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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

SaaS Pricing Models

Before adopting the SaaS business model, you need to determine your pricing model. The following pricing models influence the decision of potential users to opt for your software:

Freemium

The freemium model provides product features for free. Dropbox is an excellent example of a freemium SaaS product. People can use it for free, but when they need more storage, they must upgrade to a paid package.

Dropbox freemium

Image Source: Dropbox

Flat-Rate Pricing

With the flat-rate pricing model, you can provide product features for a flat rate. It is probably the simplest way to sell your SaaS product.

Postmark Pricing and Free Trial

Image Source: Postmark

Tiered Pricing

This is the predominant pricing model in the SaaS industry. It offers multiple packages, where each package has a different set of options designed to suit the users’ needs.

HubSpot tiered pricing

Image Source: HubSpot

Per-User Pricing

It’s a simple pricing model. One user pays a single monthly fee. For two users, the fee is doubled, and so on.

Asana per user pricing

Image Source: Asana

Usage-Based Pricing

You can charge clients for using the product versus billing for the entire set of features. The bigger the usage, the higher the bills are for your clients.

Stripe per usage pricing

Image Source: Stripe

Scaling Your SaaS Business With WordPress

More and more companies use WordPress to build something that meets users’ requirements. This includes creating SaaS applications.

WordPress is great for SaaS user management, extensible features, and payment options. It allows endless product integrations and supports frequently used platforms.

You can also extend WordPress to a SaaS by allowing user roles, functions, and different levels of features based on a given pricing model.

For example, if you need a Membership platform, managing users coupled with security and payment options can be tricky. This is why we suggest WordPress Multisite when developing SaaS solutions with WordPress. You can scale a Multisite across different servers, and in a cloud environment.

At DevriX we’ve built complete SaaS apps based on WordPress, such as Marketing automation platforms, social network-based solutions, real estate IDX suites, and various niche networks.

Project Roadmap: You can identify the requirements and the project plan for launching your SaaS, as well as your business strategy development.

Minimum Viable Product: Create a beta-testing ready MVP version to gradually improve the core product.

Milestones: Plan the next iterations and minor versions of the product.

Integration: Integrate your SaaS with a specific WordPress build.

Multisite SaaS: You can integrate domain mapping in WordPress Multisite which allows premium users to use their SaaS subsites.

Ongoing Development and Support: Invest in long-term business relationships to increase the system stability for your SaaS and your users.

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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