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Why SaaS is the Best Business Model?

380 Views | 1 min | Published On: August 25, 2023 Last Updated: December 29, 2023

In this rapidly changing digital world, the SaaS (software as a service) business model will help you stay ahead of the curve. You could be planning to launch your SaaS company and fortunately now is the ideal time to do so.

Why, you might be wondering. Have a look at the statistics: According to statistics, the SaaS space is worth over $195 billion as of 2023. And with good reason: SaaS’s economics make it the ideal business model for both small and mid-sized businesses. As the company’s resources are kept in the cloud, it helps businesses to grow their clients around the world.  

In today’s guide, we’ll thoroughly discuss the SaaS business model and why it is the best for your business. Let’s get started with the basics and then we’ll dive into detailed concepts.

Understanding the SaaS Business Model

Software-as-a-service (SaaS) is a form of cloud computing. It is a software distribution model in which a service provider hosts applications for customers and makes them accessible through the Internet. It is usually sold through a subscription model or license. 

The SaaS business model earns profits by providing SaaS-based programs to their users. They can take advantage of on-demand resources and operate their businesses remotely. 

In the SaaS business model, they allow users to rent software based on a subscription paying for the product on a monthly or yearly basis instead of buying altogether. 

The primary difference between SaaS businesses and software companies is that SaaS is hosted in the cloud. As a result, no hosting infrastructure or end-user license is needed to activate the software. To access everything, a customer merely needs to enter into their account.

Different Types of SaaS Business Models

A different range of categories fall under SaaS company that offers SaaS solutions. Let’s learn:

Enterprise Resource Planning (ERP)

ERP is software that helps businesses handle their processes. It includes human resources, manufacturing, finance, supply chains, services, procurement, and more. At its most basic level, ERP provides efficient management of each of these processes in an integrated system. The term “record-keeping system” is frequently used to describe it.

Customer Resource Management (CRM)

CRM tool helps to manage all communications and relationships between your company’s customers. In simple words, CRM solutions help companies stay in touch with customers, streamline processes, and increase profitability.

Project Management

SaaS systems are very well-liked since they can manage several, huge projects from a single platform. There are options available for project development and team communication.

Accounting and Invoicing

SaaS-cloud-based software becomes useful when it offers accounting and invoicing services. Popular SaaS businesses that follow these models include QuickBooks, Zoho, and more. 

Human Resources 

With the use of SaaS solutions, an organization’s HR department can manage payrolls, keep track of applicants, conduct interviews, and oversee the entire hiring process.

Data Management

SaaS products assist with data management and help make it usable for businesses. Also, SaaS offer provides solutions to every industry and covers almost all company’s operations. 

3 Main Phases of SaaS Business Model Development

The SaaS business model must adopt a strategic approach and follow a set of pre-defined steps to achieve success. There are three main phases that every SaaS business will go through. 

Let’s dive into these three main milestones:

1. Startup

This is the first stage of SaaS business development. Here the focus is still on generating ideas, gathering the resources required to turn that idea into reality, and determining how to market this new product. SaaS software development has revolutionized the digital market and has received extensive publicity.

2. Hypergrowth

If you are in the hypergrowth stage, then your SaaS start-up has been able to gain a strong foothold in the market and is seeing widespread acceptance. SaaS start-ups at this stage require higher data expansion, more bandwidth, and extra technologies in order to support more user accounts.

Reaching this stage is definitely a great thing but it will also cost you more money. It is because you will need to swiftly grow your data storage, bandwidth, and other technological resources to accommodate more clients.

3. Stability

At this stage, your SaaS business has leveled up. Your company is starting to turn a huge profit, bringing on new customers, higher retention rates, and reducing churn rates.  

The main challenge for SaaS businesses is to reach from hypergrowth to the stability stage. If your SaaS business manages to handle the second stage, then your business will be able to reach the final and successful stage. 

Key Performance Indicators to Track SaaS Solution

If you’re planning to establish a SaaS business, then you must know about important key performance indicators (KPIs). These metrics help to understand business growth. Following, we’ve discussed important key performance indicators. Let’s learn:

Customer Acquisition Cost (CAC) 

The CAC is the sum necessary to bring on a new client. It’s critical to determine whether a SaaS firm is succeeding or failing.

Formula:

Total Investment in Sales & Marketing / No. of Acquired Clients

Churn Rate

To find out how many consumers have abandoned their current annual or monthly membership, use the churn rate. In order to gauge customer happiness, tracking churn rate is essential in the SaaS business model. A SaaS business model’s acceptable turnover rate is 5-7%.

Formula:

The No. of Churned Customers (for a given period) / Total No. of Customers

Monthly Recurring Revenue (MRR)

MRR is a rough estimate of the monthly revenue a SaaS company anticipates.

Formula:

MRR= No. of Customers X Average Revenue

Annual Recurring Revenue (ARR)

The anticipated annual recurring revenue for SaaS enterprises or service providers.

Formula:

ARR = No. of Paying Customers X Subscription cost per year

Average Revenue Per Account (ARPA)

This indicator is helpful for tracking how much money a software company or business based on the SaaS business model is making from each paying user.

Formula:

ARPA = Total MRR / Total No. of Customers

Customer Lifetime Value (CLV)

The average revenue a SaaS company receives from a customer during an active subscription is known as CLV.

Formula:

CLV = (ARPA x Gross Margin %) / Churn Rate

Customer Retention Rate (CRR)

This measure can be used to determine the proportion of consumers who are devoted and continue to pay for a subscription.

Formula: 

CRR = (No. of Customers that Continue to use the Software / Total No. of Customers at the Start of the Period) x 100

Advantages of SaaS Business Model

Following, we’ve discussed the important advantages of the SaaS Business Model:

1. Highly Scalable

Scalability is considered the top advantage of the SaaS business model. As your firm grows, so does the amount of services it needs and the number of employees required to provide those services. A normal scaling approach would call for more personnel and infrastructure with each increase, neither of which are economical. However, if your company uses a SaaS model, you may easily add new services without worrying about having to upgrade your current infrastructure. This ensures that your company will remain competitive and adaptable as it expands.

2. Recurring Revenue

A Recurring revenue model defines when a SaaS business generates revenue from their customers on a monthly or yearly basis. Once the SaaS business becomes stable, its revenue predictability becomes stable. Also, keeping track of customer churn and customer acquisition will help you to predict the funds flow. The SaaS business model requires subscription fees from their customers, unlike the traditional method where customers pay only one time. Simply stated, SaaS businesses must offer strong services to their users so that they can stay committed to SaaS business. 

3. Regular Updates

Updating the technology or version is a time-consuming and expensive task with an on-premise system. Moreover, Technology needs to be updated to guarantee that only proper techniques are used at work. With the SaaS business model, the one-click update is straightforward for end users to use. Customers only need to grant permission for an update to start when the SaaS provider notifies them that one is available. It’s that simple. 

4. Lower Operational Cost

Software needs to be constantly maintained, therefore the operational costs need to be controlled and kept to a minimum. The SaaS provider will look over the product’s creation, maintenance, and updating. Simply worry about the user’s monthly subscription, which is often not expensive.

5. Complete Control

The SaaS business model offers total control to owners and users. Customers have access to the features they want (such as subscription, app download, and more), and also skip the ones they don’t want to use. Having such broad control allows end users to create completely unique solutions that increase the organization’s usefulness and productivity. Even if you sell SaaS, there is no compromise on control. Owners of SaaS businesses are free to choose the price structure, development environment, functionality, and other factors.

Disadvantages of the SaaS Business Model

Along with great advantages, we also have to face some disadvantages of the SaaS business model. Let’s check:

1. Neck-to-Neck Competition

Companies estimate that 70% of the business apps that they use today are based on SaaS. They also add that this will increase to 85% by 2025.

Stats reveal that the majority of companies have adopted the SaaS business model. As a result, it has created neck-to-neck competition in the SaaS business model making it challenging for businesses to achieve success. 

Your idea must be distinctive and have enhanced functionality, fantastic features, and many other things that would draw clients to your business if you want to ensure that your SaaS business is successful in the market. 

2. Requirement for Strong Security

The SaaS business model runs on strong security because all the important information and data are on cloud-based storage. So, keeping track of security is essential to building trust and confidentiality of your clients. Losing any of it will negatively affect your business. As a result, it can harm your reputation, lead to lawsuits, and huge loss of revenue. 

3. Customer Retention

Having a strong strategy is important when you’ve strong competitors in the industry. Whether it is a marketing strategy, customer retention strategy, or other strategies – you must manage every aspect of it to stay ahead of the competition. 

4. Budget Dependent

Customers are essential to SaaS companies. A successful SaaS company provides clients with goods and services that encourage them to stick with it. This then helps your team and generates revenue. However, the downside is that SaaS is dependent on customer’s sentiment. Regular revenue is mainly dependent on customer’s subscription. Therefore, it is highly important to offer best services to customers so that they can use paid services.

Note: For any client, it is not an easy decision to buy an expensive subscription. So, it is important to add video tutorials or demonstrations that will encourage clients to buy the expensive subscription service. 

What is the Pricing Model for SaaS Business?

To establish a successful SaaS business, pricing is the most important factor to consider. Your options include 

  • Free Service 
  • Pay-as-you-go
  • One cost per subscriber
  • Different prices based on different types of users
  • Different prices as per the subscription types

Earlier, it was believed that – if you needed any product or service, then you had to pay for it. That’s how business was done. However, with changing times – an intriguing paradigm called the “Freemium Model” has emerged. 

The freemium concept offers some services that are completely free. However, if users want access to premium services, they must pay a charge and upgrade their accounts. The SaaS business model examples include Dropbox, Spotify, Slack, Grammarly, Canva, and many more. 

Companies with freemium services offer software exposure to consumers. It makes it possible for others to learn about limited versions by lowering the barrier to entry. If they are happy with the services, there is a good chance that they will upgrade. For that, companies also offer discounts, special offers, free trials, and more. 

This marketing strategy works best to grow your customer base, attract new customers, improve churn rate, and guarantee a recurring revenue model.

Now, let’s learn about the SaaS sales approach. These approaches depend on the B2B SaaS business model or B2C model. 

There are two important types of SaaS sales approach. It includes low-touch sales and high-touch sales. 

  • Low-Touch Sales: It is a minimal sales-to-customer approach. It is focused on driving traffic to your product or service via websites or e-mails. 
  • High-Touch Sales: It is a traditional marketing approach that includes one-on-one interaction between consumer and salesperson. 

Examples of Successful Applications Using the SaaS Model

Following, we’ve discussed successful examples of applications that use the SaaS business model. Let’s learn:

Applications Using the SaaS Model

1. Canva

Launched in 2013, Canva is a SaaS business model that offers services for non-designers. They assist people in digital and non-digital designing services with total ease. Moreover, Canva can be accessed via a browser without any need for heavy technical machinery, unlike Adobe. 

2. Slack

Launched in 2013, Slack is the fastest-growing SaaS company. It is a popular communication and collaboration platform with over 3 million paid customers and a 30% conversion rate. It is a popular chat tool used by businesses for internal messaging, video conferencing, and to boost productivity. Major companies such as Uber, Netflix, Airbnb, and more. 

3. Zoom

Launched in 2011, Zoom is a SaaS-based video conferencing company. Its services include video conferencing meetings, audio conferencing, webinars, live chat, and meeting recordings. Further, they have a Freemium pricing model along with a paid subscription with features such as translated captions, recorded sessions, and webinars. Moreover, the Zoom app can be easily downloaded on any device without any hassle. 

Wrapping Up

The SaaS business model is definitely the future of the business world. We’ve discussed its peculiarities thoroughly, which will help you with SaaS application development with the right strategy for SaaS business. Establishing your SaaS business in the initial phase could be challenging but once you reach the second stage – you are not far from generating huge profits and achieving success. 

In the end, choose the best SaaS software development company with an expert team to create fantastic features & functionality, and provide top-notch services to your clients so that it will be a win-win situation for both parties.

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