SaaS Revenue Diversification Strategy as Part of Digital Business Transformation ～The Risks and Opportunities of Introducing an Advertising Model～

According to research from Fuji Chimera Research Institute, Inc.,¹ the domestic Japanese SaaS market is expected to reach a value of 1.833 trillion yen in FY2026. According to forecasts from Gartner,² end-user expenditure on SaaS in the global market will be over 295 billion dollars in 2025, with the size of the market growing year on year. Emerging in the early 2000s and continuing to grow even now, the recurring revenue model puts the focus on ARR (annual recurring revenue). While there are thus many cases where companies lead with investment into expanding user numbers, which is the main source of revenue in a recurring revenue model, companies also need to increase profit margins in order to perpetuate their businesses. As SaaS businesses require constant feature updates, the maintenance costs of operating the service tend to grow the longer the business is in operation. It is easy to address this issue by making additional features paid extras, but increasing paid options can in turn increase management costs and also increase the difficulty of sales, as sales managers will need to know about each option. Even if these features are the best options for addressing user issues, the fact they are paid extras makes it more difficult to get users to use them, so we also see cases where companies struggle to adequately convey to users the usefulness and competitive advantages of their products (figure 1). Increasing the base costs of services, meanwhile, is impractical when taking into consideration the competitive environment.
ABeam Consulting proposes hosting ads as a supplementary measure to recoup these costs as part of SaaS business transformations aimed at addressing these circumstances. While advertising is one of the major monetization models in BtoC or free services, multifaceted monetization methods beginning with advertising are often overlooked in paid services. Due to the nature of vertical SaaS businesses (SaaS businesses specialized in a particular industry or sector) in particular, these businesses can prove to be quite attractive as advertising media relative to general media, despite lower user numbers, as the fact that their users have similar attributes and are in the same industry means that it is clear which customer segments will be reached by ads. Presenting information about new, related products and services can provide a certain amount of value to users, just as ads posted in industry media are a useful source of information within industries.
At the same time, posting low-quality ads that are irrelevant to users or forcing users to view ads can lead to degradation of the service’s usability and damage to the brand. For this reason, when companies seek to monetize with in-SaaS ads, they need to orient themselves towards proactively developing advertiser markets while protecting their services’ brands, by carefully selecting the right advertisers, rather than simply plugging into an ad network.

¹ “2023 kuraudo konpyuutingu no genjou to shouraitenbou shijou hen/bendaa senryaku hen” (“Present and State and Future Outlook of Cloud Computing in 2023: Market Edition/Vendor Strategy Edition”) Fuji Chimera Research Institute Inc.
² Gartner “Worldwide Public Cloud Services End-User Spending Forecast” (2024)

If companies are able find advertisers that are attractive for the industries their services target or based on the attributes of their users, they then need to select suitable ways of presenting ads (figure 4).
The first possibility that arises is using something like a banner as a simple ad to lead users to the advertiser’s landing page. If the advertiser or the product being posted has sufficient trust in the industry, this could be a simple and easy-to-understand way of advertising it. With that said, if the advertiser or product has relatively little recognition despite being a strong match for the industry or user attributes, companies could also want to consider native advertising.³ For example, jointly producing and posting content such as a column in collaboration with the advertiser, bundling this with useful information for the user within the service and thus conveying what makes the product attractive is a way of increasing the impact of an ad. If companies can combine multiple pieces of content, they can even use that category of content as owned media within their service. While operating owned media requires some know-how, such media can be used in a variety of ways, such as conveying messages to users and enhancing branding, meaning the benefits of it can be great. One advertising format that can be effective is also user-participation advertising, such as surveys and quizzes. This is because the information gained by directly observing the reactions of users is of particularly high value in a SaaS where audience attributes can be clearly identified, as compared with media where participating users are many and unspecified.
However, when presenting native advertising as owned media, the quality of that media becomes very important. Low quality content comes with the risk of significant harm to user trust in the service itself. Companies also need to pay attention to the shelf life of content. While it is not viewed as a significant problem to have the same banner ad displayed over a long period of time, continuing to display the same un-updated content prominently in a service can create doubts over how up-to-date the service itself is. So, companies should start by finding trustworthy advertisers then start out with short-term, small-scale trials, before moving on to invest more and more in operating costs.
Next, posting commission-based ads as part of a service’s features can also fit well with a SaaS. One example would be a case where a schedule management SaaS lists up and shows the user information about nearby restaurants after scheduling a meeting over a meal, using the affiliate program of a restaurant data platform. As the number of viewers of ads would be limited, the scale of revenue would also not be that large. However, if it your company manages to induce customers by linking features, this would supplement the features the existing platform is unable to provide, making it advantageous also from the point of view of increasing the value of your own service. With that said, because finding services that fit well with and have a complementary relationship with a service after the fact is no mean feat, it is best for companies to anticipate this from when they are doing the initial service design and look for advertisers that would fit with them well as business partners in advance.

³ To prevent native advertising from becoming stealth marketing, companies should be aware that they need to post to this effect in line with the Act against Unjustifiable Premiums and Misleading Presentations and the guidelines of related organizations.
Reference: JIAA, “Neitibu koukoku ni kansuru suisenkitei” (“Recommendations on Native Advertising”)

By over-focusing on growing advertising revenue with the aim of recouping development costs, companies can find themselves putting the cart before the horse, in that they degrade service usability, undermining their original aims. Of the 8,727 complaints about advertisements brought to the Japan Advertising Review Organization (JARO) in 2023, 4,035 were about internet ads, occupying first place ahead of television (3,633).⁴ Because online ads can have their outcomes clearly measured, leading to a repeated process of optimization towards ads that are being pushed more heavily, they can very suddenly cross a line, transforming into inappropriate ads. To avoid such situations, companies need to clarify the aims of their advertising in advance and establish posting regulations, in addition to aligning understandings internally around the issue. Having done so, companies need to constantly focus on deploying the minimum ads required to achieve their aims. The more advanced monetization becomes, the more of a voice advertising managers will have within companies, which can lead to the posting regulations established in advance being relaxed. The above measures will head off the risk of this happening, and leading to a change of direction away from what was originally intended for the service. Once the problem grows to the point where it is obvious, advertising will have expanded to the point where the company depends on that revenue, at which point the process will be difficult to stop. Rather than putting in place measures to address the problem once it has already made its presence felt, companies need to have ongoing, company-wide discussions around these issues, and exercise care in how they go about deploying ads. Companies should also as much as possible avoid setting advertising sales revenue as a direct target for managers when operating ads in a SaaS for these reasons. This is because there have been numerous cases where, despite an initial manager who shares in the concept, some change in environment such as a change in manager causes the organization to become focused on improving revenue, leading it to fall into a negative partial optimization that ultimately prioritizes raising advertising revenue over the aims of the service as a whole.
While it is impossible to reduce the risk of something like that happening to zero, offering users an opt-out option from the time when the company begins posting ads can reduce said risks. While the total number of ad views may be reduced as a result, hidden ads will not provide added value to users, so that number can serve as an indicator of ad quality. As this also minimizes the negative impacts of ads on users who do not want to see them, such measures can also reduce the risk of users discontinuing their use of the service due to reduced usability. Even if advertisers do not buy into the idea of an opt-out option, it would still be desirable to at least offer a feedback feature for ads. The most important thing in operating ads on a SaaS is to gradually scale ads up while adjusting the quality, positioning and frequency of ads based on careful monitoring of user reactions, and while checking for any indication that ads are harming the value of the service.

⁴ Japan Advertising Review Organization ”Soudan uketsuke kensuu 2023 nendo tsuuki” (“No. of consultations received: Full financial year 2023”)