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The SaaS Business Model (Explained)


The SaaS Business Model (Explained)

Since 2005, the software-as-a-service (SaaS) sector has seen massive growth that has changed the landscape of virtually every aspect of our daily life. This field saw many challenges in its early stages, but with more cash invested in technology, SaaS has emerged to be the best thing that has ever happened to many businesses.

Although the SaaS business model is still in its infancy and inherently linked to the potential of cloud technology, this model underpins all of its activities in a breathtakingly unique way. Therefore, understanding the principles of how SaaS operates is essential for your company’s growth.

What Is Saas?

Software as a service, or SaaS, is a distribution model where customers, through subscription plans, are licensed to a centrally hosted software. A SaaS company gets its software via any centralized, cloud-based system.

A SaaS firm is responsible for the servers, database, and other software that enable their products to be available and used by their customers. Some SaaS business models offer many applications in their products, with varying subscription plans that access different services. The subscription plans for the consumers may range significantly from one SaaS company to another.

What Is The Saas Business Model?

The SaaS business model sells cloud software—commonly accessed through a mobile app, web app, or desktop app sometimes—at a subscription plan. SaaS model involves various aspects such as:

1. Recurring Payments

Customers do not purchase hardware in SaaS. Instead, the software-as-a-service business software only gives subscription services. So, rather than worrying about paying for it just once, you’ll only pay a subscription on a monthly or annual basis.

Monthly recurring revenue, or MRR, is a type of recurring payment. And since SaaS firms sell services, accounting revenue can be very hard. For example, clients may pay a percentage when they subscribe to a plan, they may pay a percentage, but you cannot consider this cash revenue until you earn. Therefore, income recognition is an essential aspect of the SaaS business model.

2. Better Customer Retention

Customer retention is vital for all businesses, but it’s even more critical for SaaS business models—clients retention is the only factor that keeps them afloat. As mentioned above, you cannot claim all customers’ subscription cash until they get a full term of service. For instance, if a client signs for a one-year subscription plan and leaves after only two months, you’ll do without recurring revenues on that slot for the next ten months.

That said, the business model’s success tremendously hangs on customer relationship management. On average, a current SaaS client spends more than a new customer and is seven times more likely to leave to a rival firm due to poor services.

3. Consistent Updates

Whereas other businesses may release “next-gen” product versions, SaaS continuously makes minor and frequent upgrades to their services to maintain high client retention.

Partly, this may be due to the nature of software business; software flaws can expose clients’ details to hackers, so continuous appraisal of the security state with patches is the priority in any SaaS business model. Additionally, hosting their products implies that SaaS firms send updates whenever necessary, providing additional features or improving the current ones.

The Phases of SaaS Businesses

A highly successful SaaS firm may command values in the billions of dollars, serve millions of clients, and even change the landscape of an entire industry. However, that may only happen in the last stage of a successful SaaS business model.

This section highlights the three phases of a SaaS business.

1st Phase: Early Stage

At the early stage, your SaaS business is still at the bare-bones stage. You can go for pre-seed funding or choose to seek a bootstrapping strategy to manage your organization better. At this stage, your business will most probably be in its development phase, and you’re unlikely to have many clients.

In the initial phases, the number of your staff is likely to be minimal because you’ll most probably have only one product to focus on. Plus, you may not have started getting good returns to manage a larger team.

Most importantly, it would be best to look for ways to track metrics and optimize pricing strategies. You can develop your business model to qualify for different loans and funds to improve it.

2nd Phase: Growth Stage

Things start getting a bit exciting at the growth stage. Here, you’ve built a brand that is fast gaining popularity, you’re getting more subscribers, and you’re starting to realize MRR.

However, to start your growth stage and maintain the growth, you’ll have to incur more expenses to enable your firm to grow its workforce, fund product development, innovate, and scale-up. The following are types of funds that your SaaS business may need at this stage:

  • Venture Capital: The glitzy method of securing money for your business, venture capital is given by organizations that see growth potential in your business or a reliable growth trend in the recent past. Essentially, they want to invest in organizations they think will have a bright future.
  • Angel Investors: An angel investor is an individual who has a considerable amount of funds and is ready to invest in any promising business. They can be excellent for startups seeking substantial initial capital. Additionally, they can play a decisive role in future financing rounds.

However, angel investors and venture capitalists are not the only funding sources to help you grow your business. Some startups go through incubators at their initial stages; other, somewhat more developed SaaS firms get startup accelerators that match their needs.

While some firms continue bootstrapping for a longer time, other companies are so adept at raising income from the beginning that they don’t need external funds until they’re ready to scale.

At this stage, you should establish excellent key performance indicators to ensure that your business can scale up.  It’s equally vital to develop a strong monetization plan to help you seek various investment forms.

3rd Phase: Maturity Stage

A SaaS firm at maturity stage has demonstrated its worth and can be considered an established one. At the maturity stage, a company has a well-defined targeted audience and dependable products that it updates regularly.

The company is earning a considerable MRR, and its KPIs are steady. While mature SaaS firms may also look for and get investments, they’ll most probably need a more significant sum than SaaS companies in the first two stages. They may need funds to access new markets or take over rival firms.

A SaaS company should be keen on its pricing strategies at this stage. Some firms here develop complacency because their businesses are profitable and often fail to explore their potential. Most SaaS companies, at this stage, are frequently on a pile of potential income that they waste with inappropriate pricing strategies.

Popular SaaS Businesses

The number of successful SaaS businesses is astounding; there are many examples of success in the B2C and B2B space, data analytics, AI video hosting, and much more. The following are examples of successful SaaS businesses that you’ve most probably used or at least heard of:

1. Shopify

Shopify is one of the most famous eCommerce business platforms—it owns four products. Its primary product is an eCommerce space for online retail and stores (POS). In 2020, Shopify’s business model was ranked in the top 50 small business products.

2. SurveyMonkey

SurveyMonkey is a web-based survey creator tool that you can use to analyze and present your data. In 2020, the firm was chosen as The Winter Momentum Leader.

3. HubSpot

HubSpot is an inbound marketing software with features for customer relationship management (CRM), social media marketing, SEO, and web analytics. In 2020, HubSpot was recognized as one of the G2’s Leading 100 Highest Customer Satisfaction Products.

4. Microsoft

Microsoft has more than 100 cloud-based products used in many different software. PowerPoint from Microsoft was awarded as one of the Top 100 software products back in 2020.

5. MailChimp

This marketing software company has three primary products. Its leading product is its email marketing platform, enabling customers to automate their email marketing and even track their results. This company regularly features in multiple lists as one of the top all-in-one marketing software.

6. Adobe

Adobe has more than 50 SaaS products in marketing, digital media, publishing, and printing. The firm featured in the Top 50 business product at the G2 awards in 2020.

7. Slack

Slack is known for three products. It is a collaboration and chatting tool that allows internal video conferencing, productivity bots, and internal messaging. In 2021, slack was awarded the Best Estimated ROI organization for Winter.

8. Zoom

Zoom is a cloud platform for audio and video conferencing, webinars, and chat. While this platform is common for business communications, individuals can also use it for regular interaction. Zoom was founded in 2011 and had its headquarters in San Jose, California, USA.

9. Calendly

Calendly is an appointment planning software that enables external and internal booking of online conferences. Calendly automatically adjusts users’ plans across their calendars to avoid multiple reservations. Calendly was established in 2020 and is based in Atlanta, Georgia, USA.

10. Zendesk

This customer service platform was founded in 2007 and has its headquarters in Copenhagen, Denmark. It is a communication platform that allows businesses to engage with their consumers via SMS, email, phone call, live chat, or the web. Furthermore, companies may automate inbound interactions and host expertise for their consumers.

11. SEMRush

SEMRush was founded in 2008 in Boston, USA. Digital marketers use this tool to monitor and upgrade their websites. Businesses can audit SEO, check SEO rankings, monitor the latest trends and keywords, and improve their SEO score and online accessibility on Google and other search engines.

12. BambooHR

BambooHR is an excellent HR software for SMEs that allows employees to request sick leave time off and get the company’s response. Additionally, this software can keep employee information such as payroll information, personal details, and documents.

SaaS Business Metrics to Keep an Eye On

Data propels SaaS firms, and in this space, success depends on how a firm keeps track of essential indicators, their interaction level, and their development strategies. Below are the five main pointers that can determine a SaaS’ potential:

  • LTV: Lifetime Value (LTV) is the total amount you should receive from a client during their interaction with their account of your product.
  • CAC: customer acquisition cost (CAC) is the aggregate cost of sales and marketing needed to land a client.
  • MRR & ARR: Monthly Recurring Revenue or MRR and Annual Recurring Revenue or ARR are the backbones of any SaaS business. They estimate the foreseeable revenue that a firm can expect in a month or year.
  • Churn rate: means the number of customers that unsubscribe from your services over a specific period. This is a nightmare statistic for the SaaS business model; even when the churn rate is low, it can tremendously hurt a firm’s goal to maintain its growth momentum.
  • Retention rate: Your capacity to retain clients will determine your firm’s growth. Churn rate is the inverse of retention rate; maintaining high retention is as crucial as maintaining a low churn rate.

4 Features That Help Saas Businesses Grow

Now that we are conversant with how a SaaS business operates, let’s shift to the accessible SaaS tools that can help you compete in the market and improve your business:

1.   Analytics

Your understanding of your data is a crucial ingredient to the success of your SaaS company, and a properly-organized, reliable analytics solution can result in significant success. Therefore, a deeper understanding of aspects that influence the growth and success of your company is fundamental. Below are a few analytics factors to keep an eye on:

  • What are customer sections enabling and reducing your products subscription?
  • Which product features fascinate your clients more?
  • Which features detract clients more?

2.   Retention Software

Despite their role in measuring the progress of your SaaS business, retention and churn rates are rarely entirely understood by many startups. Knowing a customer group and tracing revenue retention, ARR/MRR, and overdue churn. These client retention tools can help you significantly lower the churn rate while reducing human misreporting and errors.

3.   Accounting Software

Accounting is a challenge to many clients, especially if they deploy the spreadsheet technique; collecting data can take as much time as analyzing it, committing errors is easy, and expensive technique resources can be challenging. Income recognition software is vital for making your accounting process smooth.

4.   Pricing Optimization Software

Optimization holds sway in the SaaS business model sphere, and it’s never more challenging than determining pricing ranges that are accessible to the customer segment and best for your prospects of growth.

Advantages of the SaaS Business Model?

1.   The Ability To Manage Software Versioning

Since SaaS is cloud-based hosted, you can only make its updates from the provider’s end. This is contrary to the typically pricey on-site software upgrade strategy that offers less often updates, huge budgetary needs, and frequently must enlist the assistance of an expert to use the upgrade. On the other hand, clients will always be up to date on the software and get the most recent features thanks to frequent increment updates—all included in the subscription price.

2.   SaaS is Scalable

Firms that offer real-time information get great demand and require a considerable amount of data to be processed fast. Luckily, You can scale SaaS applications, and they are capable of managing massive data transaction amounts and extended swells of operations, such as month-end closures or payroll processing. This feature enables accurate reporting and informed decision-making.

Scalability in the SaaS business model isn’t restricted to only data processing. Often, SaaS providers give a range of subscriptions to match the various needs of their users, and a client can shift between alternatives. Additionally, software in the cloud helps teams with users in different locations to get together.

3.   Cloud Deployments

Thanks to software deployments in the cloud, SaaS providers offer membership to their users by giving them access to their online account details. You don’t need an on-premises installation or expensive infrastructure, and there is no need to activate the software for an end-user. All you need is a web browser and internet connection.

4.   Flexible Licensing

SaaS subscription plans are far more responsive to customer demands and provide versatility that hosted software cannot offer. SaaS subscriptions include adjustable monthly and annual periods, and the subscription length is usually on an on-demand basis. Moreover, unlike hosted software, there is no need to obtain a license or install the software.

5.   Predictable Revenue

While you cannot accurately estimate income, when the software you offer becomes essential to a firm’s operations, you’ll gain loyal clients and realize constant growth of revenue from subscribers. This model is far more measurable than one based just on one-time sales. Clients that buy your services over a more extended period are less likely to unsubscribe, resulting in a more quantifiable cash stream.

Disadvantages Exist In The SaaS Business Model

1.   Longer Conversion Funnel

In the SaaS business model, converting a free user to a paying customer typically involves a longer sales cycle; usually, many months may consist of signups and free trials. You’ll devote more time wooing potential customers and generating leads and prospects.

2.   Easy To Copy Business Models

Where a SaaS firm succeeds, there will inevitably be a wave of other imitators. For instance, if a firm has shown success with a specific marketing technique, price structure, sales strategy, or even email campaign, rivaling companies may easily replicate the same method by just visiting the website. Pricing models become more apparent to consumers and competitors in this manner.

3.   Lower Barriers To Entry For Competition

Simple integration into the SaaS model may also imply simple replacement and fewer entry barriers to competitors.

Suppose a customer is unsatisfied with your services or support. They will move to the next promising provider with the same pricing model without making a more significant upfront financial commitment than other software sales.

Since most SaaS transactions are subscription-based, you’ll continue to offer more value than your competitors while up-selling to the subscription grade after clients have subscribed.

4.   Complex Analytics

Business analytics and marketing for a SaaS business model firm can be very complicated, mainly because the information comes from different channels. According to Bay Leaf Digital managing partner Abhi Jadhav, while most SaaS marketing activities are conducted online, the application of various marketing and automation platforms creates silos, making it almost impossible to measure the progress of marketing activities. You can escalate this by implementing loosely integrated marketing automation, online analytics, and channel marketing services like PPC management email marketing.

5.   Security

SaaS products are vulnerable to malicious attacks and data loss like anything else in the cloud.

Acknowledging the constraints for which the service provider is liable for keeping your information confidential and guaranteeing that data won’t be compromised is vital. Trusting that critical and sensitive data is completely safe in the custody of a third party is a significant concern for both provider and subscriber.

Wrap Up

The number of applications offering SaaS is nearly endless, and with funding methods diversifying, there is no better time to join this sphere than now.

Nonetheless, many successful SaaS firms base their success on a few software-as-a-service business model principles; a dependence on vital statistics and accurate tools’ deployment action. Applying the same concepts in your business model will most likely lead to success.

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