial model from scratch,” highlights Dan Ni from Messaged.com.

    “After educating myself on developing a framework, I understood that the three main things I needed were an income statement, cash flow, and a balance sheet,” Ni elaborates.

    Related: Cash Flow Forecasting for SaaS: 6 Best Practices

    “This is further categorized into my expenses and to make it clear to my investors how their funding relates to the costs and how it’s being allocated between sales, hiring, etc. The most important thing I learned through all this was that my financial model should serve as a logical guideline that makes sense to my investors.”

    The top takeaway here? Educate yourself first. This means you need to take the time to study what you need to create your own SaaS financial model.

    Also, make sure that your model is logical not just to you but also to investors. Getting a second pair of eyes from someone trusted in the industry (before you share it with investors) helps too.

    Benefit of this approach: gets investors on board

    Resistance to such an approach is common. Ni admits it too. “Yes, I admit I was met with doubt from my investors who believed that a financial model should be made by a third party and were even willing to pay for that resource.”

    “But upon suggestion and a rough draft that I presented to them, it just made more sense in terms of it being tailor-made to fit the needs of the company while being simple to understand and easily accessible to my investors. Plus, the benefit of changes being brought into it also exists,” Ni concludes.

    Related: Reporting to Investors: 6 Best Practices to Help Increase Funding

    4. Experiment with different business scenarios

    Another important step to take when choosing a SaaS financial model is reviewing how the model you’re leaning toward will help your business understand different circumstances.

    This is what Brad Touesnard did for SpinupWP. “I understood that in building my SaaS business, things might not always go to plan, especially as some of our assumptions were unproven. So we performed some scenarios to illustrate the impact of changing some of the key business drivers. For example, we analyzed how price and volume sensitivities would affect our profits.”

    Benefit of this approach: wins investors by telling them the model is ready to endure uncertainties

    By walking investors through how the SaaS financial model you’ve chosen will help under uncertain circumstances, you show you’ve done your homework. This, in turn, helps you win your investors’ trust and funding.

    Touesnard shares that’s how this approach has worked for their SaaS too. “The scenarios reassured potential investors that we were prepared for market uncertainties, and this ultimately helped us secure funding,” shares Touesnard.

    5. Keep end users in mind, not investors

    The SaaS financial model that you choose ultimately depends on your product and its users. So asking yourself what would suit your product and users the best will help you in making the decision.

    CocoSign’s Caroline Lee echoes the same. “It depends on the nature of your product.”

    “For example, our product CocoSign is freemium, for which, we have 5 types of subscription plans: one free plan, 4 monthly plans with several features, and one customizable plan for enterprises. For the paid plans, we have per user fees per organization. So, it is easy for us to forecast business revenue and show reliable financial data to our investors.” 

    Benefit of this approach: gets investors on board for the long term

    “I think it is a plus point and has helped us positively impact investors,” Lee reflects.

    After having picked your SaaS financial model based on what’s best for your users and the product’s long-term success, you need to work on communicating your decision effectively.

    “Basically, you need to pick a financial model as per your product and justify it to your investors,” in Lee’s words. “Because if you choose a financial model keeping investors in mind instead of end-users, your product may suffer.”

    6. Choose the right tool

    Lastly, it’s best to work with a tool that helps you “forecast the subsequent financial performance of a SaaS business” as Eden Cheng from PeopleFinderFree puts it.

    This way, you can see how the SaaS financial model you’re choosing will help your business.

    Says Cheng: “In my opinion, while choosing the right financial model for my SaaS business, organizational structure and growth drivers proved to be of utmost significance.

    Over time, the chosen financial model became competent in representing our team’s ability to build this solution and it also helps to know what is needed to boost the measures for ensuring my business success. Next, such financial models also offer some crucial insights of my business to focus on growth development.”

    Benefit of this approach: the right tool helps you convince investors

    Using a forecasting tool, you can weave a story around how the chosen financial model will help you achieve your revenue goals.

    In fact, Cheng points out, “Storytelling is the biggest aspect of money software development services, regardless of who you are talking to, such as members or investors.”

    “As my SaaS financial model helps a company to tell its financial story to a group of people, hence, it’s reliable as I am able to persuade the investors to make smarter decisions for my company,” explains Cheng.

    3 Things Investors Look for When Assessing a Potential SaaS Investment

    Now that you have the expert insights on how to choose your SaaS financial model, let’s look at things from the investors’ point of view.

    To this end, we talked to 4 SaaS investors about what they look at when assessing a SaaS investment.

    For 3 out of these 4 experts, the SaaS financial model you use is very important to them as investors. Only Pamela Martinsek of PayPro Global said the SaaS financial model is not important.

    As for the factors that investors look at, these are:

    1. Retention or stickiness including churn
    2. Growth achieved and future growth trajectory
    3. Product-market fit, ROI, and experienced leadership

    1. Retention (stickiness), including churn

    In the SaaS world, driving lots of users isn’t enough — retaining those users is. It’s why two of the investors we talked to emphasize retention.

    For Ahmed Khairy, the Founder of Gameball, for example, “Stickiness aka retention” is key.

    The reason: “Because it indicates that investing in acquisition and scaling will be worth it; the funnel is not leaking.”

    And to assess retention, Timur Ercan, founder of Igetnow looks at MRR Growth and Churn.

    “Net MRR growth with massive Churn is unhealthy and so is low Churn with minimal growth. You need a good balance,” Gibson points out.

    2. Growth achieved and future growth trajectory

    According to Steve Gibson of SaaS Multiplier Method, a handful of analyses related to SaaS growth are important.

    It’s why Gibson looks at:

    • “How their growth has been achieved
    • Whether this is sustainable or scalable
    • How big the market could be using these methods
    • What marketing they could be doing but aren’t
    • How fast it has to grow to stay ahead of churn
    • Whether churn seems excessive, and, if it does, whether that’s a product problem or a retention problem”

    3. Product-market fit, ROI, and experienced leadership

    For PayPro Global’s Pamela Martinsek, these are some of the factors for assessing SaaS tools for investment.

    In Martinsek’s words: “Experienced leadership, relevant product with proven ROI (through case studies) and most importantly a growing need for it in the marketplace which shows it is sustainable. I’d also want to know about its competitors and how the performance compares.”

    Stripe (MRR & Churn) Dashboard Template

    Monitor and Analyze the Performance of Your SaaS in Databox

    To sum it up, securing investments depends not only on the SaaS financial model you use but also on how you tell your financial story.

    This includes a stellar breakdown of both how you plan to use the investment and how you’ve been using your finances.

    But to tell a persuasive financial story, you need a tool that effectively monitors and analyzes your SaaS’s performance and shows your revenue trends in a visually engaging manner. For that, we recommend Databox.

    Databox features all your essential financial metrics on one shareable screen using easy-to-read data visualizations such as bar charts and pie charts.

    All you have to do is to plug in your data sources and the software will create a beautiful dashboard for you — telling your financial story for you.

    The best part is that you can customize the dashboard to add or remove financial metrics and change the data visualizations used. You can also change the dashboard’s color to your brand’s colors. This way, you can leave a memorable impression on investors.

    So what are you waiting for? Sign up for Databox free and create your SaaS financial dashboard today.

    Article by
    Masooma Memon

    Masooma is a freelance writer for SaaS and a lover to-do lists. When she's not writing, she usually has her head buried in a business book or fantasy novel.

    More from this author

    Get practical strategies that drive consistent growth

    Read some