SaaS Business Model

What Is SaaS?

SaaS is referred to as a business model that includes selling cloud-based software/services by charging monthly or annual subscription fees. The services or software can be accessed via mobile/web app.

Revolutionizing Businesses with SaaS

SaaS is not about the cost only, it is also about the ease of access as well. Compared to the on-premise software, it was found by mainstream players as closed, slow, or unstable to support many business activities. The cost-efficiency, simplicity of use, and improved functionality led to the escalation of the growth in SaaS. Nowadays, for all types of businesses, no matter if it is a small business or an enterprise-level, SaaS is a practical option.

SAAS vs PAAS

The difference between the platform-based service (PaaS) and SaaS depends on what level of service is provided. PaaS provides a platform or resources for organizations or developers that allows them to develop and run apps in a computing platform, which typically includes an operating system, programming language execution environment, database, web server, etc, Windows Azure for example.

SaaS users are not in control of the app, they are just using it. One such example is Google Docs. Users can use the docs to create their files, but they can’t control how the Docs app is designed.

SaaS Basics and Advantages

Benefits For The Customer

Minimizing Costs: one of the major advantages of SaaS products is that they come up with subscription-based models, which means that users can use the software based on their needs. They can choose based on monthly or annually. Additionally, since the service is cloud-based, the infrastructure costs for customers are also reduced.

Hassle-Free Upgrade: there’s no need to download/update the software on the user’s PC. The service provider is responsible for updating the software. For SaaS software, upgrades are generally done without experiencing user downtime or with shorter maintenance windows.

Easy Accessibility: the most amazing advantage that SaaS products offer is that users can access the software from any device and in any part of the world. There’s no hassle of taking your PC where you go. All you need is a device & internet connection.

Collaborative Work Made Easier: colleagues can work together or solve a problem from anywhere in the world, thanks to the SaaS.

Up-to-date Features: SaaS products enable their users to experience up-to-date features almost instantly. The service provider takes the responsibility to update everything.

Quick Benefits: customers see immediate gains, and SaaS products are mainly cloud-based. In most cases, accessing the product function is as easy as signing up with a name & email address.

Higher Adoption: SaaS products can be used from anywhere in the world. The availability has increased their adoption. The immediate benefits experienced by the user from the software increase the chance of sticking with the product for a longer period.

Minimizes Troubleshooting: you can work without any delay or troubles.

Benefits of SaaS Business Model Vendors

Recurring Revenue: One of the benefits of the SaaS model is that it has allowed vendors to generate revenue that is expected to continue in the future. Vendors can predict these revenues.

Easy Upgrading: Vendors can continuously update their products, which helps SaaS service providers fine-tune their products, add different features regularly, and check whether users like them or not.

Easier Support System: providing the best user experience to the customer is important for any business. SaaS vendors can support their users almost immediately and 24/7. Users can continue with the free plan and, if they like it, they will upgrade to a paid level.

Experimenting With Features: as the SaaS provider is in control of the system, they can easily experiment with new features to check whether the users like them or not. They can ensure the best experience.

Additional Benefits for Software Owners

Increased Lifetime Value: SaaS business models come with an upselling/cross-selling strategy, that allows them to encourage customers to shift to a higher-end version of the product than the one they are using. Owners can offer a menu of options to the customers. Customers can purchase a feature of a relevant service when they need it. It allows the owners to capture additional revenue even if the customers choose the most basic plan.

Loyal Customer Base: SaaS providers use several tools to increase their customer loyalty. To do this, they can offer some permanent or temporary benefits, such as free features or storage. SaaS companies offer various benefits to their customers to increase customer loyalty.

Real-time Data: the SaaS model provides real-time data to understand the behavior of the customers while using the software. This enables business owners to understand their customers and provide the service they need.

Increased Valuations: company valuation is mainly counted on its revenues, cash flows, and the margin of profit and loss. SaaS providers continue to gain revenues as long as they maintain customer churn. Because of these, SaaS companies can trade at a much higher valuation.

How Does The SaaS Model Work?

The SaaS business is based on subscription-based plans, they maintain cloud servers, databases, and software that enables their customers to use the product over the Internet. A provider may offer different types of subscription plans for various products or various end-users. They may offer a free trial plan and later offer the premium service with a recurring subscription fee.

Another important thing about how SaaS works is the continuous update. SaaS companies upgrade their services and products on a continuous basis and push those updates to the users. The updates for SaaS products, as mentioned earlier, are much quicker than the on-premise software.

SaaS companies employ very high-touch customer success teams in their sales cycle, who continue to work with and serve their customers even after an annual or monthly subscription is committed. Below are three basic principles that set the SaaS business model apart from traditional models.

Focus on Customer Retention

Customer retention stands at the core of SaaS. The providers don’t only sell a product, they sell a service. The users who purchase the service are not one-time customers. SaaS companies focus on keeping their customers around for a long time. So to keep the customers, SaaS companies focused on building long-term relationships with their customers. Companies do this by keeping in touch with customers, gathering feedback from them, and answering questions to ensure everyone is satisfied.

Acquiring New Customers

Service providers constantly bring new users to their ships. They do it through various means, like ads, SEO on blogs, social media marketing, or digital marketing. They attract customers with a FREE plan. They also keep an eye on customer churn, measuring how many customers stopped using their service on a monthly or periodic basis.

Using Real-Time Data

SaaS companies keep a close eye on their customers and try to understand their behavior, like how often they are using their service, how much time they spend on them, etc. Based on this data, they offer tailored plans to the customer.

Downsides of a SaaS Business Model?

Competition In the Industry

As the market is expanding, so is the competition. Due to its rapid growth, every day, new vendors are entering the market.

Getting The Frist Customer Can Be Slow & Frustrating

This is in fact true for any type of business that tries to enter into any industry, especially if there are some giant vendors already occupying the space. In a situation like this, getting an easy entry into the SaaS industry can prove to be a daydream.

Building Long-Term Customer Relationship

SaaS is a service, and building a long-term customer relationship is much more important than getting a new one. A SaaS service provider has to be very careful about the satisfaction of their customers. There is no way a business will survive if they take it as a passive income model.

SaaS Sales Approaches

Low-Touch SaaS Sales

Some SaaS products can sell themselves. Selling a SaaS product to prospects with minimal P2P interaction is generally considered a low-touch SaaS. The main sales channels include the software’s website, digital marketing, and offering a free trial of the software optimized for onboarding from the beginning.

High-Touch SaaS Sales

High-touch SaaS models are typically based on the traditional methods of marketing and selling. The sales team receives a list of probable customers from marketing. It requires human contacts in order to generate probable leads for their customer. This type of approach is mostly focused on B2B.

Important SaaS Business Model Metrics

Monthly Recurring Revenue

MRR is a SaaS metric that helps a company analyze how much revenue they can expect to bring in every month. The growth in MRR is considered to be parallel with the growth of the business, similarly, the shrinking of MRR has a negative impact on the business.

Customer Acquisition Cost (CAC)

It’s an important metric used in the SaaS business model to track a company’s success. CAC is defined as the total cost that it takes to bring a customer from the first contact until the sale. It is counted by considering the sum total of the amount that it takes a business to acquire a customer.

Lifetime Value (LTV)

It is considered one of the most important metrics that companies can track, even the most important metric for a startup. It’s defined as the amount of money a customer spends with the business throughout his relationship. The data to calculate LTV can help the company to assess the overall condition of its business. Along with providing insight into the long-term trajectory of a startup, it also provides immediate insight into specific areas that need improvement.

Churn Rate

Churn is loss, two types of churn are generally in the business: customer churn and revenue churn. Customer churn can be defined as the number of customers that cancel their subscription plans. Whereas, revenue churn is the amount of monthly/annual revenue lost.

The Pros of the SaaS Business Model

Recurring Revenue

It is at the core of SaaS business models, enabling companies to earn revenue continuously. Customers basically rent the software/service and pay a subscription fee monthly or annually.

Rapid Growth

For SaaS, if the product can prove valuable, it will be an instant hit.

Ease of Deployment

SaaS is mainly based on the cloud, it’s easy to make quick fixes, add new features, or upgrade to a SaaS product. Customers from anywhere can purchase and use the service.

Predictable Revenue

SaaS products are based on the subscription model, so it is easier for the company to predict the expected revenue.

The Cons of The SaaS Business Model

Upfront Costs

Securing funds can be very difficult. Without proper funds, it becomes tough to maintain the capital and manpower needed to grow the business. Many startups fail because of the lack of proper funding.

High Risk

SaaS involves high risk, a business can either grow fast or may fail fast. If the market changes more than anticipated, it can be a devastating loss for the companies.

Churn

Factors like decreasing demand in the market for a Saas product or service, or the entrance of a giant company offering a similar service with a lower cost can cause customer churn. Customers often like to change the ship if they find it more attractive.

SaaS Business Model Growth Strategies

Customer Stories & Referrals

One of the most used strategies in the SaaS business model is customer reviews and referrals. It’s good proof for the company to show what they are doing, why they are doing it, and whether the customers like it or not. Companies capitalize on these success stories through various channels like marketing content, speaking events, etc.

Thought Leadership

Becoming an expert in a specific area of service can help a SaaS company grow fast. This strategy is most suitable for businesses focused on only one specific area. That credibility will spread if a company blog or community group can provide value to the end-user outside of their product.

Third-Party Resources

Using 3rd party resources to grow a business can be a good choice. Showcasing great customer reviews on well-known sites, or presenting their service to be analyzed for trusted reports.

Social Media & Influencer Marketing

Marketing strategies are changing, and so is the channel. Social media and influencer marketing help spread the company’s voice and name to end users and build brand value.

Types of SaaS Products

Packaged Software

It comes in various forms including financial management, supply chain management, human resource management, and customer relationship management. The main idea behind packaged software is to provide a complete solution for complex problems and to deliver it in one cohesive bundle.

Collaborative Software

This type of SaaS product enables users to work on a common platform or a common project. Products like Dropbox, Google Docs, HubSport, and Trello are a few examples.

Management & Enabling Tools

These types of SaaS products provide solutions for a wide range of different things, such as monitoring and evaluating user behavior on a given website, monitoring the activity of the users on a network, testing a system, and much more.

The Process of Building a Great SaaS Product

Determine If It’s the Right Choice

It’s important to understand whether entering the SaaS business is right for you. Considering all the pros and cons discussed above, you may first set up your mind if you are going to build a SaaS product. If you have made up your mind, the next step is to form a team.

Design a Roadmap & Strategy

A few key questions: How will the new product create a better customer experience? Is there a demand for this in the market? What strategy do you follow to measure success by entering into SaaS-focused metrics that emphasize customer retention and recurring revenue? How do your product requirements change to answer these questions and help you gain market share?

Design & Development

While designing the product, keep in mind that the product should be attractive enough to acquire several customers. The product should have enough advantages that the customers must think, this is the best option for their needs. While developing the product, don’t be afraid of making any modifications if you face any challenges or come up with a new idea.

Beta Testing

It’s a must for any software since it’s impossible to anticipate every customer’s needs. Start with a small group of customers by offering them the product free of cost or at a minimal cost. Take feedback from them and make necessary changes. Once you are satisfied with your product, you can now attract new customers.

Customer Onboarding

Customer onboarding is a difficult task in the SaaS business cycle. You should consider using various channels to present your product to your targeted customers. Convincing customers to use your service is crucial, especially when there are many options available in the market. Onboarding includes both initial training and ongoing support. The support should last until the customers are fully comfortable with your product.

Continue to Deliver Value & Market

The SaaS is based on the recurring revenue model, but it doesn’t guarantee success. There’s a huge competition in the market, so keeping your customers satisfied should be a priority. You should continue adding value to your product, making upgrades, and adding new features by understanding customers’ needs.

Types of SaaS Solutions

CRM Software

CRM solutions automatically collect customer information and keep track of customer behavior from different channels, including the website, support logs, customer reviews, and feedback. They also collect info from SNS.

ERP Software

ERP increases the customer satisfaction level which ultimately leads to increased revenue. The key areas ERP covers include accounting, risk, project management, supply chain management, procurement, budgeting, and compliance. Some key benefits: decreasing operation & management costs, improving business insight, consistent infrastructure, improving efficiency, minimizing risk, improving collaborative works, and providing better user adoption rates.

Accounting Software

Accounting is essential for every business, no matter how big or small it is. From simple to complicated, almost every financial aspect of a business can now be handled easily using SaaS solutions.

Project Management Software

The project management solutions enable businesses to manage different projects more easily. Using SaaS PM software, team members can work on the same platform, hence getting up-to-date information that is accessible anytime from anywhere.

CMS & e-Commerce Platforms

In this era of digital life and the internet, everything is becoming online. Traditional businesses are shifting towards e-commerce. SaaS web hosting services and e-commerce solutions have made everything easier.

Collaboration & Communication Solutions

These solutions are almost similar to project management solutions. It enables team members to share simple files, and instant messages, and manage fully-featured projects.

HR Solutions

HR SaaS solutions enable a company to manage its human resources, their performance, payroll, attendance, and other processes more easily. It is useful for both employees & managers to increase productivity and enables them less worry about administrative tasks.

Payment Gateways & Billing Solutions

It enables businesses to automate their payment processes and allow businesses to accept payments through different channels. SaaS solutions enable businesses to automate almost all aspects of the payment process between quote to cash.

Niche/Specialty/Vertical SaaS Solution

These solutions can be built on a specific niche and can include anything from a solution for gaming platforms to educational content moderation.

How Do SaaS Brands Attract Users?

Attract The Right Audience

For rapid growth, SaaS companies must target their potential customers. It should be designed in a manner that targets only specific segments of people.

Building Relationships with Leads

Nurturing leads is as important as getting a lead. Using different channels like emails, SNS, and the marketing team of a new SaaS company should nurture their leads, make a relationship with them, and convince leads to test their product.

Removing Roadblocks to Sign Up

Marketers should optimize conversions around various website goals. From trial sign-up to onboarding to converting free users into paying customers, every step is made easier for the customer.

Engaging Users

By using the free trial, users can understand the value of the SaaS product which leads them to become regular customers.

Increase the CLV

Most SaaS companies are based on the subscription model that enables them to receive recurring revenue, businesses should be focusing on customer retention. The strategy should focus on increasing CLV by reducing churn & moving customers to higher-priced plans.

Best SaaS Companies & Secrets of Their Success

Hubspot: Inbound marketing, All-in-one solution, and Easy-to-use.

DropBox: Simplicity, It’s fast, and Cross-Platform Support.

Zoom: Easy-to-use, Pioneering New Features.

Shopify: Non-tech friendly, Graphic Interface.

Surveymonkey: User-friendly interface design, A big choice of templates.

Slack: Design, Integration Power.