SaaS Business Model – Understanding its working

The SaaS Business Model, or the model followed by companies providing software-as-a-service, consists of a base hosted on a cloud infrastructure. The businesses using these services are required to pay a monthly subscription fee to use the services.

The SaaS Business model intelligently utilizes a subscription model, we will learn about that later on, but let’s first understand the details about a SaaS business.

Stages of a SaaS Business

Every SaaS business has to go through three main phases that determine both its capabilities of survival and progress. The three phases are:

  • Startup Phase,
  • Hyper-growth Phase,
  • Golden Goose Phase.

Although some people like to be in the illusion that the Golden Goose Phase comes right after the Startup phase, that’s not true. Ironically, the most important phase of a SaaS business of hyper-growth remains out of the discussions quite often.

To understand what these terms mean in the context of a SaaS business, let’s get into the details.

Startup

saas business model

As the name suggests, a SaaS startup phase contains the initiation of a company. This includes the initial production of the company’s product/service and stepping in the market to find potential customers.

Hyper-growth

saas business model

The Hyper-growth Phase is the most important phase for a SaaS business. In the event of the market endorsing your product, your company will witness an unusual wave of attention. This will make way for a number of new customers that are ready to enjoy your services.

Although this phase sounds extremely cheery, this phase might cost you a lot more money. Due to the increase in data and customers, you need to revisit your decision for the expansion of your resources. In order to satisfy your new-found customers, you need to keep the cash rolling.

Stable Golden Goose

This is the phase that every company dreams of being in before even starting; the stability phase. Your resources are extremely capable of managing the acquisition of new customers. You no longer have to worry about your infrastructure limits like you had to in the hyper-growth phase.

SaaS Business Model

Coming back to the topic, the SaaS Business Model is easy to comprehend but hard to understand. Many entrepreneurs fail to find a single factor that can be responsible for the failure of a SaaS business. In order to understand that, we need to dive deep into the details of a SaaS business model.

Customer Acquisition Cost (CAC)

The first and foremost factor in the business model is to understand the customer acquisition cost for a SaaS business. It is the aggregate cost of acquiring a customer, these costs may include:

  • Amount spent on marketing,
  • Amount spent on outsourcing a task, and
  • Overhead costs.

Lifetime Value (LTV)

The lifetime value or customer lifetime value has significant importance for a SaaS business. It determines the total revenue a company earns per customer.

Monthly Recurring Revenue (MRR)

The monthly recurring revenue for a company is the fixed amount of revenue that a company retains every month. This gives a clear picture of a company’s progress in the recent month in terms of customers retained.
You can calculate it easily by multiplying your subscription fee with the net users per month.

How does the SaaS Business Model make money?

The SaaS business model uses an internet business strategy known as freemium. Freemium, an intelligent blend of free and premium, is a strategy that provides free service to the users at the start. This free portion of the product usually covers the basic usage of the product. The extra/advanced features are locked in a premium bundle that can be unlocked by buying the bundle.

Since the customers become fond of the product and enjoy using it, they agree to spend on the premium services.

The economics of a SaaS business model relies on three important steps:

  • Acquisition – The first motive of a SaaS business is to attract a customer. This is done by providing free services so the customer finds the product usable. Basic services are included in the free package and the customer starts to get accustomed to the usage of the product.
  • Retention – The most difficult yet important step for a SaaS is to retain customers. In order to achieve success here, businesses provide different offers to engage the customer.
  • Monetization – Lastly, the intelligently designed structure of the product, and affordable prices lure the customer to purchase the premium services.

Growth Strategies

The main focus of a SaaS business model is to ensure that the business continues to grow at a constant pace, without any jitters. The growth strategies often vary from business to business, however there are some strategies that need to be implemented in all of them.

Let’s have a look at the common growth strategies of a SaaS business model.

Increase Organic Traffic

Organic traffic is a term that demands no introduction in the business sector. Although other means of generating traffic are extremely popular and deserve recognition, they are still unable to overcome the significance of organic traffic.

The sources of organic traffic usually derive from the most commonly used search engines Google and Bing. To increase and monitor your organic reach, you can use Search Engine Management tools such as SEMRush.

Introduce New Marketing Channels

In order to test a new strategy, you should be flexible enough to invest in a new marketing channel. This marketing channel is supposed to ensure that you reach statistically significant numbers to boost your product.

Enhance the efficiency of your service

The foremost priority for a SaaS business is to satisfy customers and take measures to improve their loyalty. In order to do that, SaaS businesses need to constantly improve and enhance the speed of your services. There are multiple ways to enhance your speed, refactoring bad code, and removing wasteful code.

Advantages of SaaS Business Model

A SaaS model is known for having one of the best ratios of maintenance of brand loyalty amongst the customers. The majority of SaaS businesses use emotional marketing strategies that make the customers feel they have become a part of the family.

Due to strategies like these, the customers choose to stick with the businesses for many years. Furthermore, they continue to spread the good word regarding the SaaS business, which results in more customer income.

Now, due to the subscription model of a SaaS business, both the long-term and new customers result in the businesses generating a significant amount of revenue.

Disadvantages of SaaS Business Model

The disadvantages of a SaaS business model start from the significant initial investments a SaaS business has to make in the beginning. These include the hiring of efficient and capable designers, developers, marketers, and other professionals. These are mandatory to make sure the product releases with a user-friendly outlook and contains maximum efficiency.

Moving on, as the customers start to roll in, the investments start to get bigger as your infrastructure demands some major changes to meet with the requirement of the new-found customers.

I hope this article about the SaaS business model was helpful for you. Let me know if you have any kinds of feedback in the comments section below.

Have a nice day!

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