Understand Software As A Service ( SaaS ) Business Model: A Simplified Guide

Software as a Service or SaaS is a cloud-based product distribution model where users can access products offered by any organization anywhere, any device, and anytime by paying them monthly, yearly, and lifetime Subscription plans.

Note: Lifetime Subscription plan is offered only by a few companies Example: Ubersuggest By Neil Patel.

Benefits Of Using SaaS

• No need to spend a significant amount on buying hardware for the best performance.
• We can use the SaaS software seamlessly just over the internet without installing it on our systems.
• Also, we don’t need spent money on buying data storage or maintain it; everything is included in the Subscription. The provider manages access to the application, including security, data, availability, and performance.
• Use Anywhere, Anytime, Any Compatible device without stress.

Simplified Example Of Software as a Service ( SaaS )

Free SaaS Product: if you have used google docs, google drive at least once, in your lifetime, you are already a SaaS user.

Where you sign in to a google drive account over the internet to access it, the storage software is located on the provider’s network, and your data is stored there as well. You can access your account and stored files from a web browser on any computer or Internet-connected device.

Paid SaaS Product: Google Workspace is a paid software product offered by Google, where we need to pay them monthly to access their Services.

SaaS Advantages & Disadvantages

SaaS helps to remove major expenses of organizations like buying data centers, hardware, and employees to maintain the data centers and hardware. Other benefits include.

Advantages:

• Pay Only for What you use: Some SaaS companies like AWS, Azure, Google Cloud charges only for what we use. A
• Easy Updates: Instead of purchasing new software, SaaS companies automatically perform updates and patch management. This further reduces the burden on in-house IT staff.
• Scalable Usage: SaaS offers high Upward scalability, which gives customers the option to access more or fewer services or features on-demand.
• Accessibility: Since SaaS organizations deliver applications over the internet, users can access them from any internet-enabled device and location.

Disadvantages:

• Increased security risks: Another drawback of using the SaaS is its axis around data security and speed of delivery. Because data is stored on external servers, companies have to ensure that it is safe and cannot be accessed by unauthorized parties.
• Slower speed: Slow Internet connections can reduce performance, primarily if the cloud servers are being accessed from far-off distances.
• Loss of control & Lack of customization: SaaS products also suffer from a loss of power and customization due to their remote system.

SaaS Data Privacy & Security:

• encryption and key management
• identity and access management (IAM)
• security monitoring
• incident response
• poor integration into broader, company-specific security environments
• fulfillment of data residency requirements
• data privacy
• The cost of investing in third-party tools to offset the SaaS security risk lacks communication with technical and security experts during the sales process.

Types Of Cloud Service Models

SaaS (Software-as-a-Service): Fully built cloud applications.

Example: Microsoft Office 365

PaaS (Platform-as-a-Service): One level up from IaaS, PaaS includes development tools, infrastructure, and other support for building applications.

Example: Google App Engine, Red Hat’s OpenShift.

IaaS (Infrastructure-as-a-Service): Cloud computing infrastructure – servers, databases, etc. – that a cloud provider manages. Companies can build their applications on IaaS instead of maintaining their applications’ backends themselves.

Example: Amazon EC2, Rackspace.

Example Companies or Organizations Of SaaS

1. Google Workspace
2. Netflix
3. Adobe Creative Cloud
4. Mailchimp
5. Salesforce
6. Amazon’s AWS
7. Zoho
8. Microsoft

What are the stages of a SaaS company?

Rarely do SaaS companies follow a set “path” regarding how the scale and their timeline of growth. That said, four stages are part of the SaaS business model.

Below is a quick breakdown of the various stages of SaaS companies.

• Pre-startup
• Startup
• Growth
• Maturity

Software As a Service ( SaaS ) Business Model

Understanding SaaS Business Model is not an easy task. Many entrepreneurs and even organizations underestimate its various performance indicators, which becomes the reason why they fail. Before moving on to discuss the business model of SAAS, it’s essential to know about specific key performance indicators:

CAC

CAC is the customer acquisition cost which is the aggregate cost

(marketing costs + outsourcing cost + other costs) of acquiring one customer.

LTV

Lifetime Value ( LTV ) is the total revenue earned per customer.

It’s calculated by dividing the total revenue earned by the number of customers in a specific time.

How To Calculated LTV? 

Total Revenue Earned: TR; Customer: C;

TR/C = LTV

MRR

Monthly recurring revenue (MRR) is an essential metric for SaaS businesses that utilize a monthly subscription pricing model.

How To Calculated MRR? 

Average Revenue: AR; Customer: C; Total No: Of Account For the Particular Month: TM

AR*C/TM = MRR

MRR Churn

MRR Churn refers to the revenue lost and customers who’ve left the service. It is calculated by multiplying net users left per month by the subscription fee.

How To Calculated MRR Churn? 

Users Left Per month: UL; Monthly Subscription Fee: MS;

 UL*MS = MRR Churn

The Economics of SAAS Business Model

SAAS is a subscription-based business model that involves generating profits after a considerable long time. That is, the expense is incurred a long time before you see the gain. It takes months to recover CAC, which usually results in negative cash flow in the business.

The expenses in these stages of the SAAS business model include

• COGS: which include outsourcing costs, server costs, etc.
• Sales & Marketing Costs
• Research & Development Costs
• General & Administrative Costs

Since the SAAS model is subscription-based, the revenue earned takes time to cover up the expenses and profit.

This leads to the increasingly negative cash flow for the first few months as there is an increase in the customers acquired by the business.

More customers = More CAC = Fewer Profits/Negative Cash Flow

The negative cash flow is usually minimized by charging the customers yearly rather than monthly.

Customer Churn VS LTV

Customer retention is one of the most challenging tasks of the SAAS business. Nevertheless, every SAAS business sees some of its customers leaving each month named customer churn. Customer churn affects the LTV of the business.

To avoid this, SAAS entrepreneurs look for ways to attract more customers and expand the revenue from the existing ones. The marketing funnel of the SAAS model looks like this.

Ever wondered why the SAAS packages come in free, basic, pro, & enterprise editions?

Here’s the answer:

The economics of the SAAS Business Model is divided into three parts:

• Acquisition
• Retention
• Monetization

The company acquires the customers by providing freemium services, and once received, other services are offered at an introductory periodic price to him. This leads to retention and monetization.

Advantages Of SaaS Business Model:

• Recurring revenue
• Highly scalable
• Low barrier to entry: anyone who sees a need can hire an expert dev team to build a tool
• Tons of untapped opportunities in established markets, emerging markets, and niche markets
• Allows for lots of different low-cost marketing strategies, including side project marketing and affiliate marketing
• Can create stickiness and loyalty, keeping the same customers for years

Disadvantages Of SaaS Business Model:

• Churn from customers
• Hosting and maintenance costs associated with scaling can make growth unsustainable if your pricing isn’t optimized.
• High upfront costs: most SaaS companies lose money for approximately one year while they work to build up a large enough user base to break even and then move towards profitability
• Increased competition, and new players entering all the time

SWOT Analysis Of Software As a Service ( SaaS )

S Stands For Strengths

• Experienced business units
• Excellent distribution and sales networks
• Low barriers to market entry
• High profitability and revenue rate

W Stands For Weaknesses

• Doubtful profitability
• Additional costs
• Tax structure

O Stands For Opportunities

• Enormous Scope in Global Markets
• Creation of Newer Markets

T Stands For Threats

• Rising costs
• Increase in rates of interest
• Growing competition and less profitability

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