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A Complete Guide to the SaaS Business Model

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A Complete Guide to the SaaS Business Model

Posted by Priya Nain

2/1/22 1:09 AM | Comments

A-Complete-Guide-To-The-SaaS-Business-Model-1

14 billion customers use at least one SaaS product to optimize their business operations. Even individuals use Saas products (think Spotify, or Netflix) for daily activities, or entertainment. It may seem that if you've built a Saas product, success is guaranteed.

But the truth is much more than that. Hoping for customers to arrive is not a marketing plan.

In this article, we’ll explore the ins and outs of SaaS business and see how to build a Saas business that works, sustains, and grows.

What is the SaaS Business Model?

SaaS or software as a service is a business model that deploys its software on the cloud and allows users to access the product features with monthly or annual subscriptions. Users don’t have to download and install anything on their physical devices and can log in through the internet from any location.

As opposed to conventional business models, SaaS doesn’t run on one-time transactions and uses recurring payments to maintain the revenue stream.

SaaS is designed to serve big corporations and individuals alike. When software is built to cater to other business requirements, it’s a B2B (business-to-business) SaaS product. And if it directly targets the end customer, it’s called a B2C (business-to-customer) SaaS product.

Example– Freshbooks is accounting software with an ideal customer base of businesses and entrepreneurs. It’s an example of a B2B SaaS business model, whereas Netflix is a B2C online video streaming platform with millions of customers having their accounts in its system.

What are its Advantages Over Traditional Business Models?

1. Flexibility to Scale

Since the resources are deployed over the cloud instead of physical apparatus, it becomes much easier for SaaS businesses to scale for the sudden surges in demand. Even new features can be added without disrupting the rest of the active services.

2. Higher Adoption

Onboarding a user on the cloud platform is hassle-free and quick since no complex installations are required. Also, users can access the account anytime and anywhere, boosting the product's stickiness.

3. Revenue Predictability

Since users log into the server to access their accounts, tracking their activity and usage becomes easy. It provides the required visibility for businesses to spot healthy and about-to-churn accounts. These metrics allow accurate revenue forecasting and time to compensate for any possible losses.

4. Limiting Product Piracy

The SaaS products are delivered through the web or mobile applications. It restricts the illegal distribution of the product to unauthentic users.

What are its Disadvantages Over Traditional Models? 

1. Longer Conversion Cycles

The market is flooded with SaaS products, and this cut-throat competition makes it difficult for businesses to convince customers to choose them over others.

It leads to more money spent on marketing the product and acquiring customers.

2. Demands Heavy Capital

Businesses need to be closest to the best option in the market if they want to dominate it. It requires more than just a good idea. A skilled tech team, aggressive marketing, proactive sales, and much more needs money.

So if you don’t have a runway to persist for at least the initial days, it would be difficult for you to excel.

What are the Revenue Streams For a SaaS Business?

1. Monthly or Annual Subscriptions

It’s the most reliable form of revenue where users pay a recurring fee to avail the benefits of the product.

The subscription amount can vary for users depending on which plan and how many features they want to consume.

2. In-app Purchases

The add-ons that the user can buy after subscribing to the product are in-app purchases.

For example, an online editor, Canva, provides its users with free templates, but they can also buy a paid one from the platform.

3. Custom Solutions

Mainly enterprises come up with custom requirements to solve their unique use cases. In such scenarios, B2B SaaS companies develop on-demand solutions for clients at an additional cost. This cost can be one-time or recurring depending on the resources expended by you for them.

4. Dedicated Support

A SaaS solution is incomplete without a compatible service team. Clients understand the importance of 24/7 support to make the most of the product and are willing to pay extra for it.

For businesses, it can be an opportunity to boost revenue by adding dedicated multi-channel support to clients. Ensure that even your basic plan has some extent of customer support. Otherwise, it can work against you.

5. Reports & Analytics

Data is the new currency. So you can leverage your data processing capabilities to charge the customers for advanced analytics and reports.

How to Optimize Your Revenue?

Your revenue balances on how much you spend acquiring the customers and what returns you get from them.

So, to optimize your cash flow, let’s fix these two metrics.

1. Lower Customer Acquisition Cost


CAC is what it costs you to get a new customer to your business. Start with a solid system that can make lead generation a self-running cycle.

  • Identify your niche market and ideal customer
  • Research their needs and the channels they are most active on
  • Deploy conventional and uncommon channels for marketing your brand. Instagram and Quora are great places to start from.
  • Plan your pricing strategy considering your target audience in mind.
  • Develop a freemium SaaS model to attract potential customers.
  • Invest in excellent service and support to boost customer loyalty for more referrals.

2.Boost Customer Lifetime Value

Customer Lifetime Value, or LTV, is the forecasted revenue a customer can bring in their expected partnership with you.

Though it’s a prediction, it should be based on data-driven analysis rather than assumptions.

  • Streamline the onboarding process with proper training and self-help documents.
  • Conduct regular customer surveys to understand their feedback and expectations.
  • Include highly requested features to your product to enhance product stickiness. 
  • Schedule monthly or quarterly review calls to explore more opportunities in an account.
  • Engage with all departments of a business you are serving to boost product adoption across the organization.

For more information on how to optimize your lead conversions and grow your revenue, check out The Ultimate Guide to Optimize B2B SaaS Lead Conversions and Grow Your Revenue.

What’s the Way Forward?

There is no doubt that SaaS is the new buzzword. Customers, whether businesses or the general public, both appreciate the ease of convenience and value for money.

And if you can’t fulfill the market needs, someone else will. That’s why it’s crucial to stay on your feet and aim to improvise every day.

The simplest way to do this is by introducing the right team and tools to your endeavor. Bring onboard the top talent who can help you market your product cost-effectively. Since straight away hiring top guns for your team might not be pocket-friendly, you can always squeeze out the best through outsourced talent.

SaaS marketing agencies are the best bet here because they come pre-equipped with the latest industry trends and resources to guide a budding business to success.

And most importantly, keep an eye on the metrics that matter so you can objectively evaluate your progress.

Some SaaS Business Model FAQs

1. What are the pros and cons of a SaaS business model?

Pros

  • Easy to scale and enhance
  • Flexible to allow the pivot and product modifications
  • Promises better returns on the investment with recurring revenue
  • Caters to a broader market and audience
  • Better product adoption

Cons

  • Highly competitive space
  • More risks for customer churn
  • Demands capital to set up and sustain the business

2.What are the stages of a SaaS business?

  • Pre-startup: Where you are just brainstorming the business idea and basic organizational structure
  • Start-up: When you bring together teams and tools to start the business on the ground
  • Growth: The stage when you start acquiring clients and scaling your team
  • Maturity: When you have a stable product, you can grow by adding more features or go bigger with IPO

3. What are the most relevant metrics for a SaaS business?

  • CAC: Customer Acquisition Cost is the amount spent on getting a new client.

Source

  • LTV: Customer Lifetime Value is the predicted revenue a client can bring to your business throughout your partnership.

Source

  • Monthly Recurring Revenue: It is the recurring payment done by clients monthly.

Source

  • Churn Rate: The number of clients who discontinued your services out of the total client base.

Source

  • Net Promoter Score: The score your clients give your product on a scale of 1 to 10.

Source

More FAQ's

1. What is a SaaS business model?

SaaS or software as a service is a business model that deploys its software on the cloud and allows users to access the product features with monthly or annual subscriptions.

2. What are the advantages of the SaaS business model over traditional business models?

Here are the main things that give a SaaS business model an edge over traditional business models:

  • Flexibility to scale
  • Higher adoption
  • Predictability of revenue
  • Limiting product piracy.
3. What are the revenue streams for a SaaS business?

There are five main revenue streams for a SaaS business:

  • Monthly or annual subscriptions
  • In-app purchases
  • Custom solutions
  • Dedicated multi-channel support
  • Reports and analytics.

    B2B-SaaS-Lead-Conversions

Topics: SaaS Acquisition

   

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