Fun Fact – The median market valuation for a SaaS-based business is 15 times of its revenue.
That is Huge!
The number is astonishing and much more than other conventional business models. For instance, you own a SaaS business model and your annual revenue lies at $1 million today, then your current market valuation stands somewhere around $15 million US dollars.
The concept of SaaS (or Software-as-a-Service) based business models came into the picture in 2005 and since then the industry has witnessed massive growth. Some of the popular SaaS products in the market today are Spotify, Netflix, Zendesk, Salesforce, and Zoho.
Further, the last two years have been a golden time for such businesses due to COVID pandemic, inclining people towards virtual world. The best time to enter the SaaS market is today and several data sets support this argument, such as an average company used more than 110 SaaS apps, and the market is expected to touch $10 billion valuation by 2030. Thus people who are interested in building a SaaS app and have a crazy idea with them, then they must not delay the decision.
The post explores the SaaS companies’ business models, including revenue streams, pros, cons, types of models, along with some other important topics.
Software as a Service (or commonly referred as SaaS) is a business model in which a central, cloud based software is sold to the users through subscription plans. In other words, a company that leases its centrally hosted system to different users through licensing, in exchange of some monthly or yearly amount, is called a SaaS business.
A SaaS company can offer different services within their software and charge differently for each of them. Some companies’ business model offer access to multiple softwares within the same plan. In short, different companies follow different working models.
| Note– SaaS companies take responsibility of the user data, security, server, and other third party software that access the service. |
SaaS (Software as a service) Business Model works on cloud or web browsers. Unlike traditional software like MS word that needs to be installed in your computer for use, SaaS Model works without any installation, mainly through the internet. The purchasers don’t need to pay for buying the software; they only pay to access the software online.
The model works on monthly/ yearly subscription rather than one time payment. The customers can use the software remotely without any need to install it on PC. The working of the SaaS business model can be understood with the example of Netflix.
Example –
Netflix is one of the most popular Software as a service business models. The software works through browsers and is based on monthly or yearly subscription.
The users can log in through an account on the browser itself. New content is provided to the users from time to time without any need for updating or repurchasing.
The SaaS app development model is helpful to businesses because it provides flexibility, scalability, and recurring revenue, allows for customer feedback, and generates more revenue. For customers, the SaaS business model is more economical because they can try it for a certain period and decide to continue or discontinue based on their interests. But for traditional software which is installed once in their devices, they have to pay hefty costs and they can’t even return it, even if they don’t like it in the future.
The focus of this model is on increasing the profitability and revenue of Cloud computing companies. Under this model, the target audience and the popularity of the service is the main goal.
For instance, the revenue model of Netflix will be based on deciding how much monthly price they will charge from users so that it is economical to customers and profitable to the company, what offers they can give to attract an audience, how they can create more viewership, etc.
Revenue based SaaS model can be further divided into the following categories:
One of the prominent ways to earn revenue from SaaS app development is by showing advertisements. Once your website attracts a significant amount of traffic, you can charge money from advertisers for the views.
For instance, Spotify has a large community of listeners. So instead of charging from them directly, it can take a commission from advertisers for all the advertisements that it shows to its listeners.
To implement an ad based revenue model, you can either contact a specific advertiser or try Google Adsense or any other third party ad system.
The second way to earn revenue from SaaS app development is by providing affiliate links on your website. In this model, you will earn revenue whenever someone makes a purchase from the link given on your website. This model fetches a lot of revenue if you have generated loyalty among users.
Instead of selling your service directly, SaaS companies can also use e-commerce like Amazon or Flipkart to increase the reach of your service.
One of the easiest models to earn revenue from SaaS is to directly sell it to potential users through a sales team. This way SaaS companies can save money that they were going to share with third party sites like Amazon.
One of the most popular Saas Revenue based models that SaaS development companies can use is the Freemium model. In this model, the initial use is free for a certain period. The idea is to let your potential users know about your services and build trust. Once they become accustomed to your services they will pay charges for advanced features.
Under this model, SaaS development companies charge some amount from users on a monthly or yearly basis. For example, Netflix charges Rs.199 monthly from its users and the subscription can be renewed only by monthly payments.
The only challenge in this type of model is to keep the quality high so that users don’t become reluctant to part with their hard earned money.
The focus of this model is to ascertain a suitable price for your service by taking into account the price charged by competitors, the target audience, your costs, etc.
Various popular Pricing models are as follows:
Under this model, a uniform price is charged to users, irrespective of the usage. This model eliminates any scope of customization of price and customers will be charged the same price on monthly or yearly basis for all the services.
For Example, Canva charges a flat price of Rs. 4999 for its pro plan.
In this model, depending upon the use of software, the charges will vary for each customer. This model has been adopted by Google Cloud, Azure, etc. In this model, based on whether services were rented for one day or a month, the prices will be calculated accordingly.
Sometimes the pricing is based on how many users can access software from a single account. Like in Netflix, depending on the devices, the prices will vary. This model is mostly suitable for small businesses and might be costly for big businesses.
In a tier based pricing model, Cloud computing companies can introduce different plans based on basic, advanced or premium features. Based on the level of services, the pricing will vary. For instance, for a basic plan suitable for a small business, the prices will be very low but for advanced features curated for a big business, the prices will be higher.
When two or more of the above mentioned pricing models are combined by a business, it is called hybrid pricing. For instance, a business may keep a flat price till a certain period and then opt for a tier based or usage based pricing system.
Once the SaaS companies decide their revenue and pricing model, the next step is to decide how they are going to distribute it to the customers. They can use one of the two ways:
When the Cloud computing companies decide to sell their services directly through their sales team rather than hiring or collaborating with a third party, it is a direct selling model. In this model, the employees, and technical staff play a crucial role in increasing the reach of the business. They can also use websites or telephonic calls to reach out to customers.
Under this method, the companies collaborate with third parties to sell their products and increase their reach. they can either use e-commerce websites or affiliate channels, professional firms etc. to distribute their services.
There are ample SaaS companies which are operating on the SaaS business model and increasing their revenue. Some of the top examples are –
SaaS businesses are easily scalable and adopt the change much faster as compared to traditional businesses. All the resources are deployed on the cloud instead of any physical machinery, making it easy for businesses to handle sudden boost in demand. Further, new functionalities can be added to the product without disrupting the existing services.
Since SaaS models operate online and all the users are required to log in to their accounts, all the data can be analyzed and traceable. One can identify the healthy, profitable users and track their activities to take required action. Businesses can predict the important pointers such as revenue and compensate for any expected loss.
SaaS businesses are safe to distribute and the chances of illegal distribution for such products to unauthentic users are minimal. The delivery of SaaS businesses is generally online, through web or mobile, mitigates the risk here.
Software as a service businesses’ onboarding process is quick and easy for users. No complex installations are required and hassle free user acquisition boosts the product’s stickiness. Further, one can access his account anytime and anywhere.
Building a SaaS MVP is faster as compared to other businesses, leaving you more space for marketing efforts. Also, the user access to the product is effortless and receiving the product feedback is quick, which in turn helps better value offering. Further, if your product and services gain trust, then word of mouth reduces the cost of marketing.
Although SaaS offers a lucrative recurring business model, the acquisition cost of a user is high. Subscribing to a SaaS service is not a usual decision for a user, especially for high ticket services. You have to set up a long sales process such as orientation, live product demos, sales representatives, etc. to convert one single client.
SaaS product development is quick & easy but running it in the market is the real deal. Even the smallest carelessness in marketing or product strategizing can make you lose users. You also have to be aware of your competitors that are always upgrading, spying your ideas, and selling them with an upgrade.
Competitors try to eat growing businesses by replicating their business model and offer additional features at affordable rates. This becomes easier in SaaS based business models. It is much easier to understand and identify software based businesses’ business model, including marketing strategy, pricing strategy, sales strategy, etc. using tools in the market.
Unlike traditional, offline business models that did not need to worry about online threats and attacks, internet based businesses are much more prone to the phishing and malware attacks by hackers. Some of the most common cyber attacks are phishing, spoofing, Insider threats, and IoT based attacks.
Starting a SaaS business required huge amount of initial as well as maintenance capital to run the product. If you are not making some revenue out of your SaaS product, then it becomes difficult for you to sustain in the market. Further, you also need a solid team to ensure the smooth workflow, including a customer support team and a technical development team to constantly upgrade the product with latest features.
To implement a successful SaaS based business model, you need to have a solid plan and a strategy in mind. Here is a detailed step by step guide to build a successful cloud based software business –
Building a software business requires a good market research and competitor analysis, giving you an insight of the crucial information and the potential demand of the users. This step also helps in understanding the competitors’ mistakes and learning from them. You need to build a model that offers recurring benefits to the users so that they are convinced to pay for your subscription.
An MVP is an early version of the original software with basic features for users to try the product and provide feedback. It includes defining all the basic, core features that you will be able to offer at the best possible price. You need to figure out questions like user persona, solutions offered, etc.
There are a number of SaaS business models in the market and you need to select one that caters perfectly to your target audience. Some of the most popular SaaS business models for revenue are –
Once we are done with the research, analysis, and have decided the business model, it is time to hire a mobile SaaS app development company for your product. Note that it is beneficial to hire an outsourcing development company in India that has the relevant past experience and expertise in building SaaS products. You can check the top SaaS development companies all over the world here.
The development process includes prototyping, UI/UX designing, backend, and frontend development.
Once the SaaS product is ready, the development team sends it for testing. A QA tests the product and resolves the issues, bugs, and errors in the software. The ideal way is to do automatic as well as manual testing. After testing, the product is deployed and opened for the general public to use.
Even if the product is released in the market, it still requires a maintenance team to ensure a smooth flow. The product might also require frequent updates and the development of additional features as per client requirements.
Building a SaaS app is a complex task and must be done through an experienced & expert web development company. Thus, it is crucial to do your homework well before choosing an agency for your idea. Note that going for the cheapest option is not right always and can result in further untimely delivery and might require more than required efforts from your side.
We, at App Development Agency, introduce our users with the top mobile app development companies globally. The companies are selected after deep analysis and research, keeping in mind several points. Here you can explore the list of top SaaS development companies for your next Software-as-a-Service business model.
So, this was all about SaaS based business models. We have covered almost all the relevant topics related to the Software as a Service industry. The post explores the SaaS based businesses and their working models including its pros, cons, types, important metrics, and more. Note that it is better to build a SaaS app using an outsourcing app development company that has the relevant experience to avoid any issues. Before you hire a SaaS app development company, make sure to do your homework right.
Till then, keep shining…!
The exact time required to build a SaaS app can be estimated after understanding the client requirement. However, it roughly takes 6-12 months to build a SaaS app.
The exact cost to build a SaaS application depends upon your requirements and several other factors. However, an average SaaS based software cost between $30,000 and $60,000.
Below are the three different stages of building a SaaS app –
Once the product is developed and tested, it takes more than 6-12 months to stand in the market and make some revenue. Generally, SaaS based business models become profitable after about 1.5-2 years.
Most of the SaaS businesses earn money through subscriptions model. However, many freemium models (sometimes with ads) are also available in the market that offers additional features at premium price.
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