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What Is a SaaS Business Model and How Does It Work?

What Is a SaaS Business Model and How Does It Work@2x

Software as a Service (SaaS) is the business model of today. More than 50% of enterprises run their operations with it, and 38% of them work exclusively on a SaaS platform.

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, SaaS can be somewhat difficult to understand than other business models. In this article, we hope to clarify what a SaaS business model is and how it works.

How a SaaS Company Works?

Popular types of SaaS services@2x

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 types of SaaS services 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.

Why 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, 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

3 stages of saas business@2x

For every SaaS business, 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

benefits for the customer@2x

A SaaS business model 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.

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

It 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 3 pricing

Image Source: Basecamp

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.

Salesforce com The Customer Success Platform To Grow Your Business

Image Source: Salesforce

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:

Churn Rate

Churn rate points to the number of customers that left or unsubscribed within a specified period. A SaaS business 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:

DX Sales CRM

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 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. 

Wrapping Up

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’s 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.

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