By 2024, the global SaaS market is predicted to reach a value of $185.8 billion, which is a growth of 21.4 percent. For reference, the European market is expected to grow by 18.8% in that same period.
SaaS is the business model of the future. It can prove to be incredibly lucrative, especially when executed correctly. That being said, let’s take a look at its main components.
What Is SaaS?
Software as a service, or SaaS for short, is a delivery model where software is hosted in the cloud and licensed to customers through a subscription plan.
We can label as Saas any piece of software that is delivered through a centrally hosted system. In fact, most businesses and most individuals use at least one SaaS product in their daily life and don’t even think twice about it. That leaves SaaS companies open to targeting both enterprise and private users, which is certainly an advantage.
What Does the SaaS Business Model Look Like?
The SaaS business model features some specific factors that distinguish it from others:
With the SaaS business model, clients will never buy a piece of hardware, nor will they buy any piece of equipment that stores the software solution. The service is exclusively subscription-based, so SaaS companies collect monthly or yearly recurring payments.
They are known as monthly recurring revenue. The model can make accounting for revenue very difficult, as it’s never possible to predict how many subscribers a company will have at any given time.
While yearly subscriptions help and can allow you to invest in future development, it can be very difficult to plan. Determining the value of a SaaS business is thus also made more difficult.
Customer Retention Becomes More Important
Every business will aim to retain their existing customers, as opposed to acquiring new ones, as this is cheaper. But for SaaS businesses, this becomes increasingly important.
Customer retention is what keeps SaaS companies afloat. They thus need to focus on ensuring that subscriptions get renewed over and over again. This is why promotion, relationship nurturing, and upselling play such a vital part in SaaS marketing.
Customer churn is a huge liability in SaaS, so user experience and continuous product improvement are a prerequisite for success.
Consistent Updates Become Necessary
Enterprise software is often updated only a couple of times a year, while SaaS products don’t have this luxury. To keep customer retention high, SaaS companies need to provide more frequent, smaller updates.
This is beneficial for user retention, as continuous improvements send positive signals to subscribers, making them more likely to stay. It also opens the door to continuous improvement. Consistent updating provides a chance to implement customer feedback and outperform the competition.
The 3 Stages of the SaaS Business Model
SaaS companies usually go through three different stages of development:
- Startup stage. This is the phase of creating an MVP and marketing it to customers. This can be the most challenging yet most fun phase, and its success will depend on the quality of the idea and its execution.
- Growth stage. Most SaaS companies experience fast growth as more clients adopt their product. This stage is characterized by numerous challenges in growing both the team of people behind the product and its deliverability. Most startups fail in this stage because they are unable to match the demand for their product. This is also the stage where startups acquire funding (if that is their chosen strategy).
- Stability stage. This is the healthiest stage of a startup’s development, where it has acquired enough funding and a steady influx of users.
Benefits of the SaaS Business Model
The SaaS business model sees less sales friction than others, as the product is clearly priced per user per month. This means that end users can calculate their budgets easily and instantly determine whether a software is right for them.
The recurring revenue model, which is one of the challenges of SaaS, also happens to be rather beneficial in the very short term. A SaaS startup will be able to predict their short-term income based on the number of users they have adopted so far. This enables them to reinvest their earnings into the product in the initial stages.
The SaaS business model also leaves room for endless improvements, making for practically unlimited growth. The fact that your product is also continually being tested by users means you have access to real-life use cases and can easily implement all the necessary changes.
The SaaS business model can be a highly lucrative one – provided that you offer a product that really works. Marketing a SaaS product is also full of infinite opportunities, and the scalability of the venture often exposes SaaS startups to angel investors and venture capital funding.