It’s no longer a secret. Software-as-a-service (SaaS) is the business model of the future. Research shows that 80% of companies use at least one SaaS application. The SaaS business model has numerous benefits for businesses, ranging from helping with customer attraction and retention, and enhancing IT service delivery.
The SaaS sector has grown substantially over the last few years. Industry leaders such as Adobe have set the pace by adopting a SaaS model. Initially, you paid a one-time fee to access the photo and graphics editing software. Nevertheless, since 2012, you have to pay a monthly fee to access the software on the cloud.
Here is more about the model and the tons of benefits it offers enterprises, regardless of size and industry.
What is SaaS Business Model?
SaaS business model refers to a delivery model whereby a centrally-hosted, cloud-based software is licensed to customers through a subscription plan. An enterprise that leases its software using a central, cloud-based system is considered as a SaaS company.
A SaaS company manages the servers, databases, and software that facilitate the access and use of their software. Subscription plans differ from one SaaS company to another based on the services and applications offered.
Currently, the demand for SaaS is at an-all-time-high. Businesses are continually opting for SaaS rather than investing vast amounts of money building IT infrastructure. As such, SaaS becomes a fundamental part of enterprises. Salesforce for sales teams is a prime example of the SaaS business model.
How Does SaaS Business Model Differ from Other Business Types?
A SaaS business model is different from other business types because of three primary factors.
1. Recurring Payments
A SaaS company typically earns money through recurring payments. It provides a subscription service, and customers pay for it every month or year.
Notably, it can be difficult for SaaS companies to account for revenue. Since they provide services, not products, they cannot account for money obtained through subscriptions until they earn it.
For example, when a client subscribes for your service and pays upfront, you cannot account the cash as revenue because the client may ask for a refund if you don’t deliver the service.
2. Heightened Customer Retention
While customer retention is vital for all businesses, it is ten times more important for SaaS businesses. Customer retention is what keeps a SaaS company afloat. For instance, if a customer signs up for a one-year subscription and leaves after two months, you won’t have recurring revenue for ten months.
Consequently, in a SaaS business model, customer retention and building customer relationships are paramount. Failure to offer excellent customer service will result in a SaaS customer leaving your business for a competitor. Subsequently, you lose recurring revenue as well as upselling opportunities.
3. Consistent Updates
SaaS companies must offer frequent updates to their services to meet customer needs and boost retention rates. Since software vulnerabilities can compromise customer information, SaaS companies must prioritize security fixes, software updates, and enhanced versions.
Benefits of the SaaS Business Model
1. Greater Customer Loyalty
The most desirable thing about a SaaS business model is that your customers can be insanely loyal to your offerings. This is particularly true when your SaaS service is an essential part of their business.
For instance, Zendesk provides software that helps companies develop an effective customer service solution. It is prominent for its usability and capacity to offer exceptional experiences to consumers.
While new ticketing software may spring in the market, Zendesk remains undefeated because it is an integral part of many businesses and fundamental to business success. Subsequently, many companies would opt to stay with Zendesk rather than shift to a new solution.
2. Burgeoning Recurring Income
The fact that a SaaS business model generates recurring income makes it lucrative. Basically, customers rent your software on a monthly or yearly basis, instead of purchasing it one-time.
Therefore, every month or year, you will have recurring income from customers. Recurring revenue is easy to predict and offers certainty to your business.
With a strong base of existing customers delivering recurring revenue, you can scale your business without worrying about your bottom line.
3. Lower Costs
Among the biggest merits of a SaaS business model is cost-effectiveness. When developing traditional software that users need to install, you have many things to worry about.
First, you must consider supporting multiple operating systems and devices. Second, you must offer customer supports for your clients, even for local device issues. All these come at a cost.
Luckily, with the SaaS business model, such worries become a thing of the past. You only need to ensure different web browsers support your software.
Also, you don’t require a developer – comes at a cost to create a SaaS site for you. You can utilize WordPress as a SaaS platform. Cumulatively, a SaaS business model lowers costs for you, and you can provide affordable prices to customers.
4. Ability to Pivot and Improve
Sincerely, adding new features and updates to standard software can be daunting. Think about the time when a user had to purchase a CD-ROM to install MS Office. When Microsoft launched a new version with advanced features, the user had to buy a new version again and install it.
Fortunately, with the SaaS business model, your customers don’t have to go through all that hassle. You can launch new features and useful updates quickly, and your customers get them right away. You can refine your offerings seamlessly to attract more customers and turn customers into advocates.
5. Ease of Use for Customers
With a SaaS business model, your offerings are easy to use for customers. Customers don’t have to struggle with complicated software installation. They simply need to log in to your cloud software, and they can use it right away.
The SaaS model supports free trials. You can offer tree trials easily and conveniently. Free trials are crucial because they let the buyer try your software before signing in for a paid plan.
As standard software becomes a thing of the past, more businesses are opting for subscription-based software. As such, the SaaS business model has gained momentum, thanks to its numerous benefits. The model enhances customer loyalty, generates recurring revenue, lowers costs, and allows upgrades and refines. What are you waiting for? You have every reason to start using the SaaS business model. Also, feel free to contact us to learn how you can make the most of the SaaS business model.