Software-as-a-Service (SaaS) is a software delivery method where the solution is owned and managed by a company, hosted on a cloud that a third party provides, and delivered to customers on a subscription basis via the internet.
This article will help you understand the fundamentals of the SaaS business model, including its strengths and weaknesses.
The Four Pillars of The SaaS Business Model
1. Centralized Ownership
The Application Service Providers (ASPs) retain ownership over and maintain the SaaS product. Instead of permanent licenses, they sell the solution via subscriptions and provide everything else their customers require, such as support and maintenance.
This helps with keeping costs low and enables companies with limited budgets to adopt newer technologies.
2. Cloud-based Hosting
Most SaaS companies use cloud hosting solutions such as AWS, Microsoft Azure, and GCP to deploy their applications. This makes it easier for them to scale fast while retaining the quality of performance when it comes to delivering the promised value to their customers.
Generally, SaaS platform developers use microservice architecture, which keeps costs lower and makes the solution easy to operate, modify, upgrade, and maintain.
3. The Subscription Pricing Model
As we briefly touched upon earlier in this article, SaaS companies bill their customers periodically (weekly, monthly, or annually). This subscription-based pricing renews customer access to the solution at a specified service level.
The nature of the tiered pricing model varies from company to company. For instance, some SaaS solutions charge based on features used, while others charge based on the number of users.
4. Internet-based Delivery
Customers have web access to SaaS products through their local machines. However, the data is stored and processed on servers of the cloud hosting solution used by the SaaS company, usually located elsewhere.
This cost-effective, scalable, and versatile approach helps SaaS companies adapt with time while continuing to deliver world-class services to their existing customers.
SaaS vs. PaaS. vs. IaaS
SaaS
SaaS (Software-as-a-Service) utilizes cloud hosting solutions managed by third parties to host software. Businesses then use the internet to deliver it to their target audience. The advantage of the SaaS application is that it can be accessed via a web browser, making its adoption simple.
Examples of popular SaaS applications include G Suite, Dropbox, and Slack.
PaaS
PaaS (Platform-as-a-Service) delivers a framework for developers that is used to build applications. The servers for storage, processing, and networking of data centers are managed by third-party service providers — also known as Cloud Platform Services (CPS).
AWS Elastic Beanstalk, Windows Azure, and Heroku are some of the most prominent PaaS solutions.
IaaS
IaaS (Infrastructure-as-a-Service) helps its users to monitor and maintain their IT infrastructure while giving them the freedom to scale up or out as per their requirements. IaaS keeps hardware costs low.
Google Compute Engine (GCE), Microsoft Azure, and DigitalOcean are some examples of IaaS solutions.
Strengths of the SaaS Business Model
Scalable Solution
As the SaaS solution is hosted on the cloud, there are no limits on how many customers a SaaS company can serve. Furthermore, selling the solution in every country is possible, provided the legal requirements are taken care of.
The cloud hosting solution in use will take care of the new storage and processing requirements while accommodating new users in real-time.
Easily Accessible
In the olden days, customers had to purchase enterprise software, upgrade their local machine to match the recommended specifications of the software, and install it before they could start getting any value.
Now, all they need is a computer with a stable internet connection and a license to a cloud-based tool.
Automatic Updates
SaaS solutions have made the “software update” button and waiting for it to complete before starting your work obsolete. SaaS vendors deploy new updates on the cloud, and they will be reflected in real-time on customers’ devices.
Customization and Customer Relationship Management
SaaS Providers can create multiple pricing plans to target customers of different requirements in the same or similar domains. This assists them in having a wider potential customer base while delivering economical and personalized solutions to each of them.
Predictable Costs
The pay-as-you-use linear pricing model makes it easier for SaaS businesses to predict how much working capital is required to hit the SaaS market. This makes it easier to maintain finances and scale up in the future, as well as increase the platform's average customer lifetime value.
Weaknesses of the SaaS Business Model
Cybersecurity
It is challenging for both the business and their users to store their sensitive data on third-party servers. It is crucial for businesses to carefully go through the privacy policies before choosing a cloud hosting solution.
Longer Sales Cycle and a High Customer Acquisition Cost
The journey that transforms a prospect into a paying customer is quite long. SaaS businesses often have to spend a lot on marketing strategies for the entire sales funnel to ensure it resonates with the audience.
High Competition
The strengths of the SaaS model make it easier to develop such a solution even with a strict budget. Due to this, every domain in the SaaS industry has a lot of players, big and small.
eCommerce, SaaS, and Matter Made
The SaaS business model is scalable, accessible, affordable, and easy to maintain. These advantages make it a great opportunity but also make it competitive at the same time.
The one thing that will set a SaaS brand apart from its competition is its marketing strategy — as it will relay its value to its target audience, motivating them to sign up for a trial.
Matter Made helps SaaS platforms achieve this objective through a strategic blend of demand generation, decision-maker marketing, paid media, and product-led growth.
Interested?
Schedule a chat with us today.
