SaaS Business Model: A Beginner Tech Entrepreneur's Guide for 2023

When aspiring to create a software-as-a-service (SaaS) company, it becomes imperative to develop a business plan to determine how to monetize a SaaS solution.

As the software as a service (SaaS) market made inroads into the tech market, there was a proliferation of new SaaS companies, several of which eventually reached unicorn status. With the aid of the most advanced collaboration and productivity technologies, some of the most renowned companies improved their income by multiple folds! And, if this has inspired you to launch your own SaaS company, here's your guide to creating a promising SaaS company.

What is a SaaS business model?

A software-as-a-service (SaaS) business model describes the typical procedures, revenue streams, and cost structures of a SaaS business. Such a model is meant to host web-browser accessible software in the cloud and garner revenues from subscription fees.

Running a SaaS company is more difficult due to the fact that it is hosted online. Naturally, it requires a higher level of expertise in areas like design, development, and knowledge of industry trends. And once you gain dominion in these fields, SaaS business models can help you steer clear of common pitfalls and carve out a niche for yourself in this fiercely competitive market.

The SaaS Business Model in Action

From Slack and Zoom to Clickup, Trello, and even Netflix, SaaS is making its presence felt in all business fields. Their unique features necessitate the claim of some service charges from clients, be it in the form of one-time payments or a subscription basis.

Varieties of SaaS Business Models

The various cloud-based SaaS enterprise models for remote workers are enumerated below.

Software as a Service (SaaS) Revenue Model

A revenue model comes in extremely handy in predicting the success of a SaaS venture. This framework allows for specifying the means through which a product is sold and the price tag attached to it. This means that the seller is aware of the purchaser’s identity and their interests, which helps form marketing strategies.

The following are the various types of SaaS business models:

Types Of SaaS Models

1. Ad-based Revenue model

In order to make money from advertising on a website or an app, the user must first attract a large audience. So, by driving traffic to the website through ads, users can generate large profits, thereby eliminating the need to charge customers directly.

This may be accomplished in one of two ways:

• Selling advertising space on a page to individual companies

• Trying out a localised ad network like Google AdSense to locate advertisements

2. Affiliate Revenue Model

Although SaaS revenue models bear some resonance with the as revenue model, they still differ in that instead of making money directly from individuals viewing content, one can make money by directing sales to other sites via the use of affiliate links. But remember that there is always the possibility of disappointing visitors with too many ads.

3. Channel Sales

Instead of focusing on direct sales, the platform markets a product or service for its customers. By employing resellers who already have a sizable following, users are making considerable gains on Amazon and similar online retailers.

4. Direct Trade

In this particular SaaS business model, a product is offered directly to end users, eliminating the need to split profits with any third-party resellers. But this method also involves the expense of hiring a sales crew to increase revenue.

5. Freemium Model

The freemium SaaS business model is meant to enable consumers to try out a product for free before deciding whether it is worth their money. A trial experience can help instil confidence in them about a product.

6. Subscription Revenue Model

The subscription revenue model is based on charging clients a recurring fee for a product or service. This SaaS business model is used by video streaming providers, including Netflix and Amazon Prime.

SaaS Pricing Model

The cost of any service is set under the SaaS pricing model, and this information is a deciding factor when purchasing software. It also enables entrepreneurs to have an edge over the competition by studying the market.

You can always count on these tried-and-true pricing strategies for software as a service:

1. Flat Rate

Offering a single, consistent rate for a service on a recurring monthly or yearly basis, this pricing model for software as a service (SaaS) is one of the most preferred models. Although customization is unavailable when you are just starting out, once traffic picks up, adjustments in the pricing structure can be made on the basis of the features that you wish to add in the later stages.

2. Per-User Pricing

For businesses that offer software as a service, this straightforward pricing structure is based on the number of users. Since major corporations would rather avoid recurring expenses by using SaaS applications, the pricing structure is best suited to small and medium-sized firms.

3. Tiered Pricing

Many different pricing tiers are available based on the services included in them. The more bells and whistles a plan has, the more it will cost.

By tailoring various plans to suit the specific requirements of your customers, you can get ahead of them. Start by providing a free or low-cost plan that works for start-ups, and attract seekers like never before.

4. The Pay-As-You-Go Plan

Many cloud services, including Amazon Web Services, Microsoft Azure, and Google Cloud Platform, provide this pricing structure to their customers, wherein subscribers "rent" the service. They use it for as long as necessary and then pay back the service provider when the service is once again required. So, you shall only pay for what you consume.

SaaS Distribution Model

This SaaS distribution model concerns who sells a product and how, and how these products reach the end user. There are two distinct SaaS distribution models:

• With direct distribution, one bypasses the middleman and goes straight to the customer, making use of an independent team and any relevant technical assets in the process.

• The goal of indirect distribution is to have a third party make direct contact with consumers and close the deal on the purchase of goods or services. This distrusted method includes app store marketplaces, in-app purchases, resellers, and consultancies.

Moreover, any SaaS distribution model is flexible and can be tailored to fit any business, no matter how small or large.

5 most alluring features of the SaaS Business Model

1. One of the keys to success is the rate of innovation.

The increased freedom to experiment made possible by cloud computing has led to an increase in the adoption rates of SaaS products. This is essentially because new products developed using the platform can be released into the market in no time.

2. A product that is well suited to the market requires little promotion.

When you have a SaaS product to your rescue, rest assured that you will be able to rule the intended market by facilitating cloud access. Once the right product is selected, it is easy to target customers and deliver solutions to their problems.

3. What Makes It Unique: Value That Can Be Enjoyed Anytime, Anywhere

With software as a service's round-the-clock remote access, users will be able to offer their services at any time and from any location. Businesses have increasingly relied on cloud computing and cloud-based applications to facilitate collaboration and communication, even when everything was put on hold for COVID-19. So, attain what is said to be the "customer lifetime value" (CLV) by addressing the needs of your trusted customers.

4. Getting an MVP to market sooner translates to more frequent iterations.

Building and validating an MVP can take years, but a SaaS-based product can be used with just a web connection. One can stay away from problems without the hassle of installing new software. This enables service providers to market with an MVP more quickly, provide customers with easy access, collect suggestions, and improve the quality of services.

5. Consistency in earnings has been shown to lower employee turnover.

The upfront costs of traditional software licencing and subscription-based services can be replaced with a steady flow of recurring revenue. An insight into a product's performance in the market can be easily gleaned from the data on CRM dashboards. By analysing the performance of one’s product or service and that of competitors, one can devise strategies to prevent customer defections.

Drawbacks of the Software as a Service Business Model

1. Conversion is time-consuming.

Customer adoption of a SaaS service, and especially that of costly solutions, involves a lot of investment. Therefore, it becomes important for businesses to involve salespeople, in-person product demonstrations, team orientations, and the like.

2. Easy-to-Imitate Business Model

It is true that SaaS can be a game changer for entrepreneurs, but it comes with the risk of being easily imitated by rivals. By sourcing information about a business's marketing methodology, pricing, sales, and email campaigns from the web, competitors can pose a threat to your success.

3. Rigid Competition

When planning to launch a SaaS business, one must invariably bear in mind the difficulty of maintaining it. There is a constant need to watch any competitor attempting to replicate your innovative strategies.

4. Security is a Concern for SaaS Companies

A SaaS company's data is vulnerable to online attacks, and the proliferation of cybercrime and data loss incidents is a major concern for SaaS businesspeople.

5. A substantial financial investment is necessary for the maintenance and expansion of any business.

There are many factors that contribute to the expansion and success of a business. With access to data analytics, it is possible to make better decisions. Moreover, an efficient marketing team can guide customers through the sales funnel, while the product development team is needed to add new features. A customer support group can work towards ensuring that issues are resolved within the stipulated time. But some of this can be achieved only when you are willing to invest.

How to Put a Profitable SaaS Business Model into Action

When developing a product, the aim should be to develop a SaaS offering that can demonstrate product-market fit.

To ensure the smooth launch of your SaaS business plan, the following procedure should be followed:

• Create something truly original.

• If need be, create a prototype to demonstrate how your idea works. This will be useful in determining whether or not the product concept is sound.

• Make a sample. It will serve as a catalyst for bringing in initial funding for the product.

• Draft a freemium-based minimum viable product (MVP) and release it to the public. A foundational product version should also be established, as it will aid in recording user feedback.

• Derive lessons from the reviews and apply them to creating a finished product.

• Consider your SaaS offering and what kind of pricing structure would work best for it.

• Adopt a cycle of promotion, refinement, expansion, and reiteration.

The top 6 SaaS KPIs that should be monitored

It is essential to monitor key metrics like revenue, churn, leads, and others for business progress, and in order to achieve that, here are the critical SaaS metrics to consider:

1. Loss of customers

The percentage of customers who stop using your services over a given time period is known as the "churn rate." It is an indicator of the impact of business. When calculating churn rate, it is crucial to focus on what lies beneath the surface to figure out what drove customers away and what a business can do to win them back.

2. Revenue churn

Revenue churn measures the amount of money lost over a given time frame. When a few clients bring in more cash than others, revenue churn emerges as a crucial factor. Businesses should keep track of both customer and revenue churn rates.

3. Customer Lifetime Value (CLV)

A customer's lifetime value (CLV) is the sum of money a company makes off of them over the course of their relationship with that particular company. The value of a customer over their lifetime can be determined in this way:

(Customer revenue  × the number of years they are likely to be customers) - customer acquisition and retention costs

Customers' lifetime value to any business rises in proportion to the length of time they remain subscribers to the service. The lifetime value of a customer is a SaaS metric offering a clear picture of a customer's worth.

4. Customer Acquisition Cost (CAC)

The sum of money spent on advertising and promotion in order to gain new customers is known as the customer acquisition cost. This SaaS metric can be computed as follows:

The sum of all money spent on advertising / acquiring new customers over a specified period of time

5. CAC Remission Time in Months

This SaaS metric calculates the number of months it takes to make back the money spent on customer acquisition. When the customer begins to produce profit for a company, that is when a relationship is considered successful.

The calculation of the time for CAC to return to normal can be calculated as follows:

CAC / recurring monthly revenue ×  gross margin (gross revenue - the cost of sales).

6. The customer engagement rating

Customers' level of involvement with a product is quantified by their "customer engagement score." It takes into account factors such as the frequency of user log-ins, the length of time spent using the product, and other determining factors.

To monitor customer engagement, the following factors must be remembered:

• The degree to which a customer is invested in a product or service

• The frequency of customer participation in webinars and other events promoting the product

• Client involvement in the product community

• Active recommendation by customers to others

FAQs

What are the three distinct phases of a SaaS business?

A software as a service company goes through the following stages:

looking for the ideal product and market fit.

Step 2 involves settling on a sales model that is profitable, reliable, and extensible.

Last but not least, expanding operations to meet rising demand.

List the best pricing strategies for SaaS pricing models.

• Volume-Based Rates

• Zero cost, ad-supported

• Pay-Per-User

• Feature based

• Pay-Per-Active-User

• Pay-as-you-Go

• Flat-Rate

In what timeframe can a software as a service company expect to see a return on investment?

Depending on the complexity of a SaaS offering, it could take anywhere from 9 months to 2 years to perfect.

What business model does a SaaS company use to generate revenue?

• Subscription-based models, such as monthly payments, are the primary source of revenue for SaaS providers.

• Free services rely on advertising to make money.

• Active marketing for the sale of premium versions.