SaaS stands for Software-as-a-Service, and it refers to the sale of cloud-based software as a service to clients. It is a service because, instead of selling it via one-time transaction, it is provided to consumers as a service, billed on a usage basis. With the help of cloud technologies, businesses are hosting their software solutions in remote servers, which are shared with customers whenever they sign up. Customers that subscribe to the services access this software via a web or mobile application. There is no need to download and install software on the machine.
These SaaS applications could be built for businesses, (i.e., B2B segments such as FreshBooks, Mailchimp, etc.), or end customers, (i.e., B2C segments such as Netflix, Facebook, etc.). In the present market scenario, almost every modern consumer is utilizing a SaaS-based solution, either directly or indirectly. Its ease of usage, high revenue margins, long-term revenue generation models, and many other similar advantages make it the best choice for startups working in new-age tech solutions. Understanding different aspects of SaaS-based business models will be quite useful for startups.
In this article, we’ll review some of the important aspects of SaaS-based business models, their pros and cons, and different pricing techniques. Prominent metrics useful to track performance are also covered. The details are shared below.
Pros and Cons of the SaaS Business Model
Here are some of the benefits of the SaaS model that make it profitable for business owners.
- Scalability: Scaling a SaaS-based business model is simple, both for business owners and their consumers. Because the resources are hosted in the cloud, there’s no geographical constraints to adding new users. Furthermore, a large amount of client service requests can be addressed in real-time, and routine maintenance can be scheduled with minimal downtime, resulting in a better customer experience.
- Recurring Revenue: Traditional business models rely on one-time transactions to sell software licenses, but SaaS enterprises provide monthly or annual subscriptions. These subscriptions keep income flowing for businesses and facilitate development. Customers are also not forced to make outmoded purchases. They can renew or enhance their subscription based on their business needs and manage their expenditures accordingly.
- Continuous Product Delivery: The SaaS model makes it easy to regularly update software because these upgrades are the provider’s responsibility. To ensure that a product stays relevant to current consumer demands, some suppliers generate new versions very frequently, or sometimes several times a week. With the help of newer versions, SaaS providers improve their product’s stability, remove unwanted aspects, and keep consumers delighted. Clients may quickly update to the most recent versions with just the click of a button and new features are accessible to customers as soon as they are released by the business.
- Access to New Markets: Using a SaaS business model may make products and services more inexpensive and accessible, particularly to small and medium-sized firms, which will increase the businesses’ customer base and earnings. This allows small-scale businesses to access proprietary services at lower costs while creating new income for the SaaS business. It’s a win-win situation for both parties involved.
Though the SaaS industry has many advantages, it also has certain drawbacks. Some of the disadvantages are shared below:
- Competitive Environment: Recognizing the benefits of the SaaS model, many businesses have moved to SaaS models, making it a highly competitive field. There are many SaaS firms offering innovative solutions for every client’s demand, each at competitive prices. So, though navigating the market might be difficult, the business can perform exceptionally well if it identifies the customer’s pain areas and builds an optimal solution to address it.
- Churn and Retention of Customers: The high level of competition necessitates an aggressive strategy for client retention and churn reduction. Additional skilled resources are required to assure customer satisfaction and forecast churn in order to take the appropriate action at the correct moment.
- Capital Intensive: B2B clients generally operate on payment after service, which creates a significant cash crunch for the business. Moreover, due to its highly competitive nature, Investments are required to establish and sustain the team, upgrade resources, and improve services. This makes SaaS-based businesses heavily reliant on cash flow, and funding becomes very important to remain a going concern. SaaS businesses need to ensure that they have enough cash reserves, or a well-established network to gather funds easily and efficiently.
SaaS Pricing Models
Nothing has a greater influence on business than the price plan owner chooses to sell services. A decision must be taken in order to establish a balance between income and growth. Here are some of the most common and effective pricing strategies used by SaaS companies worldwide.
- Flat Pricing: This is the most basic approach, in which the entire product is sold at a single price to all clients. The payment period can be either annual or monthly. Though this is straightforward and simpler to sell, presenting the same price to small and large organizations might inhibit the product’s value.
- Tier-Based Pricing: This approach gives clients the option to pay just for what they use. Correlating the pricing with consumption helps the company attract loyal clients. It serves businesses of all sizes, and consumers might be persuaded to choose a better plan based on their needs throughout the sales process.
- User-Based Pricing: This approach is similar to a flat fee model. However, the variable here is the number of users. The customer chooses the number of users and ramps up over time. This is the most common SaaS price plan, and it increases business growth when more users start adopting the solution.
Software as a Service Metrics
These are some of the key indicators that a SaaS company employs to measure its success and enhance its operations.
- Customer Acquisition Cost (CAC): This is the price of gaining new clients. The funds are used to generate leads, refine true prospects, raise product awareness, and get them on demo calls for a pitch. The goal should be to lower the cost per client while maximising returns.
- Customer Lifetime Value (CLTV): When a transaction is properly completed, the owner may estimate the total returns that the client can provide. This is computed by multiplying the value it offers by the average number of years it will buy services of the SaaS business.
- Monthly Recurring Revenue (MRR): MRR is the lifeblood of every SaaS company. A sustainable business generates recurring revenue month after month and year after year. A business owner can forecast income by computing the monthly revenue provided by each client. This MRR may be enhanced by encouraging consumers to upgrade or purchase extra features with their plans.
- Churn Rate: Churn is unpleasant, but it is unavoidable. It implies losing a customer and the income they brought in previously. A client may churn for a variety of reasons, such as discovering a superior product at a lower price or an internal reorganisation.
- Net Promoter Score (NPS): Net Promoter Score (NPS) is a customer loyalty and satisfaction metric derived from asking how likely customers are to recommend a business’s products to others. It is a useful indicator for businesses to measure customer satisfaction and loyalty.
Conclusion
In this article, we have discussed some of the important aspects of SaaS businesses, important metrics, and their merits. The success of SaaS-based business models can be attributed to cloud technologies, which evolved rapidly in recent decades. This technological advancement has led to a significant change in the existing markets and led to reforms in the user’s behaviour patterns. It’s highly likely that we’ll see a lot of new changes in the near future.
Such market evolution also presents a huge opportunity for startups to innovate and position themselves differently in the market. Businesses should constantly look for emerging patterns in this space and create new solutions for the new age consumers.
