What is a SaaS Business Model?

Model Behavior: What is a SaaS Business Model?

Nov 1, 2022

Turning your idea into a business means selecting a service model. The cloud-based choices are IaaS, PaaS, and SaaS. An important thing to know is that the level of control for each of the three services is different. One of the most significant decisions that you will make is which type of cloud-based service you will choose. 

In this article, we will explore SaaS (Software as a Service). It is important to understand the other two as well.

Think of IaaS as renting data centers and networking space in a Pay-as-you-go model. This service is most useful to developers. The PaaS model, Platform as a Service, offers everything found in the IaaS model plus software for application development. Yet, these may not be the most convenient models for your business.

SaaS delivers the most support and is the easiest to put in place. It allows entrepreneurs to market their services to both B2B and B2C users. For this reason, SaaS has become a phenomenon among service producers.

Below, you will find a comprehensive review of SaaS. Its key performance indicators and examples of top companies that use SaaS. We will also review the pros and cons of using the SaaS model.

What is a SaaS Business Model?

SaaS is an easier and more convenient way to supply services over the internet. As a result, it saves you from the hassle of managing complex software and hardware.

SaaS applications are also known as: 

  • Web-based software
  • On-demand software
  • Hosted software

The SaaS application runs on a provider’s server. The providers oversee the performance, availability, and security of the service. 

SaaS Characteristics

SaaS applications can run any type of business model- from an entertainment business like Netflix, to sophisticated tools and technologies like Salesforce. 

Featured key characteristics of the SaaS service model make it invaluable to a vast array of business models. Consider SaaS as though it were a bank. It ensures that customers get reliable and secure service and privacy protection for each customer while managing the application. 

The same things that make a bank safe are also the key characteristics of the SaaS model. We will detail them below to give you a better idea of what they are.

Multitenancy

Software multitenancy is an architecture where all the users and the managers use the same code base and infrastructure. The entire system is centrally controlled and supported.

Since clients of a SaaS vendor are on the multitenant architecture, it helps vendors to make innovations more quickly. They can save time on developing and supporting variations of outdated code. 

Quick and Easy Customization

SaaS makes it easy for each business to use and customize the application for their needs.

A company can personalize the application without making any changes to the infrastructure. 

The SaaS architecture fosters distinctive customization for each business or user. The SaaS vendor can adjust an app at any time with lower adoption costs and less customer risk. 

Improved Access

SaaS applications offer you better access. You only need an internet connection and a means of access. You access the provider through your laptop, mobile phone, desktop, or any other device. 

3 Key Performance Indicators (KPIs) for SaaS

SaaS providers are subscription-based businesses, they must use KPIs to measure their performance. These indicators and metrics can help the business to better understand customers. Retention rates, churn rates, acquisition costs, and other vital things for business sustainability. 

1. Customer Churn Rate 

The churn rate is the most crucial indicator for the SaaS model. This metric tells businesses that customers have canceled or stopped using their apps. 

It is important for a subscription-based company to understand its churn rate. A high churn rate percentage = more income but may show a loss in customer faith. Customer churn rate is a vital indicator for SaaS service providers since: 

  • The cost of keeping a customer is less than finding a new one
  • Business with high churn rates that are also subscription models can lose hundreds and thousands of dollars in revenue
  • It makes it harder for the app to grow if the customers are leaving too often or too quick.

2. Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is another critical metric. This information tells how much you must spend to get a new customer.

This KPI measures the efficiency of your sales and marketing campaigns. To calculate the CAC for your SaaS business, you need to: 

  • Find out the money spent on marketing and advertising over a period
  • Find out the number of new customers during the same period 
  • Divide the expense by the number of new customers to learn the CAC.

3. Monthly Recurring Revenue (MRR)

This KPI tells you the revenue made from monthly subscriptions. Most SaaS companies follow the subscription-based business model. 

The targets for MRR can vary from sector to sector. They are a true sign of the company’s growth and progress.

Benefits of SaaS

SaaS cloud-based solutions are the main choice of businesses because they are both cost and performance efficient. The SaaS business model has added benefits such as:

Low Configuration and Infrastructure Expenses

The SaaS application has a low setup and infrastructure costs. For a startup, it is an ideal choice for businesses. You pay only for the required services. This cuts any depreciating capital expenditures over time. 

Easy Accessibility

The best feature of the SaaS application is that service providers can deliver them over the internet. This makes them convenient to access – any time or any place. All you need is an internet connection, a desktop, mobile phone, laptop, or any other device for instant access.

Scalability

SaaS applications are scalable on demand. Depending on the volume of the product, you can expand or decrease the functionality and services of your application when you need to. This makes sure you are always online for your customers as your business grows.

SLAs (Service Level Agreements)

The SLAs ensure that the software will work without any issues when needed. This protects your rights with regards to quality, responsibilities, and availability of the SaaS service.

Automatic and Frequent Updates

Service providers can collect feedback from the users of the app. This allows them to understand what users want from the application. It allows service providers to improve and ensure customers get what they need. This way, your IT department will be free to deal with other crucial tasks for the business. 

Security and Customization

Data security is one of the top concerns for businesses today. All SaaS users can enjoy the highest security level due to the shared nature of the software. Customization is a bonus feature allowing integration with other business models.

SaaS Challenges and Risks

While there are a vast number of benefits you can enjoy from SaaS, there are also challenges to using the SaaS model. 

SaaS models expose businesses and users. Depending on outside vendors to support software, create exact billing, and supply data security can be risky. 

Customer Control 

Providers can face a disruption like a service outage or security breach. This might harm businesses or prevent users from running an application. 

The best way to deal with control issues is to understand and discuss the policies and processes of the SaaS service level agreement. Ensure the SLA is enforceable, so you do not face any issues. 

Loss of Control 

If the provider rolls out an updated version of the model, it will be available to all users. Users comfortable with the current version might not want to use the update. This will also mean retraining the workforce to understand the recent version. 

Issues When Switching Vendors

The issue of switching vendors is common with cloud service providers. Migrating data is a huge challenge for businesses and users.

Vendors that use proprietary technologies, make the data transfer more complex. This creates vendor lock-in. Customers find it difficult to transition from one service provider to another. 

Top SaaS Companies in 2022

We use services daily that play a critical role in our personal and professional lives. A list of popular companies that follow the SaaS business model includes: 

  • Google: Google does not need a formal introduction since we use it every day. It is one of the largest, global B2C and B2B SaaS companies. They supply more than 137 Internet-related services for businesses and customers. These include online advertising, a search engine, document editing, creation, and more.
  • Microsoft 365: Another top SaaS user found both at home and in the office is Microsoft 365. This tech giant is a pioneer in using the SaaS business model to offer customer services. It offers a wide range of tools to its user base including Excel, Windows, Word, and other powerful tools.
  • Netflix: What is the one platform that most people use for entertainment purposes? The answer is Netflix. This SaaS Company has more than 220 million global subscribers with revenue of $7.48 billion per year.
  • Salesforce: Salesforce is a customer relationship management tool that helps businesses streamline their processes. This CRM software offers users a cloud-based application and is a tech giant in the industry. 

Final Word: What Does the Future Hold for SaaS?

Software as a service and cloud computing has come a long way in a brief time span. Increased awareness and rapid growth in SaaS products have increased the number of SaaS Integration Platforms (SIPs). We expect to see continued growth in SaaS applications making our lives easier. 

Businesses will need high-performance computing in the future. As they grow, they must analyze larger volumes of data. SaaS will rise with their future challenges.

article by Kellie Clark

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