Explaining the SaaS Business Model

Business models are rapidly evolving along with technology, and when it comes to choosing the software to run a business, it is imperative to consider long-term perspectives and goals. The main task is to achieve the flexibility of the software product, which will allow the entrepreneur to keep up with the time and surpass competitors. While developing an IT product almost the best investment for today is the use of cloud computing, namely SaaS. Let’s take a closer look at what it is and how it works.

What is SaaS?

Software as a Service (SaaS) is a model of software distribution. According to it , the program is hosted by a third party vendor and then available to users over the Internet, usually through a web browser interface, instead of downloading software for local launch on a user’s PC.

Why is SaaS so popular?

SaaS is positioned as an attractive cloud solution in many areas because it offers multiple advantages for both users, companies, and developers compared to installed software:

Benefits for companies and investors

Revenue from SaaS usually comes regularly and is predictable, making it much easier to count cash flows in SaaS companies. This allows you to use SaaS in planning, here and now sell investors the future cash flow, and quite generously fund the current growth.
There are no problems with sales. Most SaaS solutions are set per a single user or per month. This price allows end-users to easily calculate the software cost. This eliminates sales problems that may arise as a result of IT budget approval.
Rapid commissioning and customer service: instead of sending software packages and issuing licenses, the service only needs to “go online” to get started.

Benefits for clients

Vendor maintenance reduces the burden on your employees: IT teams, in particular, no longer need to worry about software installation, licenses, upgrades, or maintenance but instead can focus their resources on tasks that are just as important to the company.
Easy integration of new employees: they no longer need to be granted licenses or install the software. Usually, new registration in a web tool is enough. This simplifies the integration of new staff members who can start work even faster.
Using desktop and mobile services from different devices: the software is no longer necessarily tied to a workstation. With login data, users can also use tools provided on the go or from other systems. This also greatly simplifies the remote office concept.
The cloud architecture offers all users the same security standards: the decentralized storage of all data on a cloud server means that local hardware and software problems rarely lead to data loss. Smaller companies use the same security standards as larger companies.
New features and updates are implemented and integrated much faster: since the software is on the vendor side, it is also controlled directly by the vendor. This way, you always use the latest version of the services.
User orientation: companies do not pay for the IT-solution, but for each user. In the past, software licenses have often been too expensive especially for small companies. Thanks to the payment options for each user, you can effectively manage the company’s finances.

Benefits for developers

It is easier to maintain because most SaaS platforms are in constant development and use the company’s infrastructure. The exception is SaaS in the corporate sector, however, with the vast majority of SaaS in the B2C and B2B sectors, users work over the Internet from servers supported by the company that developed this software. On the other hand, the IT-solution deployed on the client’s hardware is affected by differences in system configurations, interaction with other installed software, and operator errors.

What are the disadvantages of SaaS?

Most of SaaS disadvantages and potential dangers are akin to “teething troubles”. The SaaS model is rapidly spreading and due to pressure from competitors, problem areas such as data security and performance are constantly improving. However, you should understand some of the SaaS disadvantages:

Transmitting your data to your provider: Even if an operator promises the highest level of confidentiality and security, even if your data is protected by a contract, de facto your company’s confidential information is not in your possession and stored on remote servers. Data leaks, hacker attacks, and other incidents that jeopardize the confidentiality of your data are out of your control as you have no means to prevent them. The security of cloud services remains controversial. In Europe, GDPR can provide the proper level of security as long as the vendor actually adheres to these regulations.
Risks associated with service closing: If the SaaS provider goes bankrupt or is forced to terminate service for other reasons, it is simply impossible to continue using the service. Theoretically speaking, all data and documents may also be lost. However, SaaS rarely shuts down spontaneously, rather, the respective providers usually give users time to save their data sets and documents on other media or servers. In some cases, one service transforms into another and data can often also be transferred.
A fast and constant connection to the Internet is a must: SaaS platforms run on the Internet, so a good connection is necessary. Many operators offer offline modes that allow you to work without the Internet and synchronize data as soon as you go back online. However, to get the most out of SaaS, you need a permanent connection to the Internet. Problems with your Internet connection can lead to annoying loading time for web tools, and that can cause economic damage.
Inability to use the software during downtime: many SaaS platforms cannot be used if your ISP has temporarily disconnected. For example, due to maintenance work or server failures.
Operating system and browser compatibility: this may vary depending on the browser you use. There may also be compatibility problems with the operating system, especially if you use macOS. Most SaaS vendors are currently optimizing their tools for Windows.

How does the SaaS business model work?

In the SaaS model, the software isn’t sold as a product with a final value, but in fact, turns into a financial instrument with predictable cash flows. The basic idea is very simple: the revenue in the long term depends on the number of clients along with the average revenue per client.

The conditional life cycle of the SaaS project can be divided into several key stages:

Startup phase and customer acquisition

This phase includes such steps as getting started, developing a working product, and entering the market with your platform to begin attracting your first clients. If you perform well at this stage and demonstrate strong initial sales growth, you will achieve a lot. However, in this model, initial sales generate less income than in the traditional sales model. This is worth considering at the very beginning.

Hypergrowth and customer retention

If the market is into your product, you are likely to experience escalated growth very quickly as companies adopt your software. Although this all sounds quite tempting, it will usually cost more money because you need to quickly expand the amount of data, storage, bandwidth, and all sorts of hardware to support your newly acquired customers. Remember that customers of SaaS products often like the platform because they don’t need to build IT infrastructure for their business. Well, the reason they don’t need to build it is that the SaaS product provides them with all the necessary infrastructure through their membership. Today’s SaaS professionals understand that retention is the real revenue opportunity. An initial sale can bring you $500 when you close the deal. Retention, in its turn, will bring you an amount multiplied by the number of months during which the account remains active. The ability to generate retention revenue is exponentially greater than the initial sale.

Stability and sale of additional products

This is the stage where your SaaS business has already become relatively stable. You are starting to make quite significant profits, and the rapid acquisition of new customers will not push your infrastructure to its limits, as it happens in the rapid growth phase. SaaS business, as well as other businesses with the model of regular payments, differ in that the revenue comes for a long time (lifetime of the client). If the customer is satisfied with the service, they will use it for a long time, and the profit earned on a particular client can grow to very significant values. On the other hand, if the user isn’t satisfied, then they will quickly give up using your services, and the company will lose money it spent to attract this customer. This creates a key difference: in fact, it turns out that such business involves several sales. Some people see this as the true secret of SaaS success. Experienced SaaS teams quickly realize that they can stimulate revenue growth by expanding existing accounts. Additional sales, cross-selling, and any other sales that could generate additional revenue from existing customers have become the core of SaaS products. And it works! Mainly because the prospects for secondary revenue are virtually immense.

What are the SaaS sales models?

Broadly speaking, there are two ways to sell SaaS. The sales model dictates almost everything else for the SaaS company and product, which may be somewhat shocking to aspiring entrepreneurs. One of the classic SaaS mistakes that can take years to fix is the mismatch between the market or product and the chosen model for selling it.

1. Low-touch SaaS sales

Low-touch SaaS is designed for the majority of customers who purchase it without constant face-to-face human interaction. The main sales channels are software website, email marketing, and (very often) free trial software, with the trial being actively optimized to provide very few inconveniences on the launch.

Customer support in low-touch products is typically done in mostly scalable ways, by optimizing the product to avoid incidents that would require human intervention, by creating educational resources that scale across the customer base and using people as a last resort. However, many low-touch companies have excellent customer support teams.

2. High-touch SaaS sales

Some clients need help deciding whether to use certain products or how to use them. High-touch SaaS is developed through a laborious process to convince businesses to buy software, successfully deploy, and continue using it.

The heart of such an organization is almost always sales teams, where employees are often broken down into specialized roles: Sales Development Representatives (SDRs) who find leads for the software, account managers who own the sales process for specific customers, and customer service who are responsible for the well-being and continuous operation of the accounts individualized portfolio. The sales department is usually supported by marketing, whose main task is to generate a sufficient stream of qualified leads that the sales department must evaluate and close.

Key Pricing Models for SaaS

1. Flat Rate Pricing

This model is the simplest one for selling SaaS products. The essence of the model is to sell one product or set of functionality at a single price. Many examples of this model can be found among SaaS projects. For example, Buffer, which offers a plan with a single monthly price of $300. This tariff provides access to all product functionality.

2. Usage-Based Pricing

The essence of this model is that the cost of a SaaS product depends on the extent to which the client uses it. Thus, the more your services are consumed by the user, the more they will pay you, and vice versa. The most common model is used by SaaS companies in the field of platforms and infrastructure, for example, Amazon Web Services. They charge based on the amount of data used, requests, or the number of transactions.

3. Tiered Pricing

This model is the most common among SaaS companies. The bottom line is that one company offers several different tariff plans with different sets of services and functions. Most often there are three such “packages” – with low, medium, and high cost.

For example, HubSpot offers several “service packages” based on customer needs:

“Basic” – for beginners;
“Pro” – for professionals;
“Enterprise” is for entire teams.

4. Per Seat Pricing

The essence of the model is that one user pays a certain fixed amount monthly. If another user subscribes, then the cost increases by 2 times, etc. This method is very simple and transparent: the client can easily determine the cost of the monthly subscription.

One of the striking examples of using the model is the pricing policy of ProductPlan. Their cost for a certain product depends on the number of users – for each of them the fee is standard, regardless of the number.

5. Per Active User Pricing

This model can be called a variation of the previous model. Such billing is relevant if your clients are large companies that pay for access to a large number of their employees for a certain period. After all, there is no guarantee that each of these employees will actually use the product. That is why these customers prefer a pricing system for active users only. Then they will only pay for those employees who actually used the product.

For example, the SaaS company Slack only bills those who have used the software, no matter how many users are mentioned.

6. Payment for functions

Here the cost varies depending on the number of functions. Thus, the more functions you use, the more you pay. For example, SaaS company Evernote offers three pricing plans with different features: Basic, Plus, and Premium. This model motivates customers to upgrade. After all, after each upgrade, the user can use new functions. Plus, you will receive cash for the most difficult functions to support and maintain. You just have to put them in a more expensive package.

7. Freemium

This model was adopted from the experience of successful SaaS projects (Evernote, Slack and Dropbox). The essence of the model is that the company provides the product for free use with additional paid features. Also, this approach can be part of a differentiated pricing model, where paid tariff packages have free options. Later this option may be limited to encourage users to pay for the upgrade.

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SaaS is a great way to provide yourself with a solution that, firstly, will be profitable in the long term, and secondly, it has huge potential for scaling. It is flexible and you can listen to the opinions of users, as well as quickly add functionality. Why don’t you start the development of your own breakthrough solution right now!

Cover Image Credit: Isometric