The SaaS business model is one of the most famous business models that has been developed in the internet era. But in the business world, it’s a relatively new business model. To give you an idea, the term SaaS – software-as-a-service – is only 15 years old and was coined by John Koenig for the SDForum Software as a Service Conference, in March of 2005.
Since then, the software-as-a-service industry has grown exponentially, especially linked to the power of cloud computing. Today, the SaaS business model takes up a fair share of B2B tech offerings.
Let’s understand a little more, now, of the SaaS business model.
What is SaaS?
Saas, or software as a service, is when software is made available to the customers on a subscription basis with service elements. Thus, the software is cloud-based, centrally hosted and maintained, and only licensed to customers, for as long as they maintain their subscription.
In this way, all responsibility for the software rests with the company – server, security, maintenance, database etc. – and the user doens’t need to worry about installations and updates, for example. In general, they can access the system via web browser, mobile app or downloadable desktop software.
On the other hand, the company maintains recurring revenue, as long as its customers keep using the software. And they can offer the same large-scale service on the market.
What is the SaaS business model?
Although it appears to be a very simple business model, SaaS is quite complex. This business model includes some peculiar characteristics, such as:
- Recurring payments: this is one of the main points of the SaaS business model. The customer doesn’t buy a system or hardware. They buy a subscription. This means that while the company has the benefit of receiving revenue every month, it also needs to pay attention to accounting. Because, in general, it will need to make a large initial investment to produce this system, and the return will happen gradually, through small payments and several customers.
- Customer retention: yes, it is clear that every business needs to focus on customer retention. But this is significantly more important for SaaS, as revenue depends on retention. Thus, customer relationship and upselling are highly valuable strategies. And, of course, the service delivered needs to be of high quality in order to meet customer expectations, avoiding churn (leave the busines).
- Consistent updates: one of the ways to deliver a quality service, as highlighted in the previous item, is precisely to keep the customers updated with increasingly better versions of the software. As these updates can be done gradually and at any time, it is easier to bring what the customer needs. Unlike standard software, which needs to wait for a new release to include all new features and changes.
SaaS Business Model Canvas
Benefits of the SaaS Business Model
Using a SaaS has many benefits and that’s the very reason it has become the main business model for software companies. Costumers get a lot more value out of it and companies too.
The first positive point is customer loyalty. If your product is essential to your client’s business or lifestyle, they will remain loyal. And it is exactly this loyalty that makes SaaS a profitable business model.
The second is precisely the recurrence in payments. In practice, your customers are just “renting” your software. So, if they want to continue using, they will have to keep paying.
Thus, instead of receiving money for a single purchase, the company maintains recurring revenue that, once it exceeds the amount invested, basically turns into profit.
There’s more to it too. It actually helps both companies and customers save money, it’s more secure and easier to scale which means that it can keep pace with faster growth.
Disadvantages of the SaaS Business Model
The great challenge of a SaaS is precisely linked to one of its essential – and most positive – features: regular revenue.
The problem is that to put your product on the market, you need an expressive initial investment (on research, development, programming, design, security, storage, resources etc.). However, you will have this investment returned, little by little, in small installments and divided among several customers.
It is different from when selling “whole” software, in one go. In this case, the price is higher and the investment may be paid in the first sales.
And the other difficulty lies precisely in the fact that, since it is a recurring service, you need to continue updating and improving your product, while ensuring the safety of your users. And that also means investment – in capital, time, personnel and energy.
Popular Types of SaaS
The SaaS model got extremely popular because of the company Salesforce which is a CRM software company. But nowadays, you can find about any kind of software using the saas business model. The most common are:
- CRM – Salesforce, Pipedrive and Hubspot;
- ERP – Sage and Netsuite;
- Accounting / Invoicing – Xero, Quickbooks and Wave;
- Project Management – Trello, Asana amd Basecamp;
- Web Hosting and Ecommerce – AWS, Digital Ocean and Google Cloud;
- Human Resources – Bamboo, Web HR and Eloomi;
- Data Management – Clear Company and WebHR.
Revenue Streams For SaaS Business
Within the SaaS business model, there are some revenue streams that can be exploited. They are:
- Subscriptions: this is possibly the most common revenue stream for SaaS (although it is not the only one, as you will see below). In short, it is about offering your software in exchange for a monthly fee. While the customer is paying, they can enjoy the service. If they stop, they lose the license.
- Upsells: upsell is everything that adds more value to your customer – and that’s why they agree to pay. Selling again to customers you already have is easier and less costly than attracting new customers.
Therefore, offering new features, associated products or even enhance the service (adding storage, speed, data etc.) is one of the best SaaS sales strategies.
Just be careful if you want to increase your price by selling a new “version” of the same product. It is one of the most intricate strategies, but it can work for some businesses – especially if you can convince your audience that it’s best for them.
- Affiliate Sales: this can be a quick selling tool that allows you to penetrate new markets, with low capital and energy investment, without running the risk of losing your current customers. But it requires a lot of care – just as it can make your brand viral, you can also expose it in a negative way. So, plenty of attention in partnerships.
- APIs: the application program interface is when your software works with other apps. In that case, you get paid for allowing the systems integration. Again, it requires a study to be carried out in order to anticipate the needs, expectations and costs involved, so as not to regret it ahead.
- White Label Licensing: this is when your customer sells to their customer. It can be an interesting way to scale your business, but there needs to be a license agreement before you start.
- Setup Fees: it is a good way to validate your customer – if they are willing to pay a setup fee, they can pay for your service. Just be sure to keep any extra fees as low as possible, so that your customer doesn’t get annoyed and give up.
- Reporting: it is about charging for reports issued by the software. In that case you need to develop a reporting model that, in fact, gives value to the customer.
- Advertising: yes, it is about making space in your software available for ads. But be sure to do this in a way that doesn’t disturb users, as they understand that if they are paying for the service, they cannot be annoyed by advertising. Ads are usually only tolerated in free apps.
- Customer Service: you can also charge for customer service. Users who need support often can agree to pay to have it whenever they need it, with a monthly fee, for example. Just make sure you have a very well trained support personnel for that.
Saas Business usually have a pricing table based on features and/or number of licenses (users) like this:
SaaS Business Model Virtuous Cycle
There are many important aspects for driving SaaS revenue growth — regardless of whether they’re with a startup or an established software company moving to a cloud-based delivery model. But, as illustrated in the graphic below, there are three essential metrics in particular that form the foundation of any successful SaaS business model: Customer Acquisition Costs ; Customer Lifetime Value ; and Customer and Revenue Churn.
The phasing and interplay between these metrics — when managed successfully — can create a “virtuous cycle” that powers a positive-cash-flow business model, where future growth is funded organically.
There is a natural progression regarding when and where to focus on optimizing each of these metrics — that is, at which stage of a SaaS offering’s customer adoption life cycle. This research provides a business model framework for understanding this progression.
The bottom line
SaaS is a modern business model that works very well with current technology and is easily scalable. However, like any business model, it has its positive and negative points.
To be successful, the company needs to understand its customer very well, with its needs and expectations. In fact, also like any other business! Keep it simple!