SaaS business model
In this article, we’ll talk about SaaS technology, which you might have heard already a lot of times. In the world of modern information technologies, there are lots of terms that are not always understandable to ordinary users, so here we decided to reveal the essence of this concept as easily as possible.
What is SaaS model
SaaS (software as a service) is a model that allows using a software on a subscription basis. Most often, such software is a cloud solution, that is, located on servers on the Internet.
Typical features of SaaS-services:
- It works via browsers or API.
- One application can be used by several customers at once. SaaS business models are used by individuals, as well as representatives of SME, and enterprises with a large network of offices.
- Ability to use the program remotely, from any convenient place.
- Modernization of the solution, and all kinds of updates are carried out regularly, absolutely transparent to the customer.
- Payment for the use of the platform is carried out in the form of a subscription fee (monthly) or depends on the volume of services used.
- Technical support and comprehensive counseling, are already included in the total amount of the monthly tariff.
These are the most well-known SaaS platforms: Dropbox, Slack, Salesforce, Microsoft Office 365, Amazon Web Services, Jira, Zendesk.
Advantages of SaaS model
- Saving. The customer significantly reduces initial expenses for software acquisition, as well as a subsequent renewal of the license agreement and maintenance of the program.
- Mobility. To access the program, you do not need to be in front of the computer with the installed software. Work can be conducted from anywhere in the world. Majority of SaaS platforms can be accessed via the smartphone. To use the program, only an Internet connection is required.
- Exploitation. All the work for service maintenance is incurred by the provider. His forces and financial means upgrade the software, troubleshoot and perform other work.
- Multiplatform. Software as a service platforms are available on different operating systems and devices.
- Installation speed. SaaS deployment is much faster, it doesn’t require waiting for the delivery of the necessary equipment and implementation of the program in the business.
- Flexibility. It is possible to quickly change the functionality depending on the current tasks. Payment is carried out only for those actions that are necessary for the user at a given time. In case of temporary uselessness, the subscription can usually be suspended for several months. It is no coincidence that another version of the name SaaS- software-on-demand.
Users of software as a service platforms will not have installation files, folders, and documents on the computer. All data is placed on the servers of the service provider – in the so-called “cloud” store on the network. Users can get remote access to the program and can use it in the browser from anywhere on the planet where the Internet connection is available. At the same time, there are SaaS platforms, which can be bought and installed on users’ servers.
SaaS pricing and billing models are quite diverse.
- User-based – it means that the more users are added to the account, the more they should pay.
- Storage-based – prices depend on the amount of a storage used. Usually, users have a certain amount of storage for free and if they need extra, they should pay for upgrading their accounts.
- Freemium – this billing model gives an ability to work on a platform for free, but there are also additional versions that should be paid for. Usually, using constraints that are most typical for billing models like feature-based or user-based, the service provider pushes customers to buy an additional version
- Per active users – users can add and invite as many other users as they want, but they should pay only for active ones.
- Per feature – means that if users want to get more features for their available account, they should pay.
- Flat-rate means that business owners allow using their platform with some functions at particular pricing models. Typically it is paid per month or once a year, with a discount on subscriptions for a year.
- Tiered pricing model – provides different “packages” with various functions offered at different pricing models.
SaaS revenue and financial models
SaaS business model, like other businesses with a regular payment model, is distinguished by the fact that revenue is received over a long period of time (customer’s lifetime). If the user is satisfied with the provided service, then they will use it for a long time, and the revenue earned on a particular client can grow to very significant values. On the other hand, if the client is not satisfied, he will quickly give up the services, and the company will lose money spent on attracting this client. So it becomes clear that such a business involves two stages of sales:
- customer attraction (first sale);
- customer retention/sale of additional products (next sales).
Businesses working on a subscription basis require significant initial costs (which entails negative profit within first years of the business operations). The thing is that attracting new clients requires significant one-time costs, which then return over a long period of time. The faster the business tries to scale, the greater its negative profit. Majority of investors do not understand this feature of SaaS model and are waiting for the revenues right after the start of SaaS business scaling.
The issue of SaaS financial model is expressed by the fact that firms experience a shortage of money at the beginning because customers pay out small amounts of money once a month for a long time. But gradually, the money that old users bring will cover the costs of attracting new clients and the firm will become profitable if, of course, you do not decide to increase the pace of attracting new customers. So, it is important to pay attention to the creation of SaaS business model canvas.
As you could see, the question “what is a SaaS model?” is not difficult to understand, since you have already dealt with SaaS technologies, and the number of such services continues growing due to their relevance and ease of use. But progress does not stop there, offering more perfect and interesting ideas, paying much attention to the needs of everyone.
Posted byApril 5, 2018
Max BabychCEO, Founder
I am serial entrepreneur and IT professional. Launched 4 own products and more than 20 products for customers in SaaS and Marketplace industry
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