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.
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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.
Although it appears to be a very simple business model, SaaS is quite complex. This business model includes some peculiar characteristics, such as:
We can see the SaaS Business Model structure in the Business Model Canvas below:
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.
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.
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:
Within the SaaS business model, there are some revenue streams that can be exploited. They are:
Saas Business usually have a pricing table based on features and/or number of licenses (users) like this:
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.
When we break it down, the SaaS business model feels tailor-made for today’s tech landscape. Its scalability and synergy with modern technology are undeniable. But just like any entrepreneurial venture, it has its highs and lows. Success in SaaS isn’t just about understanding the tech—it’s about really getting your customers, knowing their needs, and anticipating their expectations. Sounds a lot like Business 101, doesn’t it? And if you’re keen on diving deeper into the intricacies of the SaaS world, I’ve got just the thing. We’ve put together a detailed guide that sheds light on the SaaS business strategy. Eager to learn more? Jump in and explore the SaaS universe with us here.
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I'm launching a start up for a women-only app that is a marketplace for sports and entertainment service providers in Saudi Arabia and Dubai customers within the vicinity. I'm currently in the making of business model and one of our revenue model is subscription model to charge customers via affiliate fees. This is our first test of idea without proof of concept yet. Not sure if this SAAS or PAAS?