Everything You Need To Know About The SaaS Business Model

These past few years have been the rise to fame of a not-so-entirely-new business model: the subscription. What was first associated with newspapers and periodicals, and then cable TV and gyms, has now become a lifestyle. And a fashionable one, I dare to say. It has also set the patch to the SaaS business model.

In 2020, when everyone has a Netflix subscription, the phenomena of long-term car rentals or car sharing, remote gaming platforms, or sophisticated subscription boxes aren’t a novelty anymore. Subscription has redefined consumer habits and changed the future of commerce. It’s a trend that shouldn’t be overlooked – no matter what type of business you run.

The subscription business model has matured and evolved over the years, spreading onto many different industries and markets. The pioneer brands of this model, who were brave enough to adapt the trend to their specifications, are now the giants of their trade. Look at Costco – a nationwide chain store that’s only available for those who pay for a membership card – or Dollar Shave Club, which delivers cheap razors and other grooming products right to your doorstep. Recently, the idea of car subscriptions has gained popularity, and it’s said that, as a result of the ongoing COVID-19 pandemic, gyms may rent their equipment for a charge as well.

But why are subscriptions so popular? Well, most of all, they’re convenient. Why having to drive to the store each month to get fancy medical pet food for your beloved puppy if you can have it delivered like clockwork? Secondly, many of them offer a better price than a regular product, making you save some bucks without even thinking about it. And usually, they get personalized or curated, which probably makes you feel over the moon about how special you are.

SaaS Business Model: The Pros

Wondering what could be better than subscriptions? Is there anything beyond Spotify, Netflix, and other subscription-based services that make our lives so great and comfortable?

Looking from the business perspective, a subscription-based model provides you with a regular, predictable income. That’s already a huge step forward when compared to businesses relying on one-time payments. Still, this doesn’t mean there’s nowhere to go from there.

A Whole New World For Software Companies

With the Software as a Service model, you’re getting the most out of your product by making it available to the broadest possible crowd at a reasonable price. And, to top that, you’ll get a predictable, regular income from subscription fees to make you feel safe and confident with your business.

As SaaS business model products are cloud-based and accessed via a browser, their most significant advantage is eliminating the need for any specific hardware, operating system, or other equipment. This means you don’t need to worry about any requirements your potential users won’t meet and, therefore, walk away from your product faster than you can say ‘Linux’. The only things they’ll need are a device (a laptop, a tablet, or even a mobile phone) and access to the Internet.

The fact that it’s so easy to use SaaS products leads to another upside of this model: flexibility.

Adaptable & Straightforward

Compared to on-prem software that needs to be bought first and then installed on a physical device, SaaS gives your users the freedom to access your product from anywhere. With remote work triumphing on the jobs market worldwide, a comfortable, no-fuss way of connecting with your job becomes crucial.

Your corporate clients will be happy to hear that SaaS solutions are faster to implement, more comfortable to update, and cheaper to support than on-prem software. This model is resource-saving in many ways – let me show you how it’s done.

Accessible & Scalable

Companies that used to buy multiple copies of the software to meet their teams’ needs will be happy to hear that they no longer need to splurge on thousands of single products and their maintenance. This leads to another great asset – SaaS is easily scalable and is not linked to a specific device. The users don’t have to perform any complicated, time-consuming operations to make the software fit their teams as they grow. They can also efficiently manage their subscriptions and scale up or down whenever needed.

SaaS saves resources through simple strategies towards uncomplicated solutions. It also helps them avoid sunk costs and long-term investments that may bring more woes than benefits.

Appealing & Cost-Saving

Switching to SaaS means giving up the responsibility for the infrastructure needed to run the product. The vendor provides the whole environment, including the servers – probably one of the priciest resources for any company. While it puts a strain on you as the SaaS provider, it’s efficient for your clients, as they can make better use out of their funds.

Transparent Pricing

Except for the convenience of no extra hardware and no implementation costs, you’re offering transparent pricing to your users by introducing the SaaS business model. Traditional, on-prem software usually excludes support and upgrades, not to mention the potential cost of upgrading one’s equipment to meet the minimum requirements, or the price you’d pay a professional to implement the product. While a one-time payment may seem more attractive than a subscription, the real costs can add up quickly.

Compared to other business models, SaaS also leaps off the page thanks to its solution-oriented approach and shorter sales cycle. It gives you the chance to offer your clients a transparent, understandable, no-fuss way to use your software. Not to mention it opens your business to thousands of smaller-scale clients who otherwise couldn’t afford to work with your products.

Modern, Agile Approach

What’s more, SaaS is more agile and responds to any new requirements faster and better than any other software type. SaaS can be updated without the need for any on-site manual work, making the users able to use the new features as soon as possible.

How Does It Work For You?

Hassle-free, instant updates aren’t convenient just for your customers. What’s even more important, they make your life easier as well!

Introducing new features and implementing critical updates to any software is unavoidable. But releasing new versions of your product to on-prem clients can take months, if not years. Not to mention that many users won’t upgrade for a long time – and others will never take this step. Many will stick to outdated versions, which puts more strain on your support teams and can lead to chaos.

SaaS makes it possible to release enhancements and upgrades as soon as they’re ready to deploy and requires no extra effort from the user.

Guided Product Development

By letting your users work on your infrastructure, you’re in for an invaluable experience. Observing as they navigate around the product can lead to surprising discoveries. Statistical data on user engagement, the usage of different features, and other factors will help you decide on the best development direction, allowing you to grasp your users’ needs and troubles they encounter when using your product.

The Challenges Of SaaS

The idea behind SaaS is to create tools that are simple, easy to access, and even easier to manage, with cloud-based data storage and infrastructure. But before you dive into this concept, here’s a couple of challenges you need to consider:

Churn Rate

Cancellations are a part of every subscription-based product, and they certainly can’t be avoided or predicted. What’s believed to be SaaS’s greatest advantage – its flexibility and quick setup – can turn against you if not thought over properly. Your user will appreciate the fact that they no longer need to go through a complicated, time-consuming installation process and can quickly scale their account up or down instead, but this is also precisely what makes them feel less committed to your software. They can walk away from your service equally fast as they walked into it.

Increased Risk 

Since resources aren’t the client’s responsibility anymore, you become the server’s sole provider. It puts a lot of strain on your team, as any technical issue can be fatal, not to mention any security breaches or attacks. Many SaaS apps store sensitive data, and compromising them can result in losing your users’ trust.

SaaS Business Model Scalability

Speaking of straining your team – once your product gets the hype it truly deserves, you’ll be in for quite a test. As more and more users will want to use your services, your infrastructure will be pushed to the limit. Last-minute upgrades may sound tempting, but they’ll cost you more (and stress you out!) than carefully planned operations done ahead of the curve.

Design your product with scalability in mind and work on ways to broaden the infrastructure as quickly and efficiently as possible. When it comes to the SaaS business model, it’s vital to think it through properly and use the resources properly instead of having them around ‘just in case’. Your servers should work automatically, turning on and off whenever the traffic needs it. Also, decide between horizontal and vertical scaling early. Determine if your business will thrive by scaling ‘out’ (buying more virtual machines to share the workload) or scaling ‘up’ (adding more power to the existing one).

Consider buying an annual subscription for your infrastructure – it won’t weigh down your budget so much. Also, look at cheaper alternatives to optimize your spendings, like reserved instances marketplace.

Balancing between the current and potential infrastructure is way easier than walking a tightrope. A simple growth plan can go a long way!

Determining Your Service Value

An accurate price for your services is one of those things you should think of at the very beginning. The value should hit just right – clients will stay away from a too expensive service, but undercharging will most likely sink your business as well. Flat rate is arguably the easiest to handle and communicate, but it’s essentially a one-shot – you either win the client or don’t.

Most SaaS companies stick to the per-user pricing that’s also clear and easily measurable. However, once scaled to thousands of users per company, it turns out pricey. Others, like Netflix, use psychological tricks to their advantage. They offer different pricing tiers with minimal difference between the first two, while the third one remains significantly pricier. Their names aren’t accidental either – with words like ‘basic,’ ‘advanced,’ and ‘professional,’ users feel naturally drawn to the middle tier, as it appears to offer the best value for the price.

Don’t neglect corporate clients – they bring hundreds or even thousands of users at once. Many SaaS owners leave some room for individual pricing that meets the enterprises’ needs.

Price tiering appeals to more than one target customer. Tailored packages, including different features, open your business to multiple buyer personas and create a clear upselling route, but can also be quite confusing. It’s vital to map out the best strategy for your business before releasing the product to a wide audience.

Other Factors To Consider

In 2020, when the world was challenged with the COVID-19 pandemic and the economic crisis that followed, some companies functioning in the subscription model have reduced their prices; others even offered their premium packages for the price of a basic one or entirely free of charge.

Consider adapting these solutions to the SaaS business model, including more flexible pricing that reflects modern-day challenges and the current market situation. Strategic moves like this can make or break your business.

If you look for more factors to take into consideration, try willingness-to-pay research to determine a price that’ll best suit your clients. This can actually be eye-opening to those of you who have a hard time estimating the buyer’s perception of their software’s value (hint: it’s usually different from the price you’d come up with).

Look at your business from your client’s perspective and assess where its real value lies. This can help you decide on the pricing strategy and establish transparent tiers that are easy to understand at a glance.

Also, observe your industry – while it doesn’t always work out, you may find some reference points there.

Should You Decide On SaaS Business Model?

SaaS is the hottest business model that can lead you to great results. It can give your users the ultimate experience of using a product with any device, wherever they are, and exactly how they please. By eliminating the need for any resources provided by the client and making any hardware requirements disappear, SaaS becomes a well-rounded, one-stop service that combines typical, day-to-day use with end-user support, agility, and up-to-date, on-time releases 24/7.

This business model is basically a fairyland to your clients, but requires a lot of thought and planning on your side, including the right security measures, pricing policy, and strategies against high churn rate. Make sure you have a well-planned scalability strategy and growth plan – it’ll save you tons of headaches in the future. 

It truly is a new era for businesses, so make sure your software keeps up with it!

This article was originally published here by Katarzyna Nawrocka