SaaS Business Model: How it Works and How to Benefit from It
The analytical agencies claim that the SaaS market size should have reached 157 billion dollars in 2020 that is more than double growth compared to 2014.
Whether this figure got real or not, the truth is that, together with the platform as a service (PaaS) and infrastructure as a service (IaaS), the SaaS business model became one of the top three cloud computing categories.
But why did the SaaS model became so popular? Let’s walk through the most crucial aspects of this business model so that you can get a better understanding of it and whether it’s worth considering to go in the cloud with your future project.
What is Software as a Service?
SaaS is software stored in the cloud and is accessed by a web, mobile, or desktop application. SaaS products or services are subscription-based, meaning that you need to make the payment for subscription every month or year to use them.
An example I have top of mind is Zoom, a video conferencing app with a capacity to host an infinite number of group meetings. Zoom also supports meeting recording and screen sharing; ensures stable connection and excellent call quality.
Is the subscription fee the only revenue generator? Usually, no.
SaaS monetization options
Apart from the subscription fee, SaaS businesses usually have few more revenue streams.
Let’s look into each of them, starting with the main one.
Recurring payments are flesh and blood of the SaaS business income. The monthly revenue amount depends much on your pricіng modеl and customеr satisfаction lеvel. Many SaaS companies encourage customers to pay annually, providing special discounts for annual payments. This way, they aim to estimate the income and secure business growth.
You can increase revenue by upselling to customers you already had additional features that provide extra value. For example, Zoom offers an Audio Plan that allows you to call out and have global toll-free numbers.
Also, Zoom customers can purchase more storage on the Zoom Cloud to keep their conference recordings.
To increase your revenue, you can offer customers to create component-based reports for an additional cost. This feature may be included in one of the high-tier plans, encouraging users to upgrade, or it can be purchased separately as an add-on. Hubspot, a sales management and marketing automation platform, gives customers a possibility to obtain Reporting Limit Increase and generate up to 3 000 custom reports.
One more way to nudge customers to pay more is to include extended customer support in more expensive price plans.
Mailchimp, an email marketing service provider, has a couple of different levels of customer support depended upon the plan. The free plan users can have 30 days of email support. Though, if you want to address your issues quicker, you can choose the Essentials plan and get 24/7 email and chat support. And in case you’re ready to pay more for the urgency and personalized approach, the Premium plan may be an excellent option to consider.
SaaS key metrics
You probably want to succeed in your business and if so, you should track the crucial SaaS metrics range. They will help you understand how healthy your business is and the weak points you need to improve to ensure your business growth.
One metric that matters (OMTM)
This metric is also known as the Northstar metric. It helps you define whether you’re succeeding or not. OMTM metric is specific for every SaaS business and depends on the goals you want to achieve within a certain period.
For example, it can be the number of users joined or products sold.
Monthly Recurring Revenue (MRR)
MRR is one of the most crucial metrics for the SaaS business as it shows how much money you get monthly. Based on this metric, you can build your further strategy, forecast your growth, estimate your profit and loss. MRR is also vital if you’re a startup and intend to get funded. Investors don’t believe much in rants, but they do trust figures they see.
Lifetime Value (LTV)
This metric gives you an idea of what is the size of income you can receive from a customer during the whole time they use your product. To keep high LTV, companies put their mind into making the UX better as it’s much cheaper to retain existing customers than to attract new ones.
Customer Acquisition Cost (CAC)
The name of this metric is self-explanatory. It shows how much cash you pay out to get brand new clients. Together with LTV, CAC will help you determine whether it is time to improve your marketing strategy.
Net Promoter Score (NPS)
NPS is a user satisfaction metric. It depends on a basic question – on a scale of one to ten, would you recommend our product to someone? If the score is not high, probably, you should consider improving product features, UI, or customer support.
In other words, this is the percentage of customers who left your product within a specified interval (week, month, or quarter). Customer churn is inevitable, and the churn rate depends much on a company’s stage. For small startups, the churn rate is usually higher than for mature companies.
Is it worth considering a SaaS business model?
A SaaS business can make from $5 million to $100 million ARR (annual recurring revenue) as a rough estimate. Besides this business model can be profitable, subscription services became a new norm in modern society. This model is optimal not only for companies, but also for the user. The customers get easy access to various products or services right after they sign up. For businesses, the SaaS model enables them to scale fast and generate profit with relatively low expenses.
You should definitely consider moving to the cloud if keeping your product viable is important to you. It can be quite costly to transit at the beginning. However, it can be fruitful later when choosing the accurate pricing plans and establishing your metrics.