Do you want to start a SaaS business? If YES, here is everything you need to know about the SaaS business model plus examples of successful companies using SaaS model.
What is SaaS?
Software as a Service (SaaS) is cloud computing in its simplest form. This model hosts the software and the data on the cloud and lets the developer update the software without the users downloading anything. SAAS requires only one prerequisite to function, and that is the internet.
Organizations of all shapes and sizes are embracing the SaaS philosophy as an alternative to on-premises hardware and software deployment. Computer Economics reports that 60 percent of all companies now have integrated at least some SaaS solutions into their business, with 36 percent intending to increase their investment in the months ahead.
The Software as a Service (SaaS) model continues to gain traction across all corners of the business world, and for good reason. SaaS eschews traditional software installation, maintenance and management approaches in favor of delivering cloud-based applications via the internet.
Listed below is everything you need to know about software as a service and 50 companies that have applied this business model successfully.
The Many Benefits of SaaS Business Model
Software as a service is one of the recent advancements in the technology industry where the software is provided online and hosted on a server and users pay the rent to use the software for a specified time period.
1. It is OS-agnostic: The biggest benefit of a SaaS is that it is OS-agnostic, meaning it doesn’t care what operating system (OS) you are running. Usually delivered via the browser (referred to as a thin client), a SaaS service doesn’t require any special software installation or hardware to run. If your computer can run an internet browser, you’re good to go.
However, some vendors also supply a desktop version of their online app. It still uses the same backend database and code, but usually has advanced features like the ability to work offline or integrate with other desktop apps.
2. It takes out the need for expensive or specialized equipment: Another key benefit of a SaaS is how it runs its software on its own servers in the cloud, which removes the need for customers to invest in and maintain expensive or specialized equipment. This also eliminates the need for a business to hire an IT specialist, as the SaaS provides its own team of support and technical staff — saving both time and money.
3. Rapid response feature: A SaaS with its subscription payments and cloud-based distribution allows it to rapidly respond to bugs and feature requests, allowing the software to be updated incrementally rather than once every one or two years.
This also means the customer of a SaaS always has the most up-to-date software and doesn’t have to worry about what version they are running, or if they are exposed to a major security leak or other problem for an extended period of time.
4. Reduced risk of piracy: There is also a reduced risk of piracy, because not only is the software more affordable, but it’s also practically impossible to steal. You either pay to use it, or you don’t get access, which helps incentivize a SaaS vendor to keep supplying the software and also keep it updated in order to keep customers paying.
While we could go on about the benefits of a SaaS, here is a quick shortlist of the benefits the SaaS business model provides for both SaaS providers and the businesses that use their services.
Benefits for the SaaS Provider:
Here are the benefits SaaS offers its providers;
- Consistent revenue stream, making it easier to maintain a team of developers, technicians, and support staff to keep the service stable and improving
- Faster development cycles with more regular incremental updates and fewer major ones
- Easier troubleshooting of problems and bugs, as problems would be more likely related to software rather than hardware
- Reduced risk of software piracy
Benefits for the SaaS Customer:
- SaaS is typically cheaper over the long term when factoring in associated equipment and staffing costs of running an internal system
- Ability to choose best-in-class software, as many SaaS platforms are highly specialized pieces of software that do a particular task really well
- Easier integration (or communication) with different SaaS platforms through the use of application programming interfaces
- Reduced need for and costs associated with having an in-house IT team
- Flexible payments that allow the business to pay monthly or yearly
- Easily scalable up or down depending on business needs
Limitations of SaaS
Nothing is perfect, of course, and SaaS is no exception. Companies that adopt multiple Software as a Service applications or plan to connect hosted software with existing on-premise apps may encounter software integration headaches along the way. Security is another common concern for businesses mulling SaaS options:
Whenever sensitive company data and business processes are entrusted to a third-party service provider, issues such as identity and access management must be addressed. Businesses must also take into account the government compliance regulations inherent to storing customer data in a remote data center.
Key Performance Indicators of SAAS
Another important aspect of the SaaS business model is the specific ratios that are applicable to the model. This includes Customer Acquisition Cost (CAC), Lifetime Value (LTV), Monthly Recurring Revenue (MRR), and Monthly Recurring Revenue Churn (MRR Churn) to name a few.
- CAC is a simple ratio that tells you how much it costs for you to get a customer. This is simply calculated by summing up all your direct costs (marketing costs + costs of visiting clients + any other costs incurred to get a client) and dividing it by the total number of clients that you acquired. This can be done annually as well as monthly.
- LTV is the average income derived per customer. This is calculated by taking the total revenue earned from subscriptions and dividing it by the net customer you attained during that period.
- MRR identifies the amount of fixed revenue that you’re retaining every month. This goes a long way in showing how well you’re retaining your customers. This is calculated by taking the net number of users for one month and multiplying that by the subscription fee.
The MRR Churn rate calculates how much revenue you’re losing. In other words, it tells you how many customers are leaving. This is calculated in a similar way as the MRR, except you are taking the number of customers lost during the month and multiplying that with the subscription fee. This will tell you how much revenue you’re losing each month. The MRR should be greater than the MRR churn rate, otherwise you’re doing something wrong.
What’s the Difference Between SaaS and Cloud Computing?
A lot has been said concerning the similarities and differences between SaaS and cloud computing. A lot of people even wonder if they are the same thing. Well, we can assure you here that the difference between SaaS and cloud computing isn’t just semantics. The cloud refers to a set of incredibly complex infrastructure technology.
At a fundamental level, it’s a collection of computers, servers, and databases that are connected together in a way that users can lease access to share their combined power. The computing power is scalable so that buyers can dynamically increase, or decrease the amount of computing power they lease.
The cloud can refer to anything that’s hosted remotely and delivered via the Internet. While all cloud programs are run by underlying software, SaaS refers specifically to business software applications that are delivered via the cloud. Given the widespread growth of cloud accessibility, it’s been easier, faster and less expensive for SaaS developers to roll out applications as compared to traditional on-premise software development. Today, nearly every type of core business function – from human resources to enterprise resource planning – is available via SaaS.
Types of SaaS Products
SaaS applications come in different sizes, shapes, and serve various purposes. Most, however, fall under one of the three categories:
- Packaged SaaS: Packaged SaaS are products that help manage a specific process in an organization — improving employee engagement, strengthening customer relations, or boosting marketing effectiveness. Hubspot is an example of a packaged solution. They offer tools companies use to manage sales, marketing, and customer relationships.
- Collaborative SaaS: Collaborative SaaS applications help improve how teams work together. From messaging and video conferencing to collaboration on documents, these platforms support collaborative efforts. Zoom, Paper, and Basecamp are some examples of collaborative SaaS.
- Technical SaaS: Technical SaaS applications offer tools to manage or improve development or technical processes. Cloudsponge, for example, allows developers to include a contact importer in their products effortlessly. Algolia offers a search API that helps other apps improve the search experience.
The Most Effective SaaS Marketing Channels
SaaS companies have a plethora of opportunities to introduce their products to potential users and achieve initial traction. Below, we’ve listed the most effective SaaS marketing channels that can help set off that initial growth in your business.
- Inbound Marketing
Inbound marketing strategies aim to attract strangers to your product and convert them into new customers. It all starts with content. Blog posts, guides, resources, and other content types help attract new visitors and then convert them by adding value at every stage of the buyer’s journey.
- Search Engine Optimization (SEO)
Today, almost everyone turns to search engines for answers. It doesn’t matter whether a person is looking for a product recommendation or guidance on solving a problem, they know that they can find it on Google.
SEO is a practice that helps position your site and content in front of potential users at every stage of the buying cycle.
- Content Marketing
Publishing engaging content helps you position your brand or product as a credible authority and helpful resource in the industry. And, in turn, you’ll build meaningful relationships that can convert prospects into paying customers.
- Online Advertising
SaaS companies place online ads to attract and entice potential users to sign up. Many also use paid ads, from pay-per-click (PPC) channels like Adwords to social media ads to display or banner advertising to drive potential users to lead generating assets or a product sign up.
These days, PR is more than just publishing and distributing press releases. Modern public relations focuses on improving almost every aspect of a brand’s online visibility. From search results to brand mentions, online reviews, and much more, PR strengthens brand awareness and recognition.
- Viral Marketing
Viral strategies focus on getting existing customers to refer and promote your product to others. These programs focus on getting your users to invite their friends, family, and connections to sign up and try out the product as well. Common types of viral marketing strategies in the SaaS space include referral, or affiliate, programs or viral loops.
- User Actions
For some apps, users can naturally expand a customer base by introducing the product to their clients. For example, Xero discovered that, on average, a single accountant using their product introduces anywhere from 6 to 31 new users to the platform.
- App Stores, Resellers, and Affiliates
Some SaaS companies can also take advantage of app marketplaces like Intuit, Apple Appstore, or Google Play to promote their products to new audiences. Many others launch affiliate or reseller programs that reward anyone willing to promote their products with cash or other rewards.
SaaS Pricing Models That Work
Before attracting any visitors, a new SaaS company must decide how it is going to charge for their product. This is important for two reasons:
- A pricing model will affect a potential user’s willingness to consider their solution.
- And it could affect a company’s rate of growth. As PwC reported, it takes two years for a typical SaaS company to break even.
So, let’s review various pricing models you could use in your product.
The freemium model offers a significant number of features for free, along with additional paid packages. Slack, Dropbox, or Airstory are examples of freemium-based SaaS products. Most users can use them at no cost. But when they need more than the basic feature-set, they must upgrade to a premium package.
- Flat-Rate Pricing
In this pricing model, a company offers a single product with a standard feature set for a flat rate. Basecamp, for example, charges a flat fee of $99 per month for which a person can use all its features.
- Tiered Pricing
By far, the most common pricing practice among SaaS brands is to offer multiple packages. Each package includes a different feature set, designed to suit various user needs.
- Per-User Pricing
Some SaaS companies offer a different option depending on the number of users. Instead of paying a flat fee or choosing a feature-set, they can pay per user. Asana, for example, charges companies a flat rate for every person they sign up to the app.
- Usage-Based Pricing
Finally, some products charge for usage, rather than feature sets or users. Companies using Stripe, for example, pay for every transaction processed.
5 Best SaaS Growth Strategies
There are a lot of directions you can take when it comes to growing a SaaS business. The growth strategies you choose really depend on your core competencies and what has moved the needle the most for you in the past. Regardless, here are some ideas you can use to grow a SaaS business to the next stage of income.
- Increase Organic Traffic
It goes without saying that the best traffic that converts the highest is usually going to be organic search traffic from places like Google and Bing. One way you can see how to increase your organic search is by simply looking at where you are currently ranking using a tool like SEMRush. This is actually a very easy strategy to implement.
- Introduce New Marketing Channels
When it comes to testing a new strategy, have some traction goals in place. Make sure you are going to invest enough in the new marketing channel that you can reach statistically significant numbers. Otherwise, there is no real point in investing in it.
A new marketing channel could be as simple as taking your best organic ranking, or most popular content, and converting that content into a Youtube video. It is, after all, the 2nd largest search engine in the world, so it is worthwhile to be found there.
- Add Product Upsells
This is a fantastic option to offer to existing customers, as it serves them better and will earn you more. These upsells could be higher end packages where the customer pays more per month to receive extra features, benefits, data storage, or all the above.
It could also be a one off upsell — perhaps an info product, such as a high impact webinar, on how to use the software to your best advantage. Whatever upsell you decide on, always make sure to consider the costs of offering that service, so you can factor it into the final pricing that your customers will have to pay for that upsold service.
One thing you can do to improve customer satisfaction and loyalty (and also reduce some infrastructure costs) is to make your software run faster by reducing bad code. Decluttering bad or wasteful code can make a huge different in upping the speed of your software, thus increasing your customers overall happiness with the product. Make it lean, mean, and even more profitable.
- Add an Affiliate Program
Adding an affiliate program can be a huge boon for your business. Especially if you offer a lucrative program that can attract skilled affiliates to promote your offer. There are many routes you can go, but if you want the best way to attract affiliates, you might want to offer a residual income opportunity. This is often more appealing in a SaaS business model than a one off payment.
On the flipside, if you have your CAC and LTV numbers down, you might just offer a large, upfront, one-time payment to the affiliate — knowing that the average customer will stay around long enough to recoup the costs of paying the affiliate that money.
Some affiliates actually prefer this, since their marketing campaigns often are operating on razor thin margins. Either way, an affiliate program can be an amazing way to increase your marketing power while also taking a lot of the actual marketing work off your plate.
When to Use SaaS for your Business
There are many different situations in which SaaS may be the most beneficial, including:
- If you are a startup or small company that needs to launch ecommerce quickly and don’t have time for server issues or software
- For short-term projects that require collaboration
- If you use applications that aren’t in-demand very often, such as tax software
- For applications that need both web and mobile access
Examples of Successful SaaS Companies
Arguably the quintessential Software as a Service application company, Salesforce remains at the vanguard of the cloud computing revolution it helped to create. The customer relations management solution enables businesses to collect all information on customers, prospects and leads within a single online platform, enabling authorized employees to access critical data on any connected device at any time. Salesforce credits its tools for boosting customer sales an average of 37 percent as well as driving increased client loyalty and satisfaction.
2. Microsoft Office 365
Signature Microsoft productivity applications such as Word, Excel and PowerPoint are longtime staples of the workplace, but the cloud-based Microsoft Office 365 dramatically expands the Office suite’s parameters. Users now may create, edit and share content from any PC, Mac, iOS, Android or Windows device in real-time, connect with colleagues and customers across a range of tools from email to video conferencing and leverage a range of collaborative technologies supporting secure interactions both inside and outside of the organization.
3. Adobe Creative Cloud
Another reinvention, Adobe was the kind of desktop creativity software that has now pivoted to make Photoshop and other audio and video editing tools available via an annual subscription. The Creative Suite offers graphic design, video editing, Web development, and photography editing.
This online workspace enables professionals to collaborate with anyone, anywhere. Users can securely share large files via traditional link or custom URL, safeguarding data and documents via permissions and password protection. Box supports more than 120 file types, and users may preview content prior to downloading.
All content sharing, editing, discussion and approval is confined to one centralized file, and users receive real-time notifications when edits are made. Box also automates tasks such as employee onboarding and contract approvals, reducing repetition and abbreviating review cycles.
5. Amazon Web Services
Amazon, too, has evolved beyond its core e-commerce platform to support the on-demand delivery of cloud-based IT resources and applications, bolstered by pay-as-you-go pricing options. Amazon Web Services currently encompasses more than 70 services in all, including computing, storage, networking, database, analytics, deployment, management and tools for the Internet of Things.
6. Google G Suite
Google’s G Suite is basically a cloud version of Microsoft Office, albeit with a little less functionality. G Suite is officially the name for Google’s business version of apps; however, the paid version is only a fraction of the price you would pay for Microsoft Office. If you have a free Gmail account, Google Apps is the free version of the same software.
Many business owners never need to use anything else to run their businesses. It also has hands down the best collaboration functionality of all the online business apps, where you can have multiple users logged into the same document and making changes simultaneously without creating versioning issues like some other services.
If you’re on a budget, G Suite can give you most of the features of Office including email, spreadsheets, a word processor, and more, without the cost — it is great for the budding entrepreneur.
A real-time messaging, archiving and search solution, Slack is redefining business communication. Users may organize team conversations in open channels dedicated to specific topics or projects or limit more sensitive interactions to private, invite-only participants.
Colleagues also may interact one-on-one using private, secure direct messages. Slack also enables users to share files, documents, spreadsheets and PDFs, complete with options for adding comments and highlighting for future reference; moreover, all messages, notifications and files are automatically indexed and archived.
This cloud-based customer service and support ticketing platform enables representatives to more efficiently tackle inbound client requests across any communications channel — email, web, social media, phone or chat. Features include Automatic Answers (a machine learning-powered tool for interpreting and solving customer questions and requests), Zopim (a real-time chat service) and Zendesk Voice (a cloud-based, built-in phone support solution). According to Zendesk, its business users experience positive ratings for more than 86 percent of their customer interactions.
Skubana provides an integrated inventory management solution for online retailers who want to sell their products via multiple distribution channels. High-quality inventory management software can be expensive, and a centralized inventory is critical to ensure a retailer doesn’t oversell their stock, which is a big problem when it comes to managing multiple sales channels. Skubana provides a cloud-based solution at a fraction of the cost of implementing a custom inventory management system from scratch.
Another software giant that got SaaS religion, it has moved all of its line of business on-premises apps to the cloud, including ERP, CRM, SCM, HR and payroll. The company also acquired NetSuite, which sells CRM to SMBs not normally served by Oracle and Salesforce.
DocuSign started out as electronic signatures for legal documents but has expanded to help small- and medium-sized businesses collect information, automate data workflows, and sign on various devices. Electronic signature technology and transaction management services platform DocuSign supports the exchange of digital contracts and other e-signed documents.
Users may access, sign and send business documents from their office, their hotel room or anywhere else their job leads, guaranteeing approvals and agreements are executed in a matter of minutes, not days. DocuSign e-signatures are legally binding for most business and personal transactions in virtually every nation across the globe. The app supports more than 85 million users.
Among its offerings is WebEx, a professional video conferencing service, and Spark, a collaboration service for teams to work together on projects. The two are often pitched in tandem.
ServiceNow specializes in IT services management (ITSM), IT operations management (ITOM) and IT business management (ITBM). It offers real-time communication, collaboration and resource sharing covering IT, human resources, security, customer service, software development, facilities, field service, marketing, finance and legal enterprise needs.
14. Google Apps
Google long ago expanded beyond its search and advertising roots to offer businesses a comprehensive suite of productivity tools. Google Apps includes custom professional email (complete with spam protection), shared calendars and video meetings alongside Google Drive.
A cloud-based document storage solution, Google Drive enables staffers to access files from any device and share them instantly with colleagues, in the process eliminating email attachments as well as the hassles of merging different versions.
15. GitHub: A popular online software development tracking and version control repository, it is particularly popular with open source projects. It allows for full project management, including version control and splits/forks management.
16. Workday: Provides financial management and human resources management to enterprises, with emphasis on complex, global industries as well as government.
17. HubSpot: HubSpot develops cloud-based, inbound marketing software that provides businesses with tools for social media marketing, content management, web analytics and search engine optimization.
Twilio is a cloud communication company that enables users to use standard web languages to build a variety of telephony apps supporting voice, VoIP, IP to traditional telcos and SMS apps. Developers can embed voice, video, messaging and authentication into their apps using the Twilio platform.
19. Coupa Software: Coupa is the cloud platform for business spend. In other words, business expenses. It offers a fully unified suite of financial applications for business spend management, like procurement, invoicing, expenses and sourcing.
20. Atlassian: Atlassian is an enterprise software company that develops products for software developers, project managers, and content management. It’s a flagship product is Jira, an issue tracking product.
Xero provides cloud accounting software for accounting professionals and small businesses. Its key features are automatic bank and credit card account feeds, invoicing, accounts payable, expense claims, fixed asset depreciation, purchase orders, and standard business and management reporting.
22. Zuora: Zuora serves companies that rely on a subscription-based business model to automate billing, commerce, and financial operations, tracking subscription payments, invoicing, products and catalogs.
23. AdRoll: AdRoll is a marketing platform that enables companies of any size to create personalized ad campaigns based on their own Website data.
Xactly offers a suite of products designed around sales and finance management to design, build, manage, audit and optimize sales compensation management programs. It measures sales performance and effectiveness as well as employee engagement.
Another software company that made a successful pivot to the cloud, Intuit has converted its flagship finance and tax prep software Quicken, QuickBooks, TurboTax, and Mint to on-demand, cloud-based versions that now account for three-quarters of all company revenue.
Keep your documents and files at your fingertips across all your devices using Dropbox. Anything added to Dropbox storage automatically shows up across all your desktop and mobile devices, enabling professionals to begin a project on their work PC, make edits on their smartphone during the evening commute home, and add the finishing touches from their home tablet. Then users can invite teammates to access any Dropbox folder or send them specific files and images accessible through password-protected links; there’s even a remote wipe option in case of emergency.
Bill.com provides users with tools automating business bill payment and invoicing processes, as well as cash flow management, all of which integrates with accounting and banking systems, including QuickBooks, Xero, NetSuite, and Intacct.
Setting up an online store yourself can be complicated and take outside expertise from developers and designers to make it work. Shopify saw the opportunity to create a platform where you could build an ecommerce store and start selling products in just a few hours.
Setting up a Shopify store is easy and painless, providing the site, the shopping cart, online catalog, and payment integration all in the one platform. It also offers customization options via its library of both free and paid plugins. If you are dropshipping or looking to run a branded site for your business that integrates with your Fulfillment by Amazon business, then Shopify offers a complete and simple solution with competitive pricing.
MuleSoft provides a platform for building applications through its directory that functions as a social network to share updates and information on APIs. It also provides integration for applications, data, and devices that are both on-premises and in the cloud.
Cornerstone OnDemand provides cloud-based talent management software solutions that go beyond the basics of HR applications for things like recruitment, training, succession management and career guidance.
31. Meet Edgar: Edgar is a social media automation SaaS product that can shave hundreds of hours off someone’s workload. It automatically fills up a social queue and also allows posts to be be recycled over time.
It operates on the premise that, since most social media posts will not be seen organically by those following someone’s Twitter feed or Facebook page, the content can be recycled and exposed to more of that business’s audience over time.
While certainly smaller than SalesForce.com, Edgar has become quite the heavy weight in the social media SaaS niche and is worth watching and modeling other SaaS businesses after.
Paychex is a 46 year old company that, along with its subsidiaries, provides payroll, human resource, and benefits outsourcing solutions for small to medium-sized businesses. It launched SaaS services for payroll, time and attendance, training, HR, and benefits in 2013.
33. New Relic: New Relic is a leading digital intelligence company, delivering visibility and analytics into Web site application and mobile app performance and real-time monitoring.
34. Splunk: The company provides operational intelligence software that monitors, reports, and analyzes real-time machine data, including logs and Big Data sources, for operational intelligence.
Business travel can pose headaches for on-the-go employees and finance departments alike. Concur streamlines the process by automating travel and expense management. Its web-based and mobile solutions enable staffers to book travel plans according to their own needs and preferences, while also making sure all bookings fall within company spending limits. Concur additionally reconciles expenses after travel is completed and delivers electronic airline, hotel and auto rental receipts directly into digital expense reports. This negates the need to collect, track and submit paper receipts.
36. FreshBooks: FreshBooks is a cloud-based accounting product designed for sole proprietors and small business owners to bill clients for time and services and track time spent with the client.
37. Tableau: Tableau Online is the SaaS version of the company’s popular interactive data visualization and data analytics products focused on business intelligence.
38. Druva: Druva offers cloud-based comprehensive backup, recovery and archival for cloud business apps like Office 365, Google Suite, Box and Salesforce with full data visibility, access and compliance monitoring.
39. Act-On Software: Act-On Software is a popular adaptive marketing automation provider for small- and medium-sized businesses, providing email marketing, landing sites and social media prospecting.
40. Blackboard: Blackboard Learn provides a virtual learning environment and course management system for online schools where there is little to no face-to-face meeting. It offers online elements to classes usually available only in the classroom.
41. GoodData: GoodData provides a business analytics platform for enterprises to create smart business applications using existing data to automate, recommend and make better business decisions.
42. SurveyMonkey: SurveyMonkey offers a cloud-based online survey and questionnaire platform for companies to gather survey-related information.
Cvent is a cloud-based an event management and planning platform, allowing planners to manage all aspects of an event, such as online event registration, venue selection, event management, mobile apps for events, e-mail marketing and Web surveys.
Blackbaud is a provider of software and services designed specifically to help non-profit organizations more efficiently operate and engage in things like fundraising, building relationships, marketing, advocacy and Web management.
InsideSales.com offers a sales acceleration platform built on a predictive and prescriptive self-learning engine designed to help with a sale from first engagement until close. Its machine learning predicts and prescribes optimized sales activities, enhance performance and motivation and increase live, high-quality conversations.
ServiceMax is built on Salesforce’s Force.com platform and serves field service technicians through cloud and mobile software by providing workforce optimization, advanced scheduling and dispatch, parts logistics, inventory and depot repair, and installed base entitlement.
Apptio is a provider of business management solutions for CIOs to better manage the business of IT. Its suite of applications use analytics to provide information and insight about technology cost, value, and quality, for making faster, data-driven decisions.
Veracode provides cloud-based application intelligence and security verification services for both internally-developed and purchased software applications and third-party components. It conducts testing and uses machine learning to identify and eradicate vulnerabilities.
Anaplan is a planning and performance management platform used in a variety of departments for all sorts of business planning practices. It uses a variety of databases to generate models based on business rules, which can be changed for instant adjustments.
50. Rapid7: Rapid7’s IT security solutions collect data across your users, assets, services and networks, on-premises, mobile and the cloud, for making instantaneous security decisions.