SaaS Business Model and How It Works
\r\nLooking for the best way to launch your future project? Perhaps you've already thought about the concept of cloud computing. Delving into this topic, you'll become familiar with the SaaS business model. Today we will tell you about one of the most discussed topics in information technology, which has already captured the attention of thousands of entrepreneurs worldwide. If you plan to join them, you need to know the most important facts about the SaaS model, its stages, examples, pros, and cons.
Introduction to the SaaS Model
If you have ever worked with companies involved in software development, you are likely familiar with the well-known concept of "software as a product" (SaaP). In this case, you order a solution, the software provider sells you a license for it, after which the application is hosted on your device. You either rent a server or purchase expensive hardware. But with the growing demand for high-quality IT solutions, the situation changed. Cloud computing brought completely new solutions and software development methods. Thus we arrived at the SaaS business model and the benefits it can bring to your company. SaaS stands for Software as a Service. According to this business model, the service provider grants access to a specific application and its functionality, while the application itself is hosted on an external cloud server. In turn, the user pays a fixed periodic fee for using the application. What does this mean? Let's look at an example. A large logistics company needs a powerful CRM to efficiently manage incoming orders. The company can solve this problem in two ways:Development of an On-Premise Solution
The business owner contacts a development agency and describes their idea. Together they discuss the terms and functionality, and after a few months (depending on the complexity of the application), the client receives a fully functional solution developed for their specific needs. This is a time-consuming and expensive process, but the finished functionality is worth the effort.\r\nSaaS Product
\r\nThere are various types of ready-made applications for any needs. Business owners can pay for a license, gaining the ability to use the solution from any device with Internet access. SaaS applications are stored in the "cloud", meaning they are secure and accessible.
\r\nMake sure you don't confuse two concepts: cloud computing and software as a service. We have written an article explaining the difference. It is worth your attention! However, do not forget that SaaS today is practically not inferior in its capabilities to traditional on-premise applications. It's just that developing traditional applications takes more time, so some business owners choose this business model as an opportunity to use the tool immediately. In many cases, it's only a temporary replacement before ordering a scalable custom solution developed for specific business needs.
IaaS and PaaS: Similar Models You Should Know
To better understand how SaaS works and what advantages it can bring to your company, you should be aware of two models that use cloud computing: PaaS\r\nPlatform as a Service (PaaS) allows you to create software solutions on the cloud. This means you can rent a platform with a specific operating system, IDE, database, and everything needed to build an application. To get acquainted with this business model, you can look at Heroku or Red Hat OpenShift.
IaaS
Infrastructure as a Service (IaaS) means providing everything necessary to host a software application. This includes servers, IP addresses, networks, firewalls, etc. Essentially, it is a digital replacement for the hardware infrastructure needed to install and run powerful software. Windows Azure and Amazon Elastic Compute Cloud are web services that use this business model.
4 Stages of the SaaS Lifecycle
After getting acquainted with the definition of the SaaS business model, it's time to find out what lifecycle stages it goes through until it becomes a golden goose for its founders.
1. Launch Stage
The initial stage of the business is when you will use the SaaS revenue model. Without having real customers yet, founders must identify the "pain points" of potential clients, create a business plan, prepare a demo version or prototype of the application, and show how the solution will solve existing problems.
Before starting your own Software as a Service business, you need to make sure the market is large enough for another IT solution.
In addition, you need to demonstrate the critical difference of your software from other existing solutions. Then, thoroughly test the application and fix any issues as soon as they appear.
Also, be sure to follow best practices and trends in SaaS application development. This will provide useful insights.
Many consider this stage the most difficult on the path to a successful SaaS business. However, the next two stages can also be challenging.
2. Acquiring First Customers
At this stage, you will attract your first customers, develop a marketing strategy, and begin generating revenue. Several points are important here:
- A/B testing. This is an experiment where you can try different design variations and find out how they affect the target audience. For example, 50% of visitors see a landing page with one design—green, and the other 50% with a different design—blue. The marketing specialist determines which design attracts more users and increases conversion and sales.
- Defining the target audience. Using tests and metrics, you can define the target audience and create a user persona. This will help you better meet the needs of potential users and strengthen your market position.
- Lead generation. Using list building, email campaigns, or other methods, you can acquire the first customers and build a database.
At this stage, it is very important to start measuring target retention, user satisfaction, and approximate recurring revenue.
3. Growing a SaaS-Based Company
Your growth should be organic. Difficulties will arise if you increase the number of customers too rapidly. You need to strengthen databases and functionality, continuously improve the services provided, and expand the support staff.
One of the reasons customers choose SaaS solutions is to minimize effort. Many simply pay for a license and use its functionality.
If you plan to start your own SaaS business, you must remember that comfort and stable support are what you need to provide to your customers. And the more viral your solution is, the more satisfied your customers will be with your application. Be prepared to provide them with the required comfort.
4. Steady Success
Those who have overcome the difficulties of the previous stages have built a stable and profitable business. Here, customer retention and growth continue. Your team will grow organically and contribute to improving the solution. Revenue will increase, creating even more opportunities for business expansion.
\r\n\r\nBut still, it's not time to rest. To keep your head above water and stay ahead of competitors, constant improvements and upgrades are necessary.
\r\n\r\nPros and Cons of the SaaS Model
\r\n\r\nDespite the fact that revenue from businesses operating under the Software as a Service model exceeded $72 billion in 2018, many doubt its viability. That's why we decided to split this chapter into two parts and discuss the pros and cons of the SaaS business model for two camps: sellers and customers.
\r\n\r\nAre you unsure whether your customers will use the application you offer? Here you can explore the main reasons why they might choose this type of product and understand how to offer a better solution.
\r\nIf you are planning to start a business and launch your own SaaS platform, you will become more aware of why this is a beneficial option.
Why Customers Choose SaaS Applications
\r\n\r\nCustomers should adopt this model if the following advantages appeal to them:
\r\n\r\nCost Reduction
\r\nWhat is the SaaS revenue model? It is a subscription-based service that reduces upfront costs and requires payment only after the user starts using the application. The subscription cost may vary depending on several factors:
- \r\n\t
- Number of users. A small digital agency with 3-4 employees will pay less for a SaaS product than a corporate company with 400 employees. As the company grows, the subscription cost may change. \r\n\t
- Number of actions. The user can decide how many tasks they plan to accomplish using your SaaS application. For example, one can send 50 automated emails per month for 5000 rubles or 500 emails for 30000 rubles. The customer has the ability to regulate their expenses. \r\n\t
- Required database. Depending on the customer's resources and capabilities, the price can vary. \r\n
Overall, software as a service is a cheaper option compared to an on-premise solution developed from scratch.
\r\n\r\nImpressive scalability
\r\nAs mentioned above, customers often fear overpaying for functionality they won't need. However, they also worry that they might need additional features in the future. With the SaaS approach, there is always the possibility to request additional functionality and scale the application.
Thanks to the scalability of support services provided by the SaaS platform, the customer does not need to worry about periodic updates, whether scheduled or requested. All the burden falls on the vendor's shoulders.
\r\n\r\nInstant access
\r\nWhen ordering a product from an IT agency, it often takes a long time to deliver. With a SaaS application, the customer can get access to the product immediately. As soon as they pay for the application, they get access to its features and can configure it to their needs.
Accessibility
\r\nLast but not least, there is no need to spend money on state-of-the-art equipment to launch and maintain the application. The infrastructure is provided by vendors. Thus, your customers can focus on growing their own business and access the application from any laptop, any smartphone, at any time, as long as the device is connected to the World Wide Web.
Disadvantages of SaaS Applications
\r\n\r\nAll this sounds great. However, many businesses cannot deliver the expected level of service to their customers. Below we have listed a few main "pitfalls" that may deter potential customers:
\r\n\r\nLack of customization options
\r\nSince SaaS products are developed for the maximum number of use cases, extensive customization options may be unattainable. This solution is not developed for a specific company, so it may lack the ability to customize.
Limited control over the product
\r\nHow does SaaS work? It is developed by the vendor and hosted on an external platform. Thus, the customer does not have full control over every update or added feature.
SaaS Business: Advantages for Vendors
\r\n\r\nIf you are considering creating your own SaaS template, pay attention to the following advantages:
\r\n\r\n- \r\n\t
- Monthly revenue. What is the SaaS business model? It is a source of continuous recurring revenue. Once you have all the necessary functionality, streamlined processes, and regular customers, revenue is guaranteed. This fact is important for two reasons: \r\n\t
- Stability is what everyone strives for. Stable revenue is the main goal of any company. By familiarizing yourself with SaaS revenue models and choosing one for your needs, you can achieve this goal and take your business to the next level. \r\n\t
- A good sign for investors. By demonstrating an example of a SaaS business model and proving that you are generating stable income from your business, you will attract more investors who will contribute to the growth of your product. Your business will be beneficial from a financial perspective and overall company development. \r\n\t
- Increased customer loyalty. As we mentioned above, customers can experience an instant positive effect from using this type of product. They do not have to sit and wait for the application to be built. Thus, they are more likely to stay engaged, leave positive reviews about your solution, and share their experience using this software. This leads to greater adoption, higher conversion, and product popularity. \r\n\t
- More opportunities for improvement. You are not tied to a few customers who expect you to fully satisfy their wishes. You do not need to convince users to upgrade the tool to a new version for better performance. Your customers have already paid for the product, they like it, and they should agree to accept updates or new features. After all, they can scale down their application and use only the features they really need. \r\n
As a SaaS business owner, you have more opportunities for critical improvements, design pivots, and product modernization. You have the ability to attract new users without losing those who already benefit from your application.
\r\n\r\nSaaS Business: Challenges Vendors May Face
\r\n\r\nReaders who have received a clear answer to the question of what the SaaS model is become its active followers. However, before starting to develop your own Software as a Service business model, you should be aware of the following challenges:
\r\n\r\nChallenges related to meeting unique needs
\r\nSaaS development is about creating a common solution for various businesses. This means you do not have to customize the application for specific needs or create special features on demand. However, you may lose sight of potential customers' needs, and thus fail to adequately address existing problems.
Be sure to listen to customer feedback and incorporate their wishes into real application features. However, do not add tons of functionality to your product. Stick to the core business concept and add only those features that bring real value to your customers.
\r\n\r\nDifficulties at the hypergrowth stage
\r\nManaging all processes during the growth phase can become a headache. Many business owners abandon this stage because they cannot handle the tasks that arise. It can be extremely challenging to manage the costs of acquiring new customers while striving to provide the best service to existing ones.
Therefore, it is necessary to prepare for this stage and develop a well-thought-out plan for organic business expansion without compromising product quality.
Data Security
As more and more applications move to cloud services, security concerns also increase. You may have already heard about the threats and potential dangers associated with cloud and SaaS services.
To avoid serious problems, follow best practices for security testing and use powerful programs to protect your customers' data.
Final Thoughts
Is SaaS what you're looking for? Have all the benefits described here convinced you to start building your corporation in this field? We think so, and we believe it is the future of software products.
To work on this type of application, you need a reliable software development partner capable of solving engineering challenges and experienced with cloud computing technologies.