You might have heard of the SaaS Fish Model, but what do you know about it? And how can knowing the model help you market your product or service? In short, the fish model visualizes how a software company can transition to become a SaaS company. The Fish Model is a tool that enables people to see long-term benefits from short-term pain.
With this model, you can negotiate your way through the giant fish as a SaaS business. Let’s get started.
History of the SaaS Fish Model
While subscription sales are trendy and provide a solid revenue model for companies, many companies are reluctant to adopt the model because of the difficulty in shifting from a capital asset transaction model to a subscription model.
This new financial model can be a hard sell, especially to top-level executives. Future financial performance will not resemble past performance. In fact, it may decline in the short term. No one wants to announce poor results to shareholders and other stakeholders.
The fish model was charted by TSIA. When they made this trajectory, it seemed like a familiar shape (a fish), hence the name.
Expounding the Fish Model
Revenue and costs are represented by the two lines that outline the fish on this chart. The difference between revenue and costs is your profit, which is represented by the white space between the two lines.
Most companies begin their life cycle with a capital asset transaction model. Historically, these SaaS business models have been very profitable.
In the past, the company has been focused on selling its products outright. Now, it wants to begin offering subscriptions. The goal is to eventually reap benefits by operating in the subscription-based SaaS (software as a service) model. At TSIA (The Software and Information Industry Association), “swallowing the fish” refers to this kind of transition from selling products outright to operating in a subscription model.
Once the model is fully operational, the company will reap the following benefits:
- More profits in the long run
- Decreased labor costs
- Increased revenue growth
- Improved efficiency
In order for a company to go from the left side of the fish to the right (becoming profitable), however, it must pass through the middle of the chart where it faces challenges.
But what is in the Middle of the Chart?
The most important phase of the product life cycle is the growth phase. This stage, which begins when a new product reaches the market, is characterized by high costs and low profit margins.
When a company switches from recognizing revenue up-front to over time, its comparable revenue performance will dip in the short term. As new subscriptions begin cannibalizing old ones, the comparable revenue performance will look even worse.
As the company shifts to a SaaS/XaaS business model, it will need to make some necessary investments. These include a Customer Success team, an Analytics team, data centers, and more. These additional costs are necessary for succeeding as a SaaS/XaaS business.
Hence, the middle of the fish model is not the best place to be stuck.
The main problem presented by the fish was an issue of expectations. When a company was accustomed to a certain level of profits, revenue, and costs, stakeholders expected the company to maintain those levels. Any significant fluctuation in those levels upset shareholders’ expectations.
Swallowing the Fish – The Hardest Part
Companies that were not born as subscription businesses need to learn how to adapt the subscription model. The goal is to minimize costs while growing revenue and not letting costs grow faster than revenue. Therefore, you don’t want a fat fish.
In order to succeed at swallowing the fish, it’s important to plan ahead. The following issues are among the most significant when businesses make the transition to a subscription model:
Issue 1: Compensating Your Sales Staff
When hiring a sales team to sell subscriptions, you must devise a compensation plan that motivates the employees and is profitable for your company. Many companies have found that offering huge incentives to the sales team can be effective in encouraging them to prioritize new subscription offers over old capital asset offers. However, these incentives are not sustainable.
Big incentives cause costs to inflate; consequently, the fish gets fatter.
Yet you need to consider how to impress upon your sales staff the importance of embracing the subscription model. If you don’t, they will continue to offer the old products that guarantee compensation upfront.
Issue 2: How to Focus on Subscription Renewals
When switching to a subscription model, it’s important to consider renewal rates. If a business’s customer churn rate is too high, its recurring revenue will dry up.
The likelihood of a subscription-based business experiencing negative consequences is high when customer churn rates are high. Conversely, if companies take measures to ensure customer retention, they can expect to gain market share and experience growth.
To reduce churn and increase renewals, it is important to staff a Customer Success team when moving to a subscription model. The addition of new Customer Success personnel will obviously increase costs, but the increase in revenue they generate should eventually offset those costs.
By investing in a Customer Success team, you can steer your business back toward profitability.
Problems at Stage 1 in the SaaS Fish Model
In the first stage, the SaaS Fish Model, you’re not yet at product-market fit. You don’t know if your customers want your software or how much they will pay for it. You might have a few paying customers or even a lot of them, but they may only be purchasing your software as a test drive and may not continue paying once they start using it in production.
You should expect this stage to last 2–6 months before reaching product-market fit.
Problems at Stage 2 in the SaaS Fish Model
If the customer doesn’t find your product valuable or useful: You need to make sure that your solution solves real-world problems and is easy enough to use without requiring a lot of effort on the part of your prospect. If it’s not, they won’t be able to deliver value from it—and if they aren’t delivering value from the product, they won’t pay for it either.
If the customer has problems using the product: Make sure that you address any technical issues with ease so that users can get up and running quickly. This will help them see results sooner rather than later and become more comfortable with your company and its offerings.
Problems at Stage 3 in the SaaS Fish Model
At the third stage, you should be able to charge a higher price than at any other stage. This is because your company has already proven its worth by getting through the first two stages (getting started and scaling). If you’re only at this stage, then it’s likely that your product isn’t differentiated enough to warrant such a high price point. You need to find ways of making your offering unique from others on the market, or you may want to consider using another framework for pricing.
Problems at Stage 4 in the SaaS Fish Model
They are not using the product: This problem can occur when a user is unaware of the product or does not think it is relevant to them. For example, if you sell marketing software for restaurants, your target audience may be existing restaurants or people who own new businesses that need marketing. But if you don’t also reach out to dads and moms running home-based catering companies as well as food trucks in big cities, you could miss out on potential customers who would benefit from your platform.
If someone has bought into your software and tried to use it for something other than its intended purpose (for example: trying to use a social media monitoring tool for customer support), this could cause friction between them and your business. They are not using it as expected. This refers back to one of our earlier points about how products evolve over time based on user feedback—if something has changed from what users were expecting when they first signed up with your software, then this could lead them down an unexpected path and give them negative impressions about their experience with you.
Examples of SaaS Fish Model
A great example of this is Netflix, which started out with DVDs by mail, then switched over to streaming video. The DVD model is like the first stage in the SaaS fish model: you pay upfront for the product and receive it once it’s available. A subscription model is more like the last stage: you pay every month for access to content.
The SaaS Fish Model is a great way to visualize your customers’ needs and the different stages of their journey. By focusing on each stage, you can drastically improve your product management and customer success strategies.
The journey through the SaaS fish model can be challenging, but it is ultimately worth it. When a company swallows the fish, it will reap the benefits of the subscription model. And because of the recurring nature of subscription-based revenue, these benefits will add up over time.