With the rise of remote work and infinite advancements in technology, many business opportunities are available in 2022. One such lucrative industry is Software-as-as-Service. The SaaS business model has proved conducive to success over the past decade and continues to grow in popularity.
You may be considering starting your own SaaS business; if so, check out Idea Maker’s 8 SaaS business ideas [LINK IN WP]. Otherwise, you may simply be looking to answer the question, how does SaaS work? Either way, continue reading this article to understand the SaaS business model and how it works.
What is SaaS?
Software-as-a-service (SaaS) is a way of delivering applications to users through a subscription and licensing model. Users pay for access to the software but never fully own a copy. SaaS applications are typically web-based and require no local installation.
Contrastingly, on-premise software must be installed on local hardware and will usually allow users to own a copy of the application. Unlike SaaS, on-premise applications are developed for specific platforms and operating systems, meaning they are not accessible on as many devices as SaaS. SaaS applications function, in some capacity, on almost all devices with a web browser.
What is the SaaS Model?
The SaaS (software-as-a-service) model offers a way to deliver software without the need for end users to install it locally. In simple terms, in a business setting, a SaaS solution is one that is web enabled and hosted in the cloud by an external service provider.
The user can access SaaS applications from anywhere at any time from a computing device such as a laptop or tablet. As SaaS is maintained by a cloud-based service provider, users don’t have to worry about operating system updates, software patches or backup and recovery.
SaaS Pricing Structures
At the very core of the SaaS model are various pricing structures. There are many different pricing structures employed by SaaS businesses, three of which are seen more frequently than others. These give users greater financial choice and more flexibility over application features.
The tiered pricing model offers users several subscription options with different features. Typically, the more expensive the subscription, the more available features. On average, SaaS businesses offer 3.5 subscription tiers, however, there are no limits.
In this model, users only pay for what they use. If a user has not used the software, they pay nothing. In many examples, such as Chargify, users do not pay a subscription fee and instead pay a commission on revenue earned through the platform.
User-based pricing is a popular choice, with 35% of SaaS applications employing this model. One individual pays a monthly subscription fee, and when a new team member is added to the software, the subscription fee increases. It’s an appealing model for small businesses and teams.
White Label vs. Private Label
When developing SaaS applications, most businesses will outsource to high-quality developers like Idea Maker. SaaS applications are developed as one of two types of software, white label or private label.
A white label SaaS application is a piece of software that is leased to a company by a service provider and rebranded to fit their image. One such example of a white label service provider is Teachable. The platform allows teachers to build a tutorage website following their own brand, using the software developed by Teachable. In this instance, it means users can build their own website and services based on pre-existing technology.
A private label SaaS application is developed for a specific business as a complete piece of software. Most SaaS businesses are private labels, for example, Canva. The Canva platform was developed to provide a service, not help users create their own services.
What is Micro-SaaS?
With more businesses choosing to adopt the SaaS operations model comes the rise of micro-SaaS. A micro-SaaS is software typically targeted towards a niche target with particular functions. They are maintained and run by an individual or limited team, have low running costs, and boast a small but dedicated user-base.
An example of a micro-SaaS is Everhour. The platform provides its users a way to track employee schedules such as break times and time spent on tasks. Everhour fills a niche need and is run by a small team.
Stages of a SaaS Business Model
With SaaS businesses on the rise, entrepreneurs must secure adequate levels of funding to be successful. There are many stages to raising funds for a SaaS startup, here are just a few.
Seed Funding is the very first stage of generating cash for any startup. It involves gaining enough financial investors to get the business off the ground. Usually, seed funding is generated through friends, family and angel investors.
Series A Funding
After generating seed funding, startup companies may option their business on the stock market. At this time, early investors will be given or sold stock before it is opened up to the wider market. This allows more income to be generated while creating a mutually beneficial relationship between early investors.
Series B+ Funding
Series B funding begins once a startup has established itself and shown a level of success. At this stage, there will be interest from more investors as the business has already proved a fruitful investment. Funding stages can continue beyond series B.
Why is SaaS a Good Choice for Businesses?
As previously mentioned, the software-as-a-service business model is growing in popularity. Almost all major tech companies have developed the SaaS model into their applications, expanding the market to a size of $171.9 billion in 2021. For instance, in the last ten years, Adobe has started allowing users to pay a monthly subscription to use Photoshop instead of buying it outright.
It’s not just Adobe; Microsoft has done the same too with the Office Suite and Teams. This trend has likely occurred because customers prefer the SaaS model. So what are the benefits of the SaaS business model, and what makes it popular amongst both business and everyday users?
SaaS applications require no hardware installations on the users’ part; they can be used on whichever devices the user already has available. This saves money on upgrading and maintaining new hardware.
What’s more, the subscription models SaaS applications employ are often geared towards affordability, letting users choose monthly plans that suit their budgets and required features. Subscription models also mean users can pick up and drop applications month-to-month, depending on requirements.
Quick Installation & Time Saving
Most SaaS applications require almost no installation whatsoever. As long as users have an internet connection and a web browser installed, they can easily access the software.
As already discussed, a SaaS installation is cost-effective, but it also saves time. With no need to perform updates or maintain the software themselves, users can focus on more critical tasks.
SaaS applications provide accessibility in two senses of the word. Firstly, they are designed with the user experience firmly in mind. After all, SaaS applications must run smoothly enough to perform well in web-browsers; that means no bloatware and a responsive interface. As a result, SaaS applications have a more gentle learning curve than traditional software, making them accessible to all levels of users.
Secondly, because they are browser-based, SaaS applications are easily accessed remotely. With custom remote working software becoming increasingly important in the COVID landscape, SaaS accessibility proved to be a considerable advantage for businesses. SaaS applications allow employees to stay connected no matter where they are, ensuring business operations run seamlessly around the clock.
Successful businesses change and grow over time. In most cases, that means a greater reliance on technology and a need for more functionality. Due to the various pricing models employed by SaaS applications, businesses can unlock more features as they grow.
This means that when a business increases its operational capacity, it can simply change its subscription plan instead of upgrading and buying new hardware. What’s more, as SaaS applications develop their platform to suit the needs of growing businesses, they can update their software without hindering client operations.
The SaaS business metrics
To track the progress and growth of their software SaaS business follow several Key Performance Indicators (KPIs).
Life Time Value (LTV) monitors how much revenue customers bring throughout their lifespan as a SaaS consumer. It can be used to predict future income when new users subscribe. LTV is closely monitored by SaaS businesses, to ensure their business model is sustainable.
Customer Acquisition Cost (CAC) is a metric that most SaaS companies use to measure the efficiency of their customer acquisition strategies. SaaS businesses are dependent on repeat customers and recurring monthly user subscription, this metric is an excellent way to monitor what keeps and entices new customers.
MRR & ARR
Monthly Recurring Revenue (MRR) is an indicator of how much revenue you’re bringing in each month. Annual Recurring Revenue (ARR) shows the cumulative amount of income made annually. These two metrics are important to SaaS companies due to the monthly subscription based pricing model SaaS applications follow.
The churn rate shows how many customers unsubscribe and stop using the SaaS application. It may help SaaS businesses identify trends as to why users leave their service, and understand where their application needs improvement.
By contrast to churn rate, the retention rate tells SaaS businesses how many users are continuing to use their services. The retention rate can help SaaS companies understand the best ways to maintain customer relationships, keeping them coming back for more.
By now, you should have a general understanding of what SaaS is and how it works. Now it’s time to look at what makes a successful SaaS business. Here are three excellent SaaS business model examples to consider.
Canva is a SaaS-based application that allows users to create graphic designs for social media, presentations, posters, and other visual content. It features an enterprise-level design suite that is accessible from web browsers and offers numerous professional design templates.
The platform uses a tiered and user-based pricing structure but offers a limited free version to those who wish to trial the software. Canva is an excellent example of a powerful and intuitive private label SaaS application.
Teachable allows its users to create their own online learning websites by taking advantage of the platform’s extensive features. It has 100,000 tutors using the platform to share their knowledge with students.
The platform uses a combination of the tiered and usage-based pricing models. Users pay a fixed monthly fee and an additional commission on sales. Teachable is a shining example of how a white label SaaS application can provide affordable solutions by combining pricing structures.
Advice Resort helps users provide financial planning solutions through reports, predictions, marketing dashboards, and more to their clients. Developed by Idea Maker, Advice Resort allows specialist financial planners to connect with the right clients and collaborate in harmony.
The platform uses a fixed-rate pricing structure, meaning it does not change depending on access to features. Advice Resort is an excellent example of the B2B SaaS business model.
SaaS applications have become essential in the everyday lives of both companies and general users. They are an excellent way to take advantage of powerful software with little technical or financial hassle.
SaaS Development with Idea Maker
If you’re looking to develop your own SaaS application, look no further than Idea Maker. We have a specialist team of dedicated professionals ready to build your software. If you’d like to learn more, schedule a free consultation with us today.