SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time. If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably.
On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. This creates a fundamentally different dynamic to a traditional software business.
What Is a SaaS?
SaaS businesses face significant losses in the early years. This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time. The faster the business decides to grow, the worse the losses become. Many investors/board members have a problem understanding this, and want to hit the brakes at precisely the moment when they should be hitting the accelerator.
So what is SaaS?
Software as a service (or SaaS) is a way of delivering applications over the Internet—as a service. Instead of installing and maintaining software, you simply access it via the Internet, freeing yourself from complex software and hardware management.
How Does SaaS Work?
Software as a Service (SaaS) is the business model of today. According to a study done by Virayo, over 80% of businesses use some type of SaaS application.
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, the SaaS business model can be somewhat difficult to understand than other archetypes. In this article, we hope to clarify what a SaaS business model is and how it works.
How Does a SaaS Company Works?
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 business model for SaaS 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.
Why Do 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 business model, 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.
Benefits of the SaaS Business Model
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.
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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 dynamics and work to provide unique solutions and value to your customers.