SaaS business model: Stages, pros & cons + essential tools to get ahead
The SaaS business model is unlike the traditional business model in many different ways. Perfecting it can be difficult without the right tools. Explore the fundamentals of how SaaS works, including models, metrics, and tools for SaaS growth.
What is SaaS?
- The SaaS business model
SaaS business stages
9 saas business examples.
- Key SaaS business metrics
- 4 SaaS growth tools
What’s next for SaaS businesses?
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Ever since John Koenig first coined the term “SaaS” back in 2005, the software-as-a-service industry has been one of the fastest-moving and creative in the world. And with the field having undergone a couple of “ knockout expansion years ,” with more revenue pouring into SaaS than ever, it has never been a better time for a young SaaS company. The SaaS business model powering all of this activity is startlingly unique, still young, and inextricably tied to the power of cloud computing. Understanding the fundamentals of how SaaS works is vital when building out a plan for your company’s forward growth.
SaaS, or software as a service, is a delivery model in which a centrally hosted software is licensed to customers via a subscription plan. Any company that leases its software through a central, cloud-based system can be said to be a SaaS company. A SaaS company maintains responsibility for the servers, database (and the data they contain), and other software that allow their product to be accessed and used. The subscription plans offered to customers can vary considerably within separate companies; some SaaS company business models involve offering multiple applications within their product, with different subscription plans giving access to different services.
How does the SaaS business model work
The reason we’re distinguishing between the SaaS business model and the rest is that the SaaS model includes a number of factors peculiar to it, such as:
In SaaS, clients do not buy hardware. The software-as-a-service business and pricing model involves providing a subscription service to use the app, so you will have to worry about paying the yearly or monthly subscription as opposed to only once. Recurring payments take the form of monthly recurring revenue, otherwise known as MRR. Because a SaaS company provides a service, not a product, accounting for revenue properly can be difficult. When your customer signs the contract and subscribes, you may get some cash upfront, but that cash cannot be counted as revenue until you've earned it. Until then, it is a liability—money that your customer can ask to be returned at any point if you don’t deliver your service. As a result, revenue recognition is a fundamental part of the SaaS business model.
Heightened customer retention
All businesses care about customer retention, but in the SaaS revenue models, it is 10 times more important because retention of paying customers is the only thing that keeps you afloat. As we said above, you can’t lay claim to all of your clients’ subscription money until you’ve provided a complete term of service, so if you’re signing customers up for 12 months who are then leaving after 2, then you’ll be without the other 10 months of recurring revenue. As a result, the SaaS business model puts tremendous value on cultivating customer relationships and upselling. An existing SaaS customer spends more, on average, than a new customer, and are more than seven times more likely to churn (leave your business) to go to a competitor because of poor customer service than they are for a better product.
While other products may come out with “next-gen” product versions, SaaS consistently provides smaller and more frequent upgrades to their services to keep the end-users happy and have better customer lifetime value. Part of this comes from the nature of being in the software business: software vulnerabilities can put customer information at risk from hackers, so continually assessing the state of security fixes is a top priority in the SaaS model. Hosting their own products also means SaaS companies can push updates whenever they need to, releasing new features, enhanced versions of old ones, and new product enhancements. By combining this with good customer communication, SaaS companies can be highly responsive to the needs and feedback of their customer base.
As we’ll see shortly, highly successful SaaS businesses can boast valuations in the $100 millions, serve a huge number of customers, and completely change the way in which entire industries think about aspects of their business. That, however, is the final and most successful stage of the SaaS business model. Broadly speaking, a SaaS business’s life can be broken down into three stages:
In the early stage of your SaaS business, you as the business owner or entrepreneur are still operating at the bare-bones level. You’re unlikely to have many customers, and your product will still be in its early developmental stages . You may be seeking your first round of pre-seed funding , or you may have decided to go for the bootstrapping approach to maintain better control of your operations. In the early stage, your staff roster will still be small, you will more than likely still have only one product you’re focusing your attention on, and you may not have started to turn real profit yet. At this stage, you should be asking yourself these main questions: Am I tracking metrics, bringing in new users, and looking to optimize pricing? Have I begun developing my own personal business model that will enable me to seek the right kind of funding and use it well?
2. Growth stage
The growth stage is where things start to get exciting. You’ve built something that’s growing fast, your product is gaining subscribers, and you’re beginning to bring in MRR and possibly positive cash flow. To kick off your growth stage and to continue powering through it, you will need to begin raising serious funds that will allow your company to grow its team, invest in product development and iteration, and scale. There are a number of funding types that serve the SaaS business model, including:
- Venture Capital: The glamour means of procuring funds for your startup, venture capital is provided by firms or funds that see high growth potential or a strong track record of recent growth in a SaaS company, enough to merit substantial financial assistance.
- Angel Investors: An angel investor is a single operator with substantial financial means who is prepared to make an investment in your company. They can be ideal for startups looking for their first big investment, although, more recently, so-called “super” angels have begun to play a decisive part in later funding rounds too.
Venture capitalists and angel investors are not the only routes to growing your business. Some companies go through incubators in their very early days; other, slightly more established SaaS companies find startup accelerators that meet their needs and use them for a different kind of funding experience. Some companies continue to bootstrap for a much longer time, and others are so adept at raising revenue from the start that they find they don’t need external funding until much later.
Now, you should be asking yourself these questions: Have I established key performance indicators (KPIs) to ensure I’m primed for further scaling? Do I have a strong monetization strategy in hand for when I do decide to seek some form of investment?
3. Mature stage
A SaaS company that has reached the mature stage has proved itself and can consider itself established. A company at the mature stage has a well-defined target audience that it’s catering to and has a reliable product that it’s making updates to. The company is bringing in good MRR, and all the other key KPIs (more on those to come) are stable. Mature-stage companies might still seek and receive investment, but it’ll be of a much larger order, aimed at breaking new markets or buying out competitors. The main question a SaaS company should be asking itself at this stage is: When is the last time we checked our pricing strategies? SaaS companies often reach the mature stage and settle into a sense of complacency, thinking that, because their business is solidly profitable, it must be running at its maximum potential. In fact, mature-stage SaaS companies are often positioned on a pile of potential revenue that they’re wasting with poorly chosen price points .
The variety of successful SaaS-type businesses is astonishing; there are examples of tremendous success in the B2B and B2C spheres, in AI and video hosting, in e-commerce, in data analytics, and more. To show you just how broad success in SaaS can be, we’ve compiled a list of a few SaaS businesses that have made a serious impact in their fields — or, in some cases, created new ones!
Wistia is a company providing video-hosting services for businesses, from uploads to tracking performance to building audiences and brand attention. Brendan Schwartz and Chris Savage founded the company in 2006 and got their first client, a medical devices company, that year. In 2019, the picture is pretty rosy for Wistia. Despite taking relatively little investment in its early days, it's now the video-hosting service of choice for more than 300,000 businesses across 50 countries that depend on Wistia, bringing them more creative and authentic communications .
Shopify is an e-commerce platform for online stores, allowing businesses to create online stores without needing to know how to code. Shopify has completely revolutionized the way businesses think about e-commerce in the process; now, any retailers, big or small, looking to sell online, on social media, or in person have a single integrated solution that can meet their needs. Shopify has been amply rewarded for its innovations in e-commerce. It made over $1 billion in 2018 and have well-exceeded that total in 2019. Since then, Shopify has grown to 4.4 million active merchants in 2023 .
Artificial intelligence has been one of the primary growth areas in SaaS during the late 2010s, and no company exemplifies the potential of that field more strongly than Chorus.ai . Chorus is a leading conversation intelligence platform for sales teams. The company’s solution functions as a plug-in to video-calling services, allowing sales teams to record their business calls and extract meaningful data.By recording and analyzing the contents of sales calls, commercial teams are able to refine their approach to selling, curate new training surveys , and regimes for their reps, and come up with new in-depth strategies for better communicating with clients. Chorus’ solutions are used by world-class revenue teams at other great (SaaS!) companies like Zoom, Adobe, Asana, and Segment.
Just when you thought recruitment was one of those fields that could never change, a SaaS company came along and changed everything. Lever revolutionized the recruitment sphere with its streamlined processes for sourcing, attracting, and hiring new talent. Its talent software makes it easier for employers to vet candidates, take care of talent marketing, and foster connections between employers and employees through the company’s cloud service. Much like Chorus, proof of Lever’s success comes with it being used by such seminal companies such as Shopify, Eventbrite, and Netflix to fill their offices with the best employees.
Clearbit creates products and curates data APIs aimed at providing insights throughout the customer life cycle to help businesses grow. There are few industries where clear communication between client and customer is more vital than in SaaS, and Clearbit’s resolution to help those who work with it “ understand [their] customers " has made it a vital asset to those they work with. Clearbit’s ability to do this, as well as their cutting-edge means of identifying future leads and personalizing marketing approaches, has led it to be designated one of the fastest-rising companies in SaaS.
The SaaS business metrics to keep an eye on
SaaS companies are powered by data, and success in the field is predicated on how you maintain awareness of key metrics, how they interact, and how to improve then. The following are five key business metrics that determine the health and potential of a SaaS business.
Lifetime value, (LTV)
LTV is the total amount you’re due to receive from a customer over the life of their account with your product. The LTV of a user is one of the most important metrics for a SaaS business, and it’s vital that you calculate it the right way . Retention-rate numbers (which we’ll come to shortly) are important but leave gaps in your understanding of how much retained customers are bringing in each month and won’t tell you much about the success you are (or aren’t) having with upselling. LTV brings you this precise understanding.
Customer acquisition cost (CAC)
CAC is the total cost of sales and marketing efforts that are needed to acquire a customer.
The fact of the matter is that bringing on new customers costs—and it’ll be a considerable time after bringing a new customer on board that the additional MRR offsets the cost of winning that new customer. You need to keep tabs on your CAC to ensure that your LTV is able to comfortably outpace it. Being too conservative with how much you’re willing to spend on CAC can lead to missed opportunities for revenue and growth from new customers; but being too reckless with it can lead to often critically low profitability.
Monthly & annual recurring revenue (MRR & ARR)
MRR and ARR are the lifeblood of a SaaS business. They measure the total amount of predictable revenue that a company expects on a monthly or yearly basis. Many companies manage to make a mess of their MRR, nevertheless. A survey hosted by ProfitWell showed that one in five SaaS companies were not reporting expenses correctly when accounting for MRR; two in five were incorrectly including trialing or free users in some manner in their MRR; and a majority were making mistakes when differentiating between monthly, quarterly and annual payment timelines. There is no excuse for slackness with MRR, regardless of the fact that it’s not a figure you need to report to a government entity. It is a key statistic that allows investors to monitor the status of your company and is as important for you when plotting your trajectory.
Churn rate is the percentage of your customers leaving your service over a given period. It’s the nightmare statistic in the SaaS business model; even a little bit can be extremely damaging to a company’s hopes for sustaining the momentum of its growth. In fact, churn can be ruinous for companies even when all of their other metrics are reasonably healthy. Knowing the foundation of your customer churn rate and the means by which you can reduce it could not be more important in SaaS. It can be a complex metric to get a full picture of. Breaking down your churn into segments and cohorts will reveal the different drivers behind your churn, while failing to correctly account for trialers or episodic/seasonal customers when plotting churn can muddle the picture. At our last count, there were 43 different ways public SaaS companies were accounting for the metric.
Your ability to retain customers is your foundation for growth in subscription-based services; churn is the flip side of retention, and keeping retention high is as important as keeping churn low. You may have noticed a pattern emerging in our speculations on key SaaS metrics —and, yes, like all the rest, there’s a serious tendency among SaaS companies to calculate their retention rates incorrectly, too. Both user and MRR retention need to be calculated in tandem, so you can account for both the effects of your product, marketing, customer service, and pricing and the likelihood of sustaining profitability. You might not be taking care to differentiate between customer life-cycle stages when calculating retention rate, either, or between the plans your customers are on. In short, there’s a lot that can go wrong with your retention-rate calculations.
3 tools that help SaaS businesses grow
Now that we have a pretty solid understanding of the SaaS business model, you might already have started wondering what’s available to allow your business to get the best of the competition and really start to grow. We’ve got a few tools here at Paddle that can really help young SaaS companies grow.
The SaaS business model is based on recurring billing, so you won't get very far without a decent recurring billing tool. There are a variety of solutions for managing subscriptions and recurring billing out there, but in many cases, you'll need to integrate these tools with a broader payments stack to manage payments and revenue. This can get messy fast. Or you can take an all-in-one approach and use a merchant of record .
As we saw above, your grasp on your data informs your success as a SaaS company: a well-organized, powerful analytics solution can make all the difference. Continued insight into the drivers behind your growth is fundamental for success in the SaaS business model: which customer segments are driving and detracting from subscription growth, which features in your product command the highest willingness to pay among your customer base, which features are leaving customers at more persistent risk of churn.
For all their importance when gauging the health of your SaaS business, churn and retention rates are seldom completely understood by young companies. Identifying customer cohorts and tracking revenue retention, MRR churn, and delinquent churn can be difficult to do without resorting to a plethora of spreadsheets. Tools that aid your retention rates and help drive down churn, while minimizing the chances of human error or misreporting, are vital.
The range of applications in SaaS is virtually limitless, and with the means of fundraising continuing to diversify, it has never been a better time to join the field. Still, all of the most successful software-as-a-service companies underpin their success by adhering to a few fundamentals in the SaaS business model: a reliance on good statistics and the use of the right tools and solutions. Apply the same principles to your business and you might find yourself heading in the same direction.
What is SaaS business model?
SaaS business model is based on selling cloud-based software for a subscription fee. The cloud-based software is usually accessible via mobile, desktop, and web apps, and the subscription fee is usually monthly or annually.
What is SaaS revenue model?
The SaaS revenue model is based on regular and ongoing payments to use software or a different digital product or tool. The payments have a defined period, and the most common two are monthly and annually.
Is Netflix a SaaS?
It may sound unusual initially, but yes, Netflix is indeed a SaaS. Netflix sells the software to stream movies and TV shows, both licensed through distribution deals and produced by Netflix.
What are the benefits of using Saas?
There are many benefits to SaaS software. The biggest include cost-effectivity, scalability, better security, no licensing management, and more scalability.
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Understanding the SaaS Business Model: How Does it Work?
The Saas Business Model Explained
Of all the new kinds of enterprise solutions made available by the advent of the internet, one of the most disruptive, most useful and most recent has been the software as a service ( SaaS ) business model. Many a startup has either pivoted to this promising new SaaS business model, or has been founded implicitly to take advantage of the SaaS revenue on offer in today’s active market. With SaaS companies enjoying an aggregated industry-wide market value that’s projected to rise over $25 billion per year going forward, now is an excellent time to move into the SaaS business model in your own organization. However, to succeed in doing so, it’s vital to understand the SaaS business model excellence in action – the tactics, organizational structures, and key metrics by which to gauge your startup company’s prosperity.
What is the SaaS Business Model?
In truth, the SaaS business model is both new and complex enough that understanding its potential, as much as the key metrics and deliverables that will be expected of you when creating one, can prove a somewhat daunting task.
Are you tracking the necessary KPIs? Do you know your CAC ? When do you need to raise more capital? We've helped SaaS founders answer these questions time and time again.
We even have a Business Model Template that will help you set goals and communicate them effectively to investors. Every SaaS startup exists because it has identified – and intends to sell the solution for – a pain point, problem, or area of unnecessary friction in enterprise. Commonly, the SaaS business model targets B2B solutions, such as inventory management and order tracking for ecommerce, or more effective inter-organization communications solutions for companies. Helping business owners and their teams coordinate more effectively within a given company is a strong SaaS business model in today’s market too – as software companies like Zoom and Slack can attest. However, many SaaS business model ideas have also been created with the intention of helping business owners better connect to – and engage with – their customer base. For example, Mailchimp email marketing keeps end users informed and inspired when an organization releases new products – and is especially popular in the rapidly growing ecommerce market . Whatever the intention of the SaaS solutions in question, software companies develop these platforms primarily by utilizing the powers of cloud computing. In fact, a popular startup idea in today’s market is developing a SaaS business model that helps those businesses struggling with their digital transformation to take advantage of cloud computing in a more user-friendly way. As you can imagine, many companies who provide solutions like this do so while relying on revenue streams beyond one-time software purchases. In fact, because SaaS solutions lean on cloud computing so prevalently, their MRR and ARR frameworks charge users a subscription fee.
How Does the SaaS Business Model Actually Work?
With an understanding of the SaaS business model’s success in mind, we can more effectively drill down into what makes for a successful SaaS business model. In order to succeed in marketing any startup offering SaaS solutions, it’s vital to ensure that your team comprises software developers who are able to take complex cloud computing challenges and convert them into user-friendly platforms. SaaS companies are looking to grow their monthly revenue streams and capitalize on a strong and engaged user base for profitable ARR and MRR key metrics. As a result, you will rarely see any SaaS business model using one-time pricing models alone. In fact, even if they do, there’s likely to be some variety of premium subscription offering or “Pro Level” measure of support in most SaaS companies today. This kind of freemium SaaS offering is able to cater to a casual user base effectively, while adding a feeling of prestige and added functionality to its monthly subscription customers. More frequently, however, SaaS business model designs are built to capitalize on recurring monthly revenues. This is true of both enterprise-level startup ideas to solve B2B problems, as it is B2C marketing solutions or consumer-level SaaS solutions to make daily life easier. Because of the monthly subscription model being used throughout the SaaS software market, the customer acquisition cost (CAC) is relatively low – although pricing will be a strong factor in how likely users will be to commit to the monthly subscription. In fact, one of the key metrics to track in any SaaS business model or any software company intends to deploy is the level of customer churn – especially in the early months. Many SaaS solutions use the allure of a free trial period before monthly subscription expenses kick in for end-users. This adds a level of pressure for any SaaS startup to demonstrate excellent value and versatility in their platform before their true subscriptions begin. A big area of customer churn is often found in free trial users who stop using the product before their monthly subscription fees begin – and a key area to overcome in the growth stage of any such startup is removing the friction between that trial period and the more-profitable monthly recurring revenue. To attain strong customer retention, your startup will need to provide an almost flawless level of service, and convenience so compelling that end-users can no longer imagine their personal or professional lives without your SaaS solution. A challenging endeavor – yet one well worth overcoming, thanks to the potential rewards of the SaaS industry (when done right).
Types of SaaS Business Models
All SaaS business model varieties out there require a team of software developers to not only create the SaaS solutions themselves, but also to update and maintain them over time. Not only that, but cybersecurity is a chief concern throughout the SaaS market today. Because of the nature of this kind of startup, it is highly likely that sensitive data on customers, end-users, and other businesses in all kinds of industries will be using your SaaS platform’s cloud computing infrastructure. A data breach or successful hack against your startup could be disastrous. Because of these continuous expenses, on top of the usual costs of developing a startup throughout (and beyond) its growth phase, having a keen understanding of the best SaaS business model – and how to avoid customer churn – becomes one of the key metrics to get right. When creating SaaS software products for use in the everyday consumer market, a freemium SaaS business model often works best. Consumers don’t always have access to the kinds of enterprise-level capital that would enable monthly subscriptions – and they would need to see a tremendous level of value in their personal lives to subscribe to such a SaaS platform. For example, imagine if PayPal used a monthly recurring revenue subscription model for every single one of its users. Paying customers would not see value and would have abandoned the service long before it became as prosperous and ubiquitous as it is today. In fact, PayPal is a great example of a SaaS business model success for transactional revenue models. That’s because PayPal levies a small fee on customers – whether average consumers or enterprise level clients – for certain kinds of transactions. This kind of transactional revenue makes a good SaaS business model for companies such as ecommerce payment gateways. A subscription model would be less successful here by far – it makes sense to simply take a small fee for services rendered per transaction. Cryptocurrency exchanges such as Coinbase are another example of the transactional revenue SaaS business model.
Examples of the SaaS Business Model
The idea of the SaaS business model is older than we might first think – in fact, many of the oldest surviving such software companies are examples of a successful SaaS business model in action, yet came to be before the advent of cloud computing. Many of the free or freemium SaaS solutions active in the market today are ones that have found success by becoming almost indispensable to the way in which companies operate today. Think of examples such as Zoom, Trello, Slack, or Monday. You may well already be aware that these examples include those that use both a freemium and a monthly subscription model – another example of that strategy in action is HootSuite. End-users can scale their monthly subscription level up and down according to the marketing and social media needs of their business – or simply use the SaaS software for free. While it can be tempting to stick with the relative simplicity of a subscription model with competitive pricing, keep an eye on how this affects your customer relationship key metrics and overall customer churn levels. A kind of subscription fatigue is creeping into many areas of entertainment, media and even software companies today – so experimenting with another SaaS business model could work in your favor.
Pros & Cons of the SaaS Business Model
When generating a new startup – after identifying the challenge to overcome or deliverable you intend to offer your end-users – it pays to contemplate what SaaS business model design philosophy truly is going to bring to the table for you. For example, SaaS products often require software developers to remain on board long-term, in order to squash new bugs, keep users’ data safe, add new features, upgrade systems to be compatible with new computer operating systems or smartphone handsets, and so on. Would it be wiser to simply create a startup product that consumers and businesses can purchase from you via an ecommerce website for a one-time fee? That depends on the kind of services you intend to render through your startup innovation. Because the world is so connected today, cloud computing empowers most modern SaaS solutions – meaning SaaS business model strategies need to lean towards the annual recurring revenue (ARR) key metrics required to sustain operating both the business and the SaaS platform. One of the key pros of a successful SaaS business is that its monthly subscription key metrics are very high. This demonstrates a high level of customer loyalty, and this advantage is becoming ever more difficult to secure in the competitive startup landscape of today. On the flip side, it’s vital to remember that one of the biggest disadvantages of the SaaS business model is that it’s capital intensive – both to get your startup going and into its growth phase, and just to operate day to day. This is not a startup idea that will ever generate any entrepreneurs passive income. It will be a lot of work throughout your SaaS product’s lifespan – and that also includes the complexities of ensuring you have good software developers to keep on top of the enormous volume of necessary coding and cloud computing infrastructure.
What are the Key SaaS Business Model Metrics?
Seeing success in your business model means tracking key SaaS metrics, which include:
- Customer churn rate – how many end-users are abandoning or ‘bouncing off’ your product per week, per month, per year?
- Customer acquisition cost – are end-users contributing to your revenue streams or is your product giving away too much for free?
- Monthly subscription numbers – are they growing, stagnant, declining?
- Cash flow – are there areas in the value chain of your SaaS business model where you can strategically employ upsells or value-added solutions?
- Customer Lifetime Value - having your sales team getting new users on board is only part of the work. Whether through monthly fees or upfront payments, how can your business model promote increased LTV?
SaaS Business Model Growth Strategies
The key to successful SaaS solutions in the market comes from identifying and solving a problem – and doing it so well you can charge for the service. As a startup, your goal will be tackling the challenge you want to overcome, and working with software developers on cloud computing solutions that resolve the issue. Once that’s accomplished, you’ll move into your growth phase – marketing to your chosen demographics and, if successful, seeing tremendous numbers coming in for ARR and MRR. However, this is the pivotal moment – sustaining the excellence of your service, and keeping pace with innovation in both your chosen market as well as in the cloud computing ecosystem overall. Over time, you’ll likely identify new challenges, new opportunities and greater potential – and from there, must decide if you want to launch new products within your SaaS business model to address them or create a new startup accordingly.
SaaS Business Model FAQs
What kinds of entrepreneurs suit the saas business model.
This kind of startup is not for everyone and certain entrepreneurs are far more likely to flourish. Investors who are experienced in working with cloud computing and software developers are likely to see promising returns – and likewise, strategically minded or innovative entrepreneurs with solid SaaS solutions will enjoy a very receptive market.
Are all SaaS companies subscription based?
No – this kind of SaaS business model is widespread, but isn’t the only option open to SaaS founders. Understanding your customer base is one of the key metrics to monetizing your SaaS ideas – and you might find greater success through one-time purchasing, freemium models, or transactional revenue fees (remember the PayPal example).
How do I grow my SaaS business?
The growth phase of any startup is exciting – and many of the winning strategies from the startup world will also apply to your SaaS business model. Think organic traffic growth, strong customer retention strategies, wide scale marketing campaigns and effective networking – especially for B2B SaaS platforms.
What is the SaaS Revenue Model?
The most frequent SaaS business model strategies used today are as follows:
- Monthly subscription revenues that charge users a recurring fee to access the cloud computing functional of the SaaS product
- Transactional revenue models , as seen in ecommerce SaaS solutions where fees are cut per monetary transaction, delivery fee, ad placement etc.
- Freemium , often used in a B2C SaaS business model – software is free to use, but has added functionality purchasable within
- Ad-based revenue , in which non-intrusive ads are placed throughout SaaS solutions
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Top 6 SaaS Business Models That Will Transform Your Company
- August 4, 2022
There are different types of SaaS business models , each with its own advantages and disadvantages.
Software-as-a-service (SaaS) sector has undergone exponential growth since it burst onto the scene in 2005. SaaS businesses are becoming increasingly popular for a variety of reasons. They are typically more affordable than purchasing traditional software and easy to use. Massive amounts of time and capital are currently going into SaaS companies and businesses, which stand a strong chance of succeeding if they fulfill market demands.
In this article, we will explore the most common models and SaaS business model examples of the most successful businesses.
Table of contents
What are the different saas business models, saas business models examples, need assistance with a saas app development launch your app with clickit, what is a saas business.
Software as a service (SaaS) is the practice of offering consumers cloud-based software . It is a way of distributing and licensing software in which the product is accessed online through a monthly/yearly subscription rather than being purchased and installed on specific PCs.
A SaaS business is a type of business model where software is provided to customers on a subscription basis. Customers can access the software remotely, typically through the internet.
SaaS businesses are usually hosted on the cloud, providing scalability and flexibility for the company and the customer. The term “ cloud ” simply refers to the area of the internet where businesses have developed their resource infrastructure and where they allot some of these resources to new customers.
Similarly to other business models, SaaS also has its positive sides and drawbacks. Keep reading to discover the advantages and disadvantages of a SaaS business model.
Advantages of a SaaS Business Model
There are many advantages of operating a SaaS business, including:
- Scalability. The cloud-based infrastructure of a SaaS business makes it easy to scale up or down as needed. This means that SaaS businesses can respond quickly to changes in customer demand.
- Recurring revenue. Because customers pay monthly or yearly, SaaS businesses have a steadier stream of income than companies that rely on one-time sales. This can make it easier to predict and plan for growth.
- Easier pivoting and modification. SaaS businesses can modify their offerings quickly and easily in response to customer feedback or changes in the market. This agility can be a major advantage over traditional software companies .
- More market potential. SaaS is subscription-based and available on the cloud, meaning that SaaS businesses can reach a global market more easily. Customers in any location with an internet connection can subscribe to a SaaS service.
- Loyal customer base. Since customers pay regularly, they are more likely to remain loyal to a SaaS service that they are satisfied with. This can lead to long-term relationships between the company and its customers and long-term income.
Disadvantages of a SaaS Business Model
There are also some disadvantages associated with operating a SaaS business, including:
- More competition . Since the barriers to entry are relatively low, there is a lot of competition in the SaaS market. This can make it difficult for new companies to stand out from the crowd and attract customers.
- Aggressive strategy for customer retention and churn. Since SaaS businesses rely on recurring revenue, they must constantly strive to retain their customers. If a customer ends their subscription, the business loses income. As a result, SaaS businesses often have aggressive strategies for customer retention and churn prevention.
- Capital dependent. SaaS businesses require a substantial amount of initial investment to get off the ground. This can make it challenging for new businesses to get started. Also, SaaS businesses must continuously invest in their product to keep up with the competition and maintain a high level of customer satisfaction. This can be a challenge for small businesses with limited resources.
As you can see, the advantages outweigh the disadvantages leaving no doubt that the SaaS business model is an effective practice used by many companies.
Now that you’re familiar with the advantages and disadvantages of a SaaS business model, let’s explore different types of SaaS business models.
The freemium model provides customers can access a basic version of the software for free. They must pay a monthly or yearly subscription fee if they want to use the advanced features.
This model is often used by companies that want to increase their customer base quickly. Providing the service for free will draw many users in. Once they use the service and see its value, they will likely pay for a more extensive set of features.
2. Flat Pricing
Under the flat pricing model, customers pay a set price for access to the software. This price is not based on usage levels or the number of users. Instead, it is a one-time or monthly/yearly subscription fee that gives the customer unlimited access to the software.
Flat pricing is simple and easy to understand, which can appeal to customers. Because the price is not based on usage, customers don’t have to worry about exceeding their budget. This predictability can make it easier for them to justify the cost of the software.
3. Usage-Based Pricing
Under the usage-based pricing model, customers are charged based on their level of usage.
This model can be appealing to customers because they only pay for what they use. If they don’t use the software often, they won’t have to pay a high price. This pricing model also gives customers the flexibility to increase their usage as their needs change.
Users often think that “pay for what you use” is a fair way to charge, and smaller companies won’t be scared away by high prices.
4. Per-User Pricing
Under the per-user pricing model, customers are charged based on the number of users that have access to the software. The price may be a monthly or yearly subscription fee.
This model is often used by businesses that need to give multiple employees access to the software. For example, a company might need to give five customer service representatives access to a customer relationship management (CRM) system.
Per-user pricing is best for situations where a lot of people need to use your software simultaneously, especially if each person needs access to different features.
5. Tiered Pricing
Under the tiered pricing model, customers are charged based on the features they use. The price may be a monthly or yearly subscription fee.
This model is often used by businesses that offer different levels of service. For example, a company might offer a basic CRM system for small businesses and a more advanced CRM system for larger businesses. The price of the advanced system would be higher because it includes more features.
6. Hybrid Pricing
The hybrid pricing model combines two or more of the other models. For example, a company might offer a basic CRM system for free and charge customers based on usage if they want to use the advanced features.
This model gives businesses the flexibility to tailor their pricing to meet the needs of their customers. It also allows businesses to try different pricing models to see what works best.
Now that you’re familiar with different SaaS business models let’s check out a few popular SaaS business model examples.
Mailchimp is a SaaS company that provides online marketing tools to small businesses. The company is based on a freemium business model. This means that the customers can test out most features free of charge.
Mailchimp offers three different products to its users: the Marketing Platform, Website & Commerce, and Transactional Email. Most of Mailchimp’s clients are small businesses, but it also works with large companies. Customers can use Mailchimp to create and send email campaigns, design landing pages , and track their marketing progress.
Mailchimp offers a plan that is free of charge for customers who have up to 1,500 subscribers. For customers with more than 1,500 subscribers, Mailchimp offers multiple paid subscription plans that include different features.
Shopify is a SaaS business model example company that provides an e-commerce platform for businesses of all sizes. Customers can use Shopify to create an online store, manage inventory, process payments, and track shipping.
Shopify has a distinct approach to its users- the company wants to do more than just sell its products to customers. It also wants to help its users become more successful by using the platform. Why? When merchants make more money, Shopify makes more money . This is also a major reason why Shopify has grown to where it is now.
The company offers different subscription plans that range from $29 to $299 per month. In other words, Shopify uses the tiered pricing SaaS model. The features included in each plan vary, but all plans include basic features such as a website builder, shopping cart, and product catalog.
Shopify also provides a 14-day trial for customers who want to test the platform before committing.
HostGator is a SaaS business model example that provides web hosting and related services to businesses of all sizes. Customers can use HostGator to create a website, host email accounts, and manage their domain name.
The company offers different subscription plans that start at a price as low as $2.75. Similar to Shopify, HostGator uses the tiered pricing model. The features included in each plan vary slightly, but all plans include basic features such as website building tools and 24/7 customer support.
The market is quickly opened up to people with different budgets thanks to the tiered pricing strategy. Additionally, it enables new users to try out the product at the most basic level before upgrading as necessary.
HostGator also offers a 45-day money-back guarantee for customers who are not satisfied with their service.
You can’t run a successful SaaS business even if you don’t have an accompanying app. Launch your SaaS app in time and capture the market share that your idea deserves with a proper SaaS Application Development service.
With the ClickIT team by your side, you’ll be able to cut the layers and unproductive mistakes out of your process. The ability to build SaaS Apps around various ideas for different industries is exactly what sets ClickIT apart from its competitors.
The ClickIT team completed more than 50 projects for startups and enterprises alike. Our services include:
- Multi-tenant and SaaS application architecture
- DevOps for SaaS
- AI ML SaaS app
- FinTech SaaS application
- Enterprise management SaaS solution
- SaaS platform for marketing automation
- Healthcare and patient record SaaS solution
- IoT and wearable tech SaaS applications
SaaS businesses have a lot of flexibility when it comes to choosing a business model. The most important thing is to choose a model that aligns with the company’s goals and objectives. If you want your SaaS business models to work, you must make a long-term commitment to customer success, including staying on top of the latest trends and technologies.
Since AI, machine learning, and data automation are becoming more popular, more businesses are looking forward to adding them to their SaaS platform. Ensure optimum customer satisfaction and stay ahead of the competitors by implementing the latest technologies into your services.
Looking to get your SaaS business off the ground? ClickIT is your choice for developing a SaaS application tailored to your specific needs!
There are three main types of SaaS The most commonly used software-as-a-service types businesses purchase are: -Cloud-based -On-premises -Hybrid.
A SaaS provider is a business that houses applications and makes them accessible to consumers online. There are many SaaS brands out there, but some of the most popular include Salesforce, HubSpot, Zendesk, and Shopify.
There are numerous SaaS business models available. Most popular are freemium, flat pricing, usage-based pricing, per-user pricing, tiered pricing, and hybrid pricing.
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The SaaS Business Model: How and Why it Works
Table of contents, what is the saas business model.
The typical business model for a SaaS business is a unique and exciting one to dive into. Software as a Service (SaaS) companies are not going away anytime soon and there is much more innovation that will continue to come from SaaS businesses. Looking at companies like Salesforce, Slack, and Zoom (just to name a few), it’s clear that the business model works. But how and why does it work? Read on for a complete breakdown and understanding of the SaaS business model.
SaaS or “Software as a Service” is a delivery model for software where a centrally located, cloud-based software is licensed to its customers via a subscription model. This might be annual, monthly, per user, or by package level but a company can be consider a SaaS company if they are hosting their software on the cloud and licensing it out.
At the core through all of these stages, the business model is based on a subscription payment set-up. This is core to the business and the building block of the model. A SaaS company may offer various types of subscriptions for different products or various end-users, but the subscription model is key to the foundation of the business. Due to the fact that SaaS companies are hosted on a centrally located cloud, they are in a unique position to constantly be updating the software and pushing those updates to users. This update and growth process for SaaS products is much quicker then in-house hardware that used to require very manual processes for the end-user. The subscription model combined with the consistent updates typically present with SaaS products leads to a higher customer retention than other business models. SaaS companies aid this by baking in very high-touch customer success teams to their sales cycle, continuing to work with and serve the customer even after an annual or monthly subscription is committed to.
A SaaS company follows a business model typically goes through 3 phases: early stage, growth stage, and mature stage. All stages involve different levels of funding. For a deeper dive on that specific component, read more here .
Related Resource: 20 Best SaaS Tools for Startups
The early stage of a SaaS company is focused on building out a product-market fit and securing some early, loyal customers. The team is typically bootstrapped or operating on a very small seed or friends and family round. The team typically stays small at this stage as well.
The growth stage in the SaaS business model is focused on scaling extremely quickly by taking on funding via Venture Capital or Angel investors and pushing the limits of your product’s success by taking some risks, scaling the team, entering into incubators, taking on more strategic advisors, and selling up-market. This stage is all about establishing metrics to track success and working to go above and beyond those in order to keep growing the business.
Related Resource: Who Funds SaaS Startups?
The mature stage kicks in when success is proven, the audience is present and hungry for the product, and the focus is now on growing and retaining customers vs. proving out the concept. The focus now can shift to continuing to fine-tune the business via pricing updates, continued product growth and development, and brand building.
Stages of a SaaS Business Model
As we mentioned in our Startup Funding Stages Guide , “There are multiple stages of startup funding: Seed, Series A, Series B, Series C, and so forth. Startups should be conscientious about the funding rounds that they will go through, which are generally based on the current maturity and development of the company.”
The same idea holds true with respects to a SaaS company. A SaaS business model is one of the most attractive to a venture capitalist. The lifecycle and funding stages likely look something like this:
Related Resource: 23 Top VC Investors Actively Funding SaaS Startups
Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders.
Series A Funding
“When a company is first founded, stock options are generally sold to the company’s founders, those close to them, and angel investors. After this, a preferred stock can be sold to investors in the form of a Series A. Series A allows investors to get in early with a business that they truly believe in. It’s a mutually beneficial relationship for both the company and the future stock holders.”
Series B+ Funding
“Once a business has been launched and established, it may need to acquire Series B (and beyond) funding. A business will only acquire Series B funding after it has started its operations and proven its business model. Series B funding is generally less risky than Series A funding, and consequently there are usually more interested investors.”
Important SaaS Business Model Metrics
While diving deeper into the SaaS business model, it’s important to understand the key SaaS metrics that will inevitably pop-up along the way. These key SaaS Metrics are critical to track in order to understand the health of a SaaS business.
MRR (Monthly Recurring Revenue)
Not to be confused with ARR (Annual Recurring Revenue), MRR is how much money your company can be expected to bring in every month. Going beyond the basic meaning, MRR is a functional metric through which you can gauge your company’s income and success. MRR growth equals business growth – the same goes for shrinking MRR most likely equaling a negative impact on the business. MRR trends are incredibly important to subscription-based businesses, because they compound over time.
CAC (Customer Acquisition Cost)
The sum total it takes for your team to acquire a customer. This includes the time of the sales reps but also the marketing dollars spent. Tracking your customer acquisition cost tells you a lot about how your company is operating. If the dollars and time spent to acquire a single customer is higher than the MRR or ARR that customer brings in, that can be a huge red flag for the business. Over time, your customer acquisition cost will also tell you whether it’s getting more difficult or easier to acquire new customers. You’ll be able to look at trends to see when acquiring customers becomes more affordable, and if there are specific seasons during which customer acquisition is more expensive.
LTV (Lifetime Value)
Here at Visible, we consider LTV of a customer to be the most important metric you can track. LTV is the average customer revenue multiplied by the gross margin percentage divided by customer churn rate. Another way to think about it is MRR or ARR X Customer Lifetime. Understanding LTV is important in assessing the overall health of your company as well as justifying CAC costs to your investors. Some good news as you’re starting your business – you can track CAC and LTV right in Visible .
Essentially, churn is loss. You can have customer churn – the number of customers that cancel their subscription to your business annually or monthly. You can also have revenue churn – how much money is lost annually or monthly. Churn is expected in most businesses but maintaining an acceptable rate in comparison with the growth of your business is a key metric to understand, measure, and track. You can accept about three to five percent of your small to medium sized businesses portfolio every month or less than 10 percent annually. As enterprise level businesses go, aim for a churn rate less than one percent. Your churn rate should continue to decline in subsequent years until you reach negative churn.
This SaaS metric refers to how long you are able to maintain a customer per your subscription model. This could be annually or monthly. Healthy retention can also be customer growth. If a software is user-based or has multiple product components, upsell and expansion can be possible leading to annual retention exceeding 100%. Healthy customer retention may not mean you maintain every customer every year, but you ultimately are seeing growth in the business through a balance of renewals, upsells, and contract expansions.
Successful SaaS Business Model Examples
There are thousands of SaaS businesses in the world today with more growing every year. Despite the model being a popular and growing business practice, 93% of SaaS startups fail within the first 3 years due to a lack of product market fit, run into cash flow problems, or experience more churn than growth. Diving into a few examples of successful SaaS businesses can be a helpful way to better understand the business model.
An extension of the SaaS model that has emerged and has proven to be successful is the “Freemium” model. This pricing structure allows a portion of the product to be used for free by a user or team with full features being available through a subscription. This model works because it allows users and teams to get hooked on a product, have a positive experience with it, and share it internally and externally. This model is a good way to prove product-market fit and keep CAC down by having the product and its use take on a viral aspect with customers being bought in to a point that when the ask comes in to purchase the full software, the education that typically happens around a sale has a lot less friction associated with this.
Two companies with extremely successful Freemium models are Slack and Zoom . Both tools can be used for free by individuals, teams, and even larger organizations but have limits on things like storage, meeting times, and seat #s that are only available when an enterprise package is purchased.
Pros & Cons of a SaaS Business Model
Like any business model, there are of course pros and cons to diving down any particular path.
Pros of a SaaS Model
- Rapid growth – if you find product-market fit early and are able to secure funding, the possibility of growing your company to a Billion dollar valuation is very real and can happen extremely quickly.
- Ease of deployment – because SaaS lives in the cloud, it can be easy to make quick fixes to your product and sell to and serve customers from virtually anywhere.
- Predictable revenue – the subscription model affords you the ability to fairly consistently understand how much money you can expect to make. There is no seasonality in a subscription model and annual or monthly contracts provide security that many other business models cannot guarantee.
Cons of a SaaS Model
- Upfront costs – If you aren’t able to secure funding right away, it can be tough to maintain the capital and manpower needed to grow your company quickly enough to be successful. It’s common to not see profitability in the first few years, so it can be a hard business model to follow by truly bootstrapping. Specifically the cost of a team, CAC, and cost to build out the infrastructure to host your cloud software are major factors to consider.
- High risk – growing fast also means you can fail fast. Taking on a lot of capital and scaling quickly can bring reward but if something changes in the market, your business could crash and burn overnight.
- Churn – although revenue may be predictable, if the wrong combination of events takes place in a year (major competitor comes to market, market needs change, economic changes occur), you may see a huge bout of churn in a renewal cycle. This extreme shift could be almost impossible to bounce back from.
SaaS Business Model Growth Strategies
In addition to the “Freemium” model shared above, there are many other growth strategies that can be implemented in a SaaS Business model. A few popular ones include:
Customer Stories and Referrals
If your SaaS is integral to the way a company does business, you may be lucky enough to have customers who are super fans and love advocating for the value you bring to their day, their work, and their business. Capitalizing on these success stories through marketing content, speaking events, or even referrals can be a smart way to grow your business in an authentic way. These customer stories are good proof points to why you work. Referrals can often lead to better conversations earlier on with prospective customers or even help your sales team break into accounts that have been historically tricky to sell to. Here is an example from one of our customers:
If your company is selling into a specific space, a common strategy is to try and become the “expert” in that space. If your company blog or community group can provide value to your end-user outside of your product, that credibility will spread. Lattice does a great job of this. They have built a free 10k plus HR community group for any HR leader. They keep this space completely focused on their ultimate end-user but never focus on the product, simply provide a space for that community to meet. From there they are able to source content and ideas on what to write about in their blog and share on their podcast, effectively providing value to their end-user before even attempting to make the sale. This name recognition and “expert” status makes the use-case for the product feel more in-line with what the user group is actually interested in.
3rd Party Resources
Companies that actively spend time building up great customer reviews on sites like G2.com or work to be analyzed for trusted reports like Forrester , can use that credibility as an outside proof-point for why their product is valuable when selling into new customers.
Social Media and Influencer Marketing
This strategy is all about going where your end-user is. Build a brand and a voice via social media sites that are popular with your customer. Showcasing your companies voice and personality as well as commenting and sharing insight into trending topics can be an easy way to grow your awareness in an industry. Influencers, or well-known folks in a specific space, can be valuable on social media as well. If a top marketing influencer endorses your marketing SaaS software, folks may come inbound based on that person’s recommendation. Connecting with and offering trials to influencers can be a great way to get this started. Additionally, identifying an exec at your company with a strong following can be a great way to build your company brand via that individual. Folks on LinkedIn, for example, are much more likely to engage with what a person has to say then what a branded company page does.
Tools to Help You Optimize Your SaaS Business Model
We recommend a few tools to start when jumping into a SaaS business model. Free or premium versions are great, but it’s important to invest in tools that allow you to measure the key metrics listed above and track overall business health.
CRM – A customer relationship management tool is key to maintaining an accurate and complete data-base of all of the accounts your team is actively selling to, are active customers, or who have churned. A complete picture of the relationships your company works with will allow you to measure growth and track CAC, MRR and churn. Salesforce, Hubspot, and Oracle all offer quality options but starting out you can build a basic CRM via spreadsheet tools – it will just be a lot more manual.
Analytics Tool – Invest in a tool that will allow you to accurately measure all the metrics for your company. We recommend google analytics or manually tracking your metrics via a spreadsheet tool if you don’t have the budget to invest right away. Looker and Tableau are great options once you have budget to spend.
Visible – We of course have to share how we can help with growing our SaaS business model, too. Once you take on funding, we are the most complete tool for sharing updates with your entire team and managing existing and potential relationships with investors. You can learn more and check out a free trial of us here .
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A Complete Guide to the SaaS Business Model
14 billion customers use at least one SaaS product to optimize their business operations. Even individuals use Saas products (think Spotify, or Netflix) for daily activities, or entertainment. It may seem that if you've built a Saas product, success is guaranteed.
In this article, we’ll explore the ins and outs of SaaS business and see how to build a Saas business that works, sustains, and grows.
What is the SaaS Business Model?
SaaS or software as a service is a business model that deploys its software on the cloud and allows users to access the product features with monthly or annual subscriptions. Users don’t have to download and install anything on their physical devices and can log in through the internet from any location.
As opposed to conventional business models, SaaS doesn’t run on one-time transactions and uses recurring payments to maintain the revenue stream.
SaaS is designed to serve big corporations and individuals alike. When software is built to cater to other business requirements, it’s a B2B (business-to-business) SaaS product. And if it directly targets the end customer, it’s called a B2C (business-to-customer) SaaS product.
Example– Freshbooks is accounting software with an ideal customer base of businesses and entrepreneurs. It’s an example of a B2B SaaS business model, whereas Netflix is a B2C online video streaming platform with millions of customers having their accounts in its system.
What are its Advantages Over Traditional Business Models?
1. Flexibility to Scale
Since the resources are deployed over the cloud instead of physical apparatus, it becomes much easier for SaaS businesses to scale for the sudden surges in demand. Even new features can be added without disrupting the rest of the active services.
2. Higher Adoption
Onboarding a user on the cloud platform is hassle-free and quick since no complex installations are required. Also, users can access the account anytime and anywhere, boosting the product's stickiness.
3. Revenue Predictability
Since users log into the server to access their accounts, tracking their activity and usage becomes easy. It provides the required visibility for businesses to spot healthy and about-to-churn accounts. These metrics allow accurate revenue forecasting and time to compensate for any possible losses.
4. Limiting Product Piracy
The SaaS products are delivered through the web or mobile applications. It restricts the illegal distribution of the product to unauthentic users.
What are its Disadvantages Over Traditional Models?
1. Longer Conversion Cycles
The market is flooded with SaaS products, and this cut-throat competition makes it difficult for businesses to convince customers to choose them over others.
It leads to more money spent on marketing the product and acquiring customers.
2. Demands Heavy Capital
Businesses need to be closest to the best option in the market if they want to dominate it. It requires more than just a good idea. A skilled tech team, aggressive marketing, proactive sales, and much more needs money.
So if you don’t have a runway to persist for at least the initial days, it would be difficult for you to excel.
What are the Revenue Streams For a SaaS Business?
1. Monthly or Annual Subscriptions
It’s the most reliable form of revenue where users pay a recurring fee to avail the benefits of the product.
The subscription amount can vary for users depending on which plan and how many features they want to consume.
2. In-app Purchases
The add-ons that the user can buy after subscribing to the product are in-app purchases.
For example, an online editor, Canva, provides its users with free templates, but they can also buy a paid one from the platform.
3. Custom Solutions
Mainly enterprises come up with custom requirements to solve their unique use cases. In such scenarios, B2B SaaS companies develop on-demand solutions for clients at an additional cost. This cost can be one-time or recurring depending on the resources expended by you for them.
4. Dedicated Support
A SaaS solution is incomplete without a compatible service team. Clients understand the importance of 24/7 support to make the most of the product and are willing to pay extra for it.
For businesses, it can be an opportunity to boost revenue by adding dedicated multi-channel support to clients. Ensure that even your basic plan has some extent of customer support. Otherwise, it can work against you.
5. Reports & Analytics
Data is the new currency. So you can leverage your data processing capabilities to charge the customers for advanced analytics and reports.
How to Optimize Your Revenue?
Your revenue balances on how much you spend acquiring the customers and what returns you get from them.
So, to optimize your cash flow, let’s fix these two metrics.
1. Lower Customer Acquisition Cost
CAC is what it costs you to get a new customer to your business. Start with a solid system that can make lead generation a self-running cycle.
- Identify your niche market and ideal customer
- Research their needs and the channels they are most active on
- Deploy conventional and uncommon channels for marketing your brand. Instagram and Quora are great places to start from.
- Plan your pricing strategy considering your target audience in mind.
- Develop a freemium SaaS model to attract potential customers.
- Invest in excellent service and support to boost customer loyalty for more referrals.
2.Boost Customer Lifetime Value
Customer Lifetime Value, or LTV, is the forecasted revenue a customer can bring in their expected partnership with you.
Though it’s a prediction, it should be based on data-driven analysis rather than assumptions.
- Streamline the onboarding process with proper training and self-help documents.
- Conduct regular customer surveys to understand their feedback and expectations.
- Include highly requested features to your product to enhance product stickiness.
- Schedule monthly or quarterly review calls to explore more opportunities in an account.
- Engage with all departments of a business you are serving to boost product adoption across the organization.
For more information on how to optimize your lead conversions and grow your revenue, check out The Ultimate Guide to Optimize B2B SaaS Lead Conversions and Grow Your Revenue.
What’s the Way Forward?
There is no doubt that SaaS is the new buzzword. Customers, whether businesses or the general public, both appreciate the ease of convenience and value for money.
And if you can’t fulfill the market needs, someone else will. That’s why it’s crucial to stay on your feet and aim to improvise every day. SaaS solutions are perfect for eCommerce platforms as they allow company owners to scale up their businesses.
The simplest way to do this is by introducing the right team and tools to your endeavor. Bring onboard the top talent who can help you market your product cost-effectively. Since straight away hiring top guns for your team might not be pocket-friendly, you can always squeeze out the best through outsourced talent or consider help from MVP development companies .
SaaS marketing agencies are the best bet here because they come pre-equipped with the latest industry trends and resources to guide a budding business to success.
And most importantly, keep an eye on the metrics that matter so you can objectively evaluate your progress.
Some SaaS Business Model FAQs
1. What are the pros and cons of a SaaS business model?
- Easy to scale and enhance
- Flexible to allow the pivot and product modifications
- Promises better returns on the investment with recurring revenue
- Caters to a broader market and audience
- Better product adoption
- Highly competitive space
- More risks for customer churn
- Demands capital to set up and sustain the business
2.What are the stages of a SaaS business?
- Pre-startup: Where you are just brainstorming the business idea and basic organizational structure
- Start-up: When you bring together teams and tools to start the business on the ground
- Growth: The stage when you start acquiring clients and scaling your team
- Maturity: When you have a stable product, you can grow by adding more features or go bigger with IPO
3. What are the most relevant metrics for a SaaS business?
- CAC : Customer Acquisition Cost is the amount spent on getting a new client.
- LTV : Customer Lifetime Value is the predicted revenue a client can bring to your business throughout your partnership.
- Monthly Recurring Revenue : It is the recurring payment done by clients monthly.
- Churn Rate : The number of clients who discontinued your services out of the total client base.
- Net Promoter Score : The score your clients give your product on a scale of 1 to 10.
SaaS or software as a service is a business model that deploys its software on the cloud and allows users to access the product features with monthly or annual subscriptions.
Here are the main things that give a SaaS business model an edge over traditional business models:
- Flexibility to scale
- Higher adoption
- Predictability of revenue
- Limiting product piracy.
There are five main revenue streams for a SaaS business:
- Monthly or annual subscriptions
- In-app purchases
- Custom solutions
- Dedicated multi-channel support
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SaaS Business Model: Learn How It Works and How to Measure If It Does
mins to read
With more than 15,529 SaaS companies registered on Crunchbase and 12 times growth rate since 2010, it's okay to say that SaaS is a business model of the 21st century. As a SaaS design company , Eleken works with SaaS businesses every day. Over the past couple of years, we've seen an increasing number of entrepreneurs looking to adopt this business model. Why does everyone want to be a SaaS company?
We decided to cover the most important aspects of the SaaS business model so you could better understand how it works and whether you need to be looking into it for your next project.
What is SaaS?
SaaS (Software as a Service) is software hosted on the cloud. It can be accessed via an internet browser, mobile application, or desktop app. SaaS is provided to users on a subscription basis, which means they have to pay a recurring fee monthly or annually.
You know Zoom, right? It's a go-to app for group video chats today. You may hold an unlimited number of one-to-one and group meetings on Zoom as well as record these meetings, share screens, use boards, and have productive discussions without any annoying issues (hello Skype!). Zoom offers access to its video conferencing app using a subscription model.
SaaS revenue streams
SaaS companies typically have a few revenue streams in addition to subscription. Let's look at all of them.
Recurring payments are the main revenue-generating stream of SaaS businesses. This stream is fluctuating and varies from month to month (depending on your pricing model and customer satisfaction). People continue to use the app as long as it delivers value.
You can upsell to existing customers offering them more storage, more data, additional features, or more accounts. Going back to Zoom again (we do not promote it, but we do like it, especially in times of remote work), they have a couple of available add-ons: Audio plan and Additional Cloud Recording Storage. With the Audio plan, you can call out your participants (like in Skype) instead of just waiting for them to join in. If you need more storage to keep your conference recordings in the Zoom account, you can pay for additional space.
You may charge for software setup. This revenue stream not only adds to the profit of your SaaS but also enables a customer validation process. You need to approach setup fees carefully. It works better for enterprises (big clients) with a lot of data.
For example, a well-known customer relationship management platform, Salesforce, provides different integration and installation services from their in-house architects on request. They get pretty good financial returns from this offer. Salesforce has hundreds of apps and features which are useful for any business, but customers struggle to integrate them. Because the value dominates over the price, people pay for architects’ services.
You may apply additional charges for creating data-driven reports based on what service you provide to your customers. It may be a feature in one of your plans or just an additional service. Make sure that these reports add value to your customers and have ROI (return on investment). One more successful SaaS player, Hubspot, a platform for sales management, marketing automation, and customer service offers their customers to get Reporting Add-on and create Custom Reports to track various metrics.
You can develop different levels of customer support and charge for this service. Customer service is an important and expensive part of any business. And, we consider it to be part of the SaaS value proposition so it might also be included in the pricing model.
A prominent email-marketing automation SaaS, Mailchimp, offers different levels of support depending on the pricing plan. If you are signed up to the Free plan, you will only be able to use published tutorials, and email-support during the first 30 days. Standard and Essential plans will let you communicate with support representatives via live chat. And Premium Mailchimp plan users, in addition to the mentioned before support features, can get phone support and priority response.
Key metrics of SaaS Businesses
SaaS is a “metrics-based” model. If you want your business to succeed in the competitive SaaS environment and scale up, you have to keep an eye on the key metrics for your business.
One metric that matters (OMTM)
It is also called the Northstar metric. It helps you figure out whether your product is succeeding or not. Northstar metric is unique for every SaaS business and defines the goal for your entire product team. For example, Slack aims to 2K messages per user. Airbnb has bookings per night as OMTM.
Monthly Recurring Revenue (MRR)
MRR is the most important financial metric. As SaaS is a subscription-based business, you need to count how much money you get every month. This metric doesn’t include upsells or profit from additional revenue streams. You should only take into account the number of subscriptions.
Lifetime Value (LTV)
LTV is the amount of money you receive from your customer during the whole period of using your software. This number helps you predict profit and allocate resources wisely. Companies that have a good LTV focus on improving the user experience of their existing customers. It's cheaper to keep an old client that attracts a new one.
Customer Acquisition Cost (CAC)
CAC is a marketing metric that indicates how much money you spend to acquire new clients. Watching LTV and CAC of your SaaS will help you keep a healthy balance and growth.
Net Promoter Score (NPS)
NPS helps you identify how satisfied your users are with your product. NPS is based on a simple question: How likely are you to recommend our product to your colleague or friend from one to ten? This metric is related to the quality of product features, customer services, and user interface.
It is a percentage of clients you have lost during a defined period of time (week, month, quarter). SaaS businesses are based on a subscription model which means you have to keep track of current clients and make sure they continue to use your service from month to month. Trying to find the reasons of why they churn may help you improve your product.
Will every business evolve into a subscription business model?
According to a 2020 survey , the average growth rate for startups with less than $1M ARR is 144%. For companies with more than $5M ARR, the number decreases to 60%, which is still rather significant growth. The business model is lucrative and thus luring entrepreneurs to build new products. Still, there are dozens of other industries that generate the same or even bigger revenue. What do so many entrepreneurs want to build a SaaS?
We have been living in the “subscription economy” long time before SaaS became popular. We used to rent and lease housing, cars, offices, even outfits, and pay a monthly fee for using them. SaaS is another service that offers stuff "for rent," the only difference is that the stuff is digital.
Software as a Service business model is a win/win for customers and businesses. For businesses, SaaS scales fast, generates recurring revenue, and gets managed easily. For customers, it offers convenience and reduced investments.
Customer demand is changing. They are more willing to pay for access to the product or service in smaller amounts rather than paying lump sums up-front. Customers enjoy not only lower costs but also constant upgrades of the software and easy access to new features and cutting-edge technologies.
There is a luring opportunity for every business to evolve into a subscription business model. If you want to keep your product viable and generate constant profit, regardless of where you are, you should start considering this option.
The transition may be expensive at first, but you can reap benefits very fast as soon as you choose the right pricing model and set up your metrics.
Tien Tzuo, in his book “Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It” makes a point that the subscription business model is about freedom, easy access, cutting edge technologies, and easy financial management.
How to Screw up Everything but Still Succeed. Guide to Product-Market Fit
Product-market fit sounds like a very basic concept, the one you can understand just by the name. However simple it is in theory, in practice it is one of the hardest things to get as an emerging company. And just as crucial.
As a design agency , we work a lot on developing MVP (minimum viable product) for all sorts of businesses. Quality MVP is important, but there is one thing that really defines the success of an MVP and the whole startup.
What is product-market fit and why should you care?
The product-market fit was invented by Don Valentine from Sequoia Capital. He used it to describe a startup that can succeed despite being a total wreck just because there are people who need the product so much.
This definition may be a bit misleading. That’s why we would rather go with the one by Marc Andreessen, who was the first one to write it down:
Product-market fit means being in a good market with a product that can satisfy that market.
Fair question is, what is a “good market”? It means having lots of potential customers who have some underserved needs and therefore are likely to use your product.
There is a common belief that when you have product-market fit, you feel it. I bet if you read this article, you are still not sure whether you have the product-market fit or not. Doubt everything, as Buddha said. Also, intuition might not be enough for the investors.
Let’s take a look at some ways of proving product-market fit (or finding one).
The startup pyramid
This pyramid is a great visualization of the importance of the product-market fit. The author of this concept is Sean Ellis, the CEO of GrowthHackers.
From everything he learned (and taught) about growth, Sean Ellis got the conclusion that there is no scaling before achieving product-market fit. In this case, scaling can be dangerous and ruin the startup faster.
The startups that are yet to reach product-market fit, are called BPMF (before product-market fit), and the rest are called APMF (after product-market fit). No need to remember these abbreviations. The only thing to remember is that achieving product-market fit is essential.
6 Steps to product-market fit and one more pyramid
Eric Ries described one of the easiest ways of achieving product-market fit in his book The Lean Startup . It is also known as The Lean Product Process and there are just six steps:
1. Find target customer
2. Define what are their needs
3. Develop a value proposition
4. Figure out the main features of the Minimum Viable Product (MVP)
5. Build an MVP ( read how to build an MVP here )
6. Test and collect feedback
Product-market fit is one of the key elements of Lean Startup theory, as well as the product-market fit pyramid. It is a great visualization of how product-market fit connects different components of the product design process.
6 steps may turn into 12 or 18 or more if the initial hypothesis doesn’t prove true. After each iteration, you have to check the metrics to realize how close you are to product-market fit.
Measuring product-market fit. Key metrics
So what are the metrics that you should look at when striving to reach product-market fit? There will be lots of formulas and details on each of them, but here we’ll just look at the basics of each.
1. PMFSurvey. How disappointed the users would be without your product?
Sean Ellis promotes this metric to be the main indicator of product-market fit. Product market fit survey is also known as the Sean Ellis test.
The survey consists of asking one simple question to your customers. You can use this survey tool made specifically for this metric.
If at least 40% of users would be very disappointed if they could no longer use your product, you got the “must-have” product and can start thinking about scaling it.
2. Churn rate. Do people want to stay with you or not?
The annual churn rate is the most common metric, and the standard benchmark is set at 5% . The number is not universal: each type of business has its own specifics, and new companies will typically have a higher churn rate than the established ones.
Note that the annual churn rate is very different from monthly! Calculating monthly rates and comparing the dynamics is important, too, but make sure you don’t mix annual with monthly rates.
3. Net Promoter Score (NPS). How much do people like you?
This one is easier. NPS is calculated based on answers to the classic “On a scale of 0 to 10, how likely are you to recommend this company’s product or service to a friend or a colleague?”
Companies with good product-market fit get at least 50 NPS. 50 is a great result for a SaaS. This metric is basically a quantitative method of measuring word of mouth, which is so important for emerging products.
4. Growth rate. How many customers do you attract?
Growth rate can be calculated in revenue or number of users (for SaaS), and the time period can be different for each product.
Many people believe that if the business is growing, it goes in the right direction. However, it is not that simple. Having a high growth rate is good, but you have to be conscious of what makes it so high. If that is just the result of marketing investment, then it has little to do with product-market fit.
How to analyze metrics?
Don’t worry if one of the metrics is far from the benchmark. There are plenty of examples of product-market fit that work despite the metrics. Here is just one of many cases: at the top growth rates of Facebook, their NPS was -14.
Metrics is the tool, not the goal. What really matters are the underlying causes that influence the overall situation and, consequently, the numbers.
There are so-called vanity metrics, which means the numbers that look impressive but don’t truly influence the overall sustainability of the business. For example, having 10 million users is great, but what if no one pays for the premium? Doesn’t look that great anymore.
It happens when we look at separate metrics independently. For example, you have a really high growth rate. Awesome. The next thing you have to check is whether the churn rate is not higher than the growth, and then – whether the customer acquisition cost is balanced with customer lifetime value. You can be sure you’re doing great only when the metrics are balanced.
That’s why metrics should be plural. It may be tiring sometimes, but there is no single magical formula that shows your success (though just in case you found it, please drop us a line).
If all those metrics leave you confused, take a look at this list of best books on SaaS metrics . If you are not committed enough to read a whole book, we have main take-outs from each of them.
Testing product-market fit
Ok, so how do you test product-market fit? First of all, get your product ready. MVP is good, but you can go with what you have, a prototype can work. Make sure you know what buyer personas you target.
If you want to test more than one hypothesis at once, you can set campaigns with different positioning points. Be careful with that option, as it requires more experience.
So what do you need from the customers?
First of all, answers to the main questions of the product-market fit survey (see metrics #1 and #3 above).
Second, you need in-person interviews. Many people find it intimidating and end up talking to the users they already know, ending up with biased results. The customers for the survey need to be chosen randomly. You’d be surprised how many people are ready to dedicate some of their time to help you improve the product.
The way of phrasing questions is important. You won’t get very valuable information if you ask what they love about the product. Instead focus on what is wrong, what could be improved. Ask them why you should not use the product .
The process of achieving product-market fit is basically testing the value hypothesis. If the hypothesis proved to be right, the metrics are fine, you have the PMF. If that is not the case, you have to iterate, change the product or change the focus market.
Looking for a product-market fit made many people change their product completely. Did you know that Slack founders initially were developing a video game? The working chat was just a tool to simplify their internal communication when at some point they realized that a business communication platform would have a better market than a video game.
Here is another example from one of our clients for whom we did UI/UX design . Gamaya, an agricultural data processing company was initially focused on farmers. At some point, they realized that their product could also serve golf clubs that need to monitor the conditions of the fields. Read more in the case study .
Changing the market might look like an easier option, but really you should be prepared to change both market and product, only if just slightly.
Finding or creating? Reaching the right audience
There are two approaches in finding the right market:
1. Focus on a particular niche/improving existing solution (example: Telegram as a better social media app)
2. Find an innovative solution (example: Netflix, as a new approach to video rental)
The first option is less risky, the second one is disruptive and may require more iterations. Success is not guaranteed.
Many startup founders think that creating a new market is the best option. The most famous startups are the disruptive ones, giving solutions that the customers couldn’t have thought of. Airbnb, Apple, Uber — they were selling products to people who didn’t know they would use such a service before, simply because it was not existent.
Whatever you choose, you have to know that the root is the same: you have to find an existing problem and the solution to it. In one case, the solution is a completely new product, in the other, it is just cheaper or faster than the existing solutions. In both cases, there has to be a problem to get a market.
· Product-market fit means that your product has apool of people who need it and are willing to pay for it. It is one of the mostimportant things for a startup. Only the products with good PMF can have stablehealthy growth and scale successfully.
· Some of the metrics that help measure PMF are:churn rate, organic growth rate, Net Promoter Score (how many people arewilling to recommend the product), PMFS (how many people would be verydisappointed if they could no longer use the product).
· Product-market fit should be tested and lead toiterations if the value hypothesis is not proved. Once reached, it has to betested regularly, as both product, market, and competition tend to change.
· Whether you aim to develop a better solutionthan your competitors or build something completely new and disrupting, thefirst thing you need to do is to find the problem that you are trying to solve.
Are you ready to start your journey to the product-market fit? Great, then it's time to set up a plan for your team and build a product roadmap. We have an article full of tips and tools for building a product roadmap .
AARRR SaaS Metrics: Actionable Decisions for Rapid Growth
In 2007, Dave McClure, an investor in the 500 Startups venture capital fund, presented his AARRR method. AARRR is a marketing funnel formation model that takes into account five very simple and effective metrics: Acquisition, Activation, Retention, Referrals, and Revenue.
Because of the similarity of the abbreviation to the corsairs' shouting "Aarrr!", this method is also known as "pirate metrics".
AARRR SaaS Metrics helps to monitor the strategy of promoting startups and new products, and see the real picture of how your business is developing. Tracking each of the key five indicators allows determining weak points in your conversion funnel and come up with the right strategy to improve them.
For example, our client, Handprinter, identified that their product generates great interest with people at the acquisition stage, but because of the poor user experience, they fail to convert visitors into users at the activation stage. The solution we provided was a well-thought-out UI/UX redesign that helped Handprinter overcome this problem (read more in our case study ).
At this point questions like “what do you mean by acquisition?” “How can I improve my activation?” and so on may arise in your head. No worries, that’s why we are here. In this article, we are going to dive deeper into each metric separately to understand how they work, how to implement them, and why they are beneficial for your SaaS startups. No more words, let’s do it!
Pirate metrics explanation
The way Dave McClure illustrated the AARRR model in his original presentation looks, let us say,.... a bit chaotic.
In fact, everything is simple.
AARRR is a sales funnel for a startup. If to order all 5 stages based on the number of users, starting with those who just came to the website and ending with those who made a purchase, we will get the following scheme:
Image credit: blog.tability.io
You need those actionable metrics to calculate the conversion: the number (or percentage) of users moving from stage to stage. The beauty of these five metrics is that they all are built on one another. The number of people that will move gradually down the funnel and eventually make a purchase depends on how thoroughly you will work out each stage.
Now, let’s one by one analyze each indicator from the pirate metrics.
The acquisition is about getting visitors to your website and making them sign up for your service.
For most SaaS companies the goal at this stage is to make the user sign up for a free trial of the product. However, if you have micro-conversions on your website (such as email subscription, call-back request, etc.), you can break down customer acquisition metrics and measure their performance separately.
Tactics to use:
- SEO optimization
- Guest posts
- Webinars in which you are a speaker/invited guest
- Email newsletter
- Contextual advertising
How to implement:
You are the one to decide which tactics to choose.
In case you have enough time and budget then test as many options as possible. You may create a table in Excel and put all the information about each campaign there (name of a campaign, type of target audience, number of transitions from the advertising to your website, amount of conversions, cost per customer). This way you will see which campaigns bring more conversions and benefit the development of your business, and which tactics are better to give up.
If you have limited time and budget, then it is better to start with those tactics that are most likely to be successful. At the end of the test period, you draw conclusions whether the channels and methods of business development were chosen correctly. You can understand it by measuring the cost per customer (to measure the cost per customer take the number of transitions to the site from a certain channel (we take the data from Google Analytics) and divide it by the money spent).
1. СPC - cost per click.
2. CPL - cost per lead.
3. СTR - click-through rate.
4. Leads - the number of leads.
5. Bounce rate - the number of users who left the site immediately after opening.
You can go and acquire a person to come into your SaaS app, but that doesn’t necessarily mean they activate (become a user). Activation means your leads take a meaningful set of steps to move forward in the funnel. If they just register and then leave to never come back, they never become activated.
Some examples of activation may be making the first booking on Airbnb, checking the first text with Grammarly, sending the first email as a new Gmail client, etc.
Take a look at how Evernote engages users explore their solution further. It sends a set of educational emails listing some special features and how to use them.
If the user interface of your app is consistent and the software is convenient and useful, then the customer will catch their “ aha moment ” and will be willing to continue using the app. If the transitions to the service did not result in action (conversion), analyze the behavior of users and figure out at what point they left the page.
Tactics to use:
- Optimize the onboarding process to make the product more understandable for users.
- Simplify the registration process.
- Offer a free month or demo.
How to implement:
- Choose the tactic. Based on it create prototypes and test them. Make several different variants of the onboarding process/registration forms with different approaches to the target audience, different designs, etc. Focus on the needs and problems of your customers.
- Do A/B testing to find out which variant works best in the chosen strategy.
- Collect a base of activated users and analyze their actions. Pay attention to the way they interact with your product. As well, analyze which features of your app they don’t use. These observations are the key to what you need to improve and change in your app.
- CPA - the cost per acquisition: registration, subscription, a transition from free to paid version.
- Engagement - duration and depth of the session.
- Bounce Rate - the percentage of bounces.
After you have activated users, you need to make your product impossible to give up.
Retention is the most important stage for any SaaS business, as most cloud companies use a subscription-based pricing model. It means you can once acquire a customer and keep getting a predictable amount of revenue for an unlimited period of time (in case the client sees the value and is satisfied with the service you provide).
And that’s really crucial because acquiring new customers is difficult and costly, but if you optimize retention, you will have a consistent relationship with the customer and get a predictable flow of revenue coming in.
For example, Grammarly has come up with a creative idea of sending retention emails to users in a form of achievements.
- Email newsletter (e.g. describe how you improved the functions that the client has already used)
- Weekly digest
- Improve user experience.
How to implement:
Track the statistics of how often customers use your service and at what point most users leave your app. Monitoring the churn will help you to identify what features in your service require improvement.
To keep your customers, you should find out what they love most about your app and how they receive the value from using it. Ask your most devoted clients what they do in your application, what features they use more often, and why.
Don't forget to take care of customer support as one of the working strategies to reduce the churn rate . Listen to your users and react to their feedback as fast as you can.
Once again, the most effective way to make your customers come back to your app, again and again, is to learn what they value most about your product. Keep improving the most popular functions and never stop refining the user experience.
A consistent and intuitive design of your app is what unveils your solution's most powerful features and lets users see its true value. At Eleken, we managed to help many SaaS companies make their products hard to give up thanks to a well-thought design.
- Session duration - how long the user interacts with the product during one visit.
- Customer return rate - how many users reuse the product over a certain period.
- Customer churn - how many users stop using the product over a certain period (for example, a month).
It is at this stage of retention that your customers become brand advocates. Your task is to take care of them and encourage them to spread the information about the company.
This is where the referral phase begins.
If you acquire a customer and then they activate and keep using your app and they love it so much they start telling other people about it, either through word of mouth or through some referral system, or whatever it may go, they invite their friends or team members to use your product and it is the referral metrics stage.
The goal here is to encourage users to recommend your product. Do everything to make the process of sharing quick and easy.
Tactics to use:
- Send email reminders about your referral program
- Offer referral rewards (cashback, discount, etc.)
- Offer two-sided reward (like Airbnb that offers credits if someone signs up with your shared link)
- CSI - Customer Satisfaction Index (measured through testing).
Income is an indicator of whether you have successfully completed all the above stages.
Only those users who fully understand what value your product gives them will proceed to the revenue stage.
The main goal at this stage is to receive first money from your customers.
Tactics to use:
- Add a step of connecting the payment card for users before they start a free trial
- Configure push notifications that will inform the user about the limitations of the free version and offer to switch to the paid version.
- Consider up-selling and cross-selling
- ACV - average contract value
- LTV - life time value, profit from a client for the entire time of working with him.
- The total amount of proceeds for a certain period.
Revenue was the last “R” in the AARRR framework. If you start to make decisions on how to optimize each of these core metrics that means you can accelerate the path to the next stage of growth of your cloud business.
Does the customer journey end here?
And the answer is, of course, no. It’s just the beginning.
AARRR funnel framework is a great start. It helps to:
- See the entire customer journey
- Recognize the bottlenecks of the funnel
- Check each stage separately and adjust the client's behavior
The metrics are transparent enough to customize the flow of customers when launching a SaaS project: from acquisition to activation and purchase. But this model only considers the number of people at each stage of the funnel. By relying solely on these metrics, you will not be able to fully gauge the long-term performance of your actions, so you must keep track of other important metrics as well.
If you need some more guidance on how to track the right numbers that matter specifically for SaaS, take a look at our article about Financial KPIs for SaaS Companies , or for those who prefer more traditional variants check the list of best books on SaaS metrics .
Product Life Cycle: Everything You Need to Know about Stages and Success Strategies
Why SaaS Buyer Personas Fail (and How to Get Them Right)
Red Ocean vs. Blue Ocean. A Practical Guideline on Your Business Strategy
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What Is a SaaS Business Model and How Does It Work?
Software as a Service (SaaS) is the business model of today. According to a study done by Virayo , over 80% of businesses use some type of SaaS application.
SaaS applications run in the cloud, and they are often accessible both through a web interface, as well as through desktop and mobile apps (as needed).
For a recurring monthly fee, people have a powerful online tool at their disposal. SaaS companies benefit from the recurring revenue and can roll out new features as soon as they’re ready.
However, for a novice company that wants to enter the software realm, the SaaS business model can be somewhat difficult to understand than other archetypes. In this article, we hope to clarify what a SaaS business model is and how it works.
How Does a SaaS Company Works?
So, what is SaaS business model? SaaS is software owned, supplied, and managed remotely by one or more of its providers.
SaaS companies maintain servers, databases, and software that enables the product to be used over the internet. Users can also access and use the software from almost any device. Generally, the users pay a recurring subscription fee to have access to the software. The more popular business model for SaaS include:
- Customer Resource Management (CRM) : Allows users to manage client information and track sales.
- Enterprise Resource Planning (ERP) : A SaaS application most suitable for big organizations.
- Accounting and Invoicing : Business software focused on billing and invoicing services.
- Project Management : Software that helps teammates communicate projects.
- Web Hosting and eCommerce : Remote servers that handle companies’ online presence.
- Human Resources : SaaS that tracks employee engagement, manages payroll, the hiring process, etc.
- Data Management : SaaS products that facilitate data analysis and protect business data.
Check out if your SaaS is a CRM or similar: How Introducing a CRM Helps Your Sales
Why Do Businesses Adopt the SaaS Model?
Because it works! Software installed on a device can undergo harmful interactions with other software and OS errors. In SaaS business model, users don’t have to install anything to access the product features.*
SaaS is cheaper than software sold via other billing models, which convinces users to adopt the product. Developers love SaaS because it is developed consistently and run on the company’s infrastructure. Investors love SaaS revenue because it is recurring, which leads to predictable cash flow.
The Stages of a SaaS Business
For every SaaS business model , there are three primary stages that they go through:
- Startup : Creating a working product and marketing it to new customers.
- Hypergrowth : Experiencing faster growth as clients adopt the product. This stage implies data expansion, bandwidth, and all sorts of technicalities to support users’ accounts.An inability to successfully handle hypergrowth is where many SaaS companies fail.
- Stability : The stage where your SaaS business model levels out. You are making a healthy profit, acquiring new users quickly, and experiencing churn.
Benefits of the SaaS Business Model
Adopting a SaaS Business model over standard software installations is beneficial to both the product vendor and customer.
Benefits for the Customer
A business model for SaaS favors your target customers. It minimizes costs and increases product usage flexibility. The key benefits of SaaS for your target customers include:
Lower Costs : SaaS platforms are distributed on a subscription basis. That eliminates licensing fees involved in traditional software installs.
It also allows your clients to increase or decrease their expenses based on usage. Additionally, because SaaS solutions are cloud-based, infrastructure costs for customers are eliminated.
Flexibility & Scalability : The SaaS business model offers your customers greater flexibility. If you base your pricing on a usage metric, then your clients will only pay more if they’re using the product more often.
This provides your customers with the opportunity to grow their business with your software . It also eliminates the risk of paying a hefty fee in advance for a product that might not suit their needs.
Quick Benefits : Because SaaS tools are cloud-based, clients see immediate gains. In most cases, it is as easy as signing up with a name and email address to instantly access product functions.
Higher Adoption : The ability to use SaaS tools anywhere in the world has increased their adoption. If users experience immediate benefits from the software, the chances of sticking with the product are much higher.
Free Upgrades : For many companies, downtime can be costly. In most cases, it happens during product upgrades. SaaS software upgrades are generally done without experiencing user downtime or with shorter maintenance windows.
Benefits of The SaaS Business Model Vendors
The benefits of the SaaS business model for vendors include:
No Sales Friction : Most of the SaaS solutions are priced per user or per month. This price allows the end-users to calculate software costs easily. It eliminates the sales friction that can come as a result of IT budget approval.
Recurring Revenue : One of the greatest benefits of the SaaS business model is that it allows a recurring stream of revenue which helps you control churn.
Pivoting & Improvements : With SaaS, you can continuously update your product. That will help fine-tune your product so that you can increase retention and attract new customers in the process.
Easier Free Trial Support : On-premise software support can be lengthy and tedious. With SaaS, you can provide support to users immediately as well as a free 7, 14 or 30-day trials. Thereupon, the user can continue with the free trial or upgrade to a paid level when they can.
Easier to Update and Support : As a SaaS company owner, you control the system and the environment that the product is being developed in.
Easier to Update and Support: As a SaaS company owner, you have to know how to value a SaaS company, and that includes controlling the system and the environment that the product is being developed.
For example, if you build a product that needs to be installed on multiple devices, it will need to support edge cases and different OSs, etc. With a browser-related SaaS (e.g. Asana ), you control the infrastructure on which it is being used .
SaaS Sales Approaches
There are two major ways to sell SaaS: Low-touch and high-touch sales. The sales approach defines whether you sell to B2C or B2B customers.
Low-Touch SaaS Sales
SaaS is a product that can sell itself. The main sales channels are the SaaS website , email, and in many cases, a free trial optimized for onboarding from the start. In general, low-touch SaaS is sold on a monthly subscription.
Basecamp is an excellent example of a low-touch SaaS business.
High-Touch SaaS Sales
Some prospective users need further persuasion in deciding whether to use a particular product. High-touch SaaS is all about using human staff to convince your potential clients to adopt the software or continue using it.
In SaaS, most of the high-touch sales are B2B focused. The key to the success of this sales model are the sales teams. More specifically, sales development representatives (SDRs), account executives (AEs), and account managers (AMs).
Sales teams are usually strengthened by marketers that keep the lead pipeline full for the sales team to assess and close. Salesforce is a typical example of a high-touch SaaS business.
Key SaaS Metrics
Metrics are the indication for the health of any business model, not only SaaS. However, among the abundance of things that you can measure when growing your software business, some metrics are more important than others, and you need to keep a close eye on:
The churn rate points to the number of customers that left or unsubscribed within a specified period. A SaaS business model without churn does not exist. Products evolve all the time, and users leave one company for another in a flash.
The churn rate can tell you exactly how satisfied the users are. However, if it’s on a constant rise, it’s a sign that things are going downhill in your business. For SaaS, 5-7% of churn rate is the acceptable level.
For calculating churn rate, you can use the following formula:
The # of Churned Customers (for a given period) / Total # of Customers
Customer Acquisition Cost (CAC)
Knowing how much time and money you need to invest to acquire a new user is one of the best ways to determine whether your SaaS company is profitable. To calculate it, use the following formula:
Total Investment in Sales & Marketing / # of Acquired Clients
Monthly Recurring Revenue (MRR)
MRR is the anticipated revenue that can be expected per month. Measuring MRR can help you understand the month-to-month variations in your income. To calculate it, you can use the following formula:
MRR = # of Customers X Average Revenue
Average Revenue Per Account (ARPA)
The average revenue per account (ARPA) is a metric that shows how much revenue is derived from one client, in most cases, per month, quarterly, or yearly. To calculate it, use the following formula:
Total MRR / Total # of Customers
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the average revenue that you can get from users during the period that they’re subscribed to for the software. It can be calculated according to the following formula:
CLV = (ARPA x Gross Margin %) / Churn Rate
Customer Retention Rate (CRR)
Customer retention is a metric that shows you the percentage of customers who have continued to pay for using your software. To calculate the retention rate for a given period, you can use the following formula:
(# of Customers that Continue to use the Software / Total # of Customers at the Start of the Time Period) x 100
WordPress SaaS Considerations
WordPress is no longer a blogging platform . As the most powerful CMS in the marketplace, today, you can practically build anything, including software-as-a-service. It allows SaaS businesses to use a cohesive platform and technology, with a higher product focus and flexibility than any other CMS.
Furthermore, WordPress provides SaaS companies with ready-made plugins that can be used as a foundation for the software. For example, on top of WordPress, we’ve built DX Sales CRM , a high-end CRM plugin:
With WordPress, customization is much smoother, and you can install various plugins and add more functionalities to your layouts. The development process is modular, and you can extend your SaaS according to the requirements.
However, along with the benefits that WordPress provides, there ought to be a few challenges along the way when building SaaS on top of the CMS.
Our CEO, Mario Peshev, throughout the years of developing high-scale WordPress SaaS platforms, learned about and shared some of the biggest infrastructural hurdles that any SaaS business needs to expect on his blog , namely:
- Evolving programming languages that developers need to adapt to that can be significant, predicated on the budget.
- Heavier technology stacks and hosting packages, which imply considerable costs in the long run, but improving the site’s stability, security, and scalability for the SaaS project.
- Developing SaaS on top of a framework such as WordPress is good if you only tailor the environment for your project. A media-based SaaS business model can be built on top of a CMS, whereas an eCommerce SaaS would require a dedicated open-source framework without building something from scratch.
- Finding the right talent to carry out a WordPress SaaS project is pivotal. You need a team with substantial technical experience in the field. On the other hand, popular platforms can bring a significant burden because, in their purpose, they’re usually pretty general. So, a lot of code must be implemented if you want your software to include all the necessary functions and meet your requirements.
The SaaS business model provides you with endless business opportunities. It’s widely accepted, and its adoption will continue to rise. Coupled with the market demand and competition, you need to pay attention to the SaaS industry dynamics and work to provide unique solutions and value to your customers.
*This depends on the SaaS product and if there are any apps provided for accessing/using the software on desktop, mobile, and in a web interface.
WordPress SaaS Development
We have built from scratch or developed components for various Software as a Service solutions built on WordPress.
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The SaaS business model can track many metrics that other businesses cannot track on a monthly scale, such as MRR, efficiency, and churn, among others. This opportunity allows SaaS owners to constantly develop new versions and updates, offer new programs, and work out bugs in systems to provide seamless service.
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