SaaS Monetization for Startups: From Freemium to Usage-Based

Choosing a monetization model impacts SaaS tool adoption, market positioning, and long-term sustainability. For example, while we’ll discuss the incredible success of the freemium monetization model, the stats indicate that 60% of SaaS startups using it fail. This happens primarily due to applying it prematurely, before the product-market fit is nailed. 

Other choices, like per-seat or flat-rate, in the case of Basecamp, ensure business sustainability. While growth is not as rapid, it is ‘safe’, steady, and almost guaranteed. For SaaS tools that perform heavy computation and rely on physical infrastructure, usage-based pricing is the only sustainable choice. Think AWS. 

Moreover, for some founders, choosing a monetization model extends beyond market considerations. It is a reflection of the founder’s philosophy on what is the right balance between ambition & risk appetite and customer fairness & long-term vision. 

Monetization strategy is not set in stone. Changing or evolving it often aligns with advancing through the startup lifecycle stages: 

• The first thing a SaaS startup decides on is a startup business model. And it might take a while to arrive at a working one. Consider the MVP development process and hitting the right value proposition or product-market fit. 
• By the time you start finding the right channels to deliver this value, you are likely to have a worked-out revenue model. Within a variety of SaaS revenue models, it will likely be a subscription revenue model. 
• Then, you move to operational mechanisms for extracting revenue, a.k.a. monetization strategy. Do you offer a freemium model with your subscription revenue model to drive adoption, or base subscription plans on usage or features to communicate fair pricing? Or, maybe a hybrid of these? 

In this blog post, we’ll unpack SaaS monetization strategies and illustrate them with real-market SaaS case studies. 

How SaaS Monetization Fits into a Bigger Picture

Let’s focus for a moment on the bigger picture of monetization for SaaS businesses.

A business model set into a business model canvas defines how your startup creates and delivers value to the target customer. SaaS startups often target either daily or event-based workflows, which sets the tone for the SaaS revenue models. Compare a project-management platform for teams to micro SaaS ideas, such as social proof solutions or drip campaign creation tools. First involves day-to-day collaboration, while others spike in usage in connection to the event.

SaaS revenue models often define the number of streams and their continuity. For instance, even event-based SaaS tools, such as launching a campaign or running a survey, can be done on a subscription basis. In addition, one tool can generate multiple revenue streams: subscriptions as well as one-off professional consultations – employee training, enterprise customizations, and so on.

Finally, the startup monetization model, which is the focus of this article, can be equally applied to any revenue model. For instance, here is how the freemium monetization model applies to every revenue model:

• For subscription revenue model – basic free tier and premium plans (Slack).
• For a usage-based revenue model – usage under a certain limit is always free, above it – paid (AWS).
• For a licensing revenue model – an individual license can be free, but for commercial use, companies charge premiums (legacy model).
• For a professional services revenue model – limited free onboarding, free guides, educational videos, or pre-done configurations. But for more extensive training or extra customizations, companies would charge a premium. 
• For a marketplace take rates revenue model – Atlassian Marketplace, for instance, offers free plugins.

Slack: A Hybrid Monetization Model

Choosing the startup monetization model is a strategic and stays relatively constant over the startup’s lifecycle. To illustrate this, let’s look at the evolution of the Slack hybrid monetization model. Since its launch, throughout the years, Slack has maintained a subscription revenue model with a mix of monetization models: freemium and per-seat. Features and their usage are more reflective of technological development and the market expectations, rather than a part of monetization in Slack’s case.

Slack vs Basecamp: Freemium vs Usage-Based & Flat Rate

To highlight why a choice of monetization model of strategic significance, let’s compare somewhat similar SaaS businesses: Slack and Basecamp. Although Slack is considered to be a purely communication tool, Basecamp is a project management tool that also offers team communication capabilities. 

The year 2024 looks as follows: 

• Slack made 5,967 million with approximately 750k signed-up organizations.
• Basecamp generated 280 million with around 250k signed-up organizations. 

And to note the starting points, Slack launched in 2013 while Basecamp 2 appeared in 2012. Here is the evolution of the monetization strategy for Basecamp below. 

From it, it is evident that Basecamp tried out several monetization models, yet avoided freemium, except for briefly introducing a free tier for teachers & their learners. Here is Basecamp’s monetization philosophy in the words of its CEO, Jason Fried:

“it’s like build a good business, … aim to be in business for a long time, be profitable, be honest with your customers and your employees, treat people well, make things simple. … but … our industry’s obsessed with growth at all costs and it just wants to grow and dominate and destroy everyone else. Our industry is obsessed with giving things away for free and trying to figure out how to make money later.”

Freemium fuels fast growth; however, it is not without its risks. 

SaaS Freemium Model: Unlocking Fast Growth

Underneath its two subscription plans, Basecamp features a side-by-side price comparison: Basecamp’s functionality against the functionalities of Slack, Asana, and Google Workspace combined, all of which use a freemium model. As the screenshot has it, Basecamp’s implementation costs only a fraction of the cost of what three other SaaS companies ask. But if you add Asana’s revenue ($668.4 million) and Google Workspace’s ($16bn), it appears that their freemium SaaS monetization brings 80 times more revenue. 

The way freemium SaaS monetization achieves it is through driving fast adoption. It acts as a funnel, which lures a lot of free users at the top, and then users are nudged to convert into paying customers through advanced functionality or extensive usage. 

Moreover, the free tier often allows SaaS startups to lower their acquisition costs (CAC). Lower CAC improves the LTV to CAC ratio. And it is a significant indicator for investors when it comes to the scaling stage.

However, as the CEO of Basecamp hints, the freemium has its risks. 

• The statistics show that 60% of freemium SaaS startups fail to succeed. 
• The latest data suggests that SaaS conversion rates on freemium are between 2% and 5%. Freemium-fueled growth can be unsustainable.

So, the freemium SaaS monetization strategic choice does require getting certain things right, such as:

• Low operational costs per user;
• Strong conversion rates;
• Clear upgrade strategy;
• Sustainable unit economics.  

Feature-Based SaaS Monetization: Great for Upsells

The best example in the industry is probably HubSpot. They offer a core CRM subscription revenue model with a freemium. But then, each customer can customize their own bundle of HubSpot’s features.

True feature-based SaaS monetization implies that features are extras unlocked for an extra payment. For instance, Slack plans also differ in functionality, but it is more like plan’s segmentation: what an enterprise needs is different from what a team of 5 will require. The appeal of feature-based monetization is to offer users to purchase features they are truly going to use. HubSpot uses feature-based monetization as a true lever to increase Customer Lifetime Value (LTV).

Feature-based model is great for upselling, but not as a main monetization model. It will be highly difficult to market each feature and explain what each feature does so that a customer can make a decision. As such, it may require detailed descriptions, comparison charts, cost calculators, sales guidance, and so on. It will not only be complex but also expensive – CAC will skyrocket. Finally, if the entire use is made up of features, customers will likely feel that the product is ‘nickel-and-diming’ them.   

HubSpot also takes full advantage of usage-based monetization, which we’ll look into next.

Usage-Based SaaS Monetization: Close to Value & Sustainability

Below you can see a screenshot of HubSpot’s extra usage offers on top of its subscriptions and feature-based monetization models. They offer either generalized credits, for simplicity, or extra usage for specific purposes: more ads, more customization objects, more records, more users, etc.

However, the canonical example of usage-based SaaS monetization would be AWS. AWS services are not offered based on subscription; they are billed based on usage. Usage can be measured in different units. For AWS, it is compute time for EC2, GB of data for S3 storage, or per million requests when it comes to its API Gateways and Lambdas. In contrast, Snowflake manages to wrap usage-based SaaS monetization into a subscription using abstract credits (screenshot below).

In Snowflake usage-based monetization, subscription refers to the features of the tier, and the credit (unit of usage) price increases with more capabilities. But you purchase as many credits as you need. So, it is still a usage-based monetization but wrapped into a subscription revenue model.

In terms of advantages, this model is perceived as fair by customers. For a SaaS startup, the advantage is in tying the cost side to revenues. 

On the downside, customers’ usage can fluctuate considerably, which makes your business’s revenues less predictable. Another common risk with this SaaS monetization is ‘bill shock’. To avoid negatively surprising customers, it is strongly advised to add ‘usage alerts’ or usage caps, especially for the first months. 

Flat Rate: Unlimited Subscription

The previously mentioned ‘bill shock’ is completely removed with this SaaS monetization model. Basecamp has switched to it for enterprise clients from usage-based monetization and has stuck with it. Flat rate monetization model removes friction across many processes:

• It is much simpler to sell.
• It is easy to market.
• Pricing cannot get clearer than that.
• Your revenues are predictable.

In a flat rate monetization model, you charge per account, regardless of the seats on that account, actual usage, or utilized features.   

The downside is huge, though. With the flat-rate, the company willingly puts a limit on its Average Revenue per User (ARPU). Especially with enterprise clients, a company with 30 employees would pay the same as a company with 300 or 3,000. This means a startup forfeits potential revenues from large enterprises. 

Moreover, this SaaS monetization can fail certain SaaS startups if the usage may end up costing more than the flat rate. It refers to AI/ML SaaS tools, heavy compute, or data-intensive services.

Per Seat Monetization: Delivering Value to Active Users

This model is simple for customers to understand. The majority of SaaS tools do not charge all employees in the company, and bill only the active users. SaaS startups find the appeal of this model in the ease of upselling: as the client’s company grows, the more active users you’ll get. Sort of, in-built organic revenue growth. In addition, for SaaS startups, per-seat SaaS monetization simplifies unit economics and makes it more predictable, on both the revenue and cost sides. 

However, similar to the flat-rate monetization model, companies should watch for power users. This is why per-seat monetization can also set up caps on usage per user.

Hybrid

These days, you’ll be hard-pressed to find a successful SaaS startup that uses a single monetization model for any significant amount of time.

Monetization strategies evolve with the startup lifecycle stages to capture more revenue from the value a SaaS tool delivers: 

• For instance, during the growth stage, SaaS startups prefer freemium or subscription with one option for simplicity, either a flat rate or per-seat pricing. 
• Then, as a startup matures and scales, it is common to see the introduction of more tiers for segmentation purposes. Larger accounts often require advanced integrations, features, per-seat billing, and support. A SaaS startup tries to expand its ARPU with the introduction of add-ons (extra usage or features unlock), as well as manage the cost side better. 
• Eventually, there is a step at which a SaaS startup transitions to a platform, and monetization becomes even more granular. The company introduces marketplace take rates and meters the usage of third-party plugins.

Summary

SaaS Monetization	Pros	Cons
Freemium model	Fast-tracks adoption; lowers CAC; improves the LTV to CAC ratio.	Risky and unsustainable if the conversion is weak, no clear upgrade strategy, and high costs per user.
Feature-Based	Customer perceived fairness – pay for features you use; Often used as an upsell.	Hard to predict revenue, risk of “bill shock”
Usage-Based / Pay-As-You-Go	Highest perception of fairness for customers – pay for only the capabilities you use; aligns revenue with value.	Hard to predict revenue,risk of “bill shock”
Flat Rate / Unlimited Subscription	Simplicity for selling, marketing, and billing; predictable revenue	Limits ARPU;  Leaves money on the table from large customers;  not suitable for heavy-resource usage
Per-Seat	Not used as a main monetization model due to the complexity of selling, increased CAC, and causes a perception of ‘nickel-and-diming’	Power users can increase costs
Hybrid	Not used as a main monetization model due to the complexity of selling, increased CAC, and causes perception of ‘nickel-and-diming’	Complex to implement;  Often introduced at a later stage of a startup’s lifecycle.

FAQ: SaaS Monetization for Startups: From Freemium to Usage-Based