Software as a Service (SaaS) is a relatively young business that has been growing at an impressive rate in recent years. The pandemic and the world we live in have given digital technology a boost, and at this point there is little doubt as to whether this business model makes sense. Rather, most companies are wondering how to find themselves in this business and how to make money from it. Today, let’s understand what this area of service is and how to choose the right one among SaaS marketing.
A new era of business monetization
Once upon a time, if a customer wanted to use a certain software, in the classic model he had to buy a software license, he got a nice box with an installation CD and a manual. Later, he had to install this software on his equipment and often use it “until death” or a little less frequently. Of course, at the time of purchase, payment had to be made, which was often a significant expense in the entire investment budget of that company or consumer. And it also happened that there were annual maintenance and renewal fees later on. True, progress is being made, and distribution channels have become more efficient (CDs have been replaced by Internet installation), but the problem of high initial cost and lack of confidence in the quality and necessity of the software purchased has remained. We ourselves feel that this was a fairly heavy model, both capital-intensive and requiring resources from the customer. So something came up that was easy, nice, simple and relatively cheap, i.e. SaaS .
Developing an acronym and translated into Polish, Software as a Service is software as a service . In practice, it means offering customers tools with certain features, as well as technical support and the necessary infrastructure to run the application. Many companies operate on an asset relief model (leasing assets for operations rather than buying them), so to some extent SaaS follows this path.
SaaS – benefits for the customer
From the perspective of the potential customer, this approach has many advantages, the most important of which are listed in the chart below and briefly described below. In my subjective opinion, the most important ones are highlighted in bold, although each business may have different aspects.
The process of implementing this software at the client is usually simple and quick. There is no need to install and run the program on the customer’s computer. This in turn means a simplified process of implementing this solution, which saves time and money.
Next comes the question of service, software updates and technical support. It all depends on the provider of such a solution. The customer is constantly using the latest solution without worrying about upgrades, which in such a model usually happen without the customer being taken over, the servers having to be shut down or the IT department having to work overtime. Sure, there are technical interruptions that can temporarily limit service availability, but that whole area gets out of the customer’s head and responsibilities.
The ability to test the software before making a purchase decision. The customer can usually download a demo version to test it in peace. Companies also often offer a free (usually 7-14 days) trial version, i.e. a free trial period during which the customer can use the fully functional software and at the end of that time make a purchasing decision. This obviously minimizes the risk of a bad decision. The product can not only be smelled before use, but even tasted in peace.
Relatively small and predictable (cyclical) payments are another feature and advantage of SaaS. It is essentially a kind of monthly/quarterly or annual subscription. In the previous model, payments were often associated with high one-time software purchase costs, which was a barrier for some businesses. Here we have recurring payments, which are usually easier to carry, win, and plan for in a given unit’s budget than in the case of buying the software outright. Buying a SaaS service lowers the entry threshold and allows you to use tools that until now have been out of reach for some companies or individual consumers.
Another advantage is the flexibility and ease of opting out of the service if it does not meet the customer’s expectations. In many cases, the customer pays monthly, and if they don’t pay, the service is disconnected. This also makes it possible to use such software for specific projects that last for several months, for example. If you buy the software yourself, the cost will probably be too high, but a few monthly payments – why not?
Scalability of the product as consumer demand grows. If a customer develops and grows, they may need, for example, additional accounts for more employees or a broader service package. All of this can be set up by buying additional workstations/licenses or upgrading to a higher plan. And if he needs to reduce his engagement, it will work and vice versa.
The ability to use the application from anywhere in the world with only a computer with an Internet connection . In fact, we need a login, password and network access and we can even work on someone else’s equipment during the holidays – not recommended. Nowadays, more and more of this software is also available (if necessary) for smartphones, and special applications are being developed.
As you can see, SaaS is quite an attractive model from the customer’s point of view, because it is relatively cheap, quite flexible and does not require involvement of own infrastructure resources.
SaaS – profit for the provider
So, can such a perfect product from the point of view of the recipient also have advantages from the point of view of the company offering such services? The obvious answer is definitely YES. If it were otherwise, would companies offer such a business model and make extra money from it?
First, this business model enables the global reach of the services offered . Most SaaS companies have customers all over the world and have no geographic limitations. This means that finding even a theoretically small product niche can be a good idea if we reach customers from all over the world. In that case the domestic market would probably be too small, but the whole world is a different scale.
Secondly, the distribution process is usually as simple as possible. The software is online, and the process of buying and using it is usually very simple. This translates into low absolute costs and in terms of the number of customers attracted. Companies don’t have to (at least at first) create large sales teams that would simply cost them a fortune, with no assurance that those costs will be recouped in the future. There is no need to travel to the client for several or more days, pay for business trips, transportation costs, and hotels to the team implementing such a service at the client, because there is no such team in fact. The customer installs the software himself, and if he has any problems, there is customer support by phone or more digital channels.
The scalability of the business also has a place on the side of the software companies, and that’s probably the most attractive feature of this business idea from their point of view. We invent and produce software once, and we can sell the same product to many customers at low marginal cost. Much of SaaS software is easy to install and implement, and it’s created by the customer themselves. And here, simplifying things a lot, we can say that every subsequent sale is 100% profit. I’ll show later that it’s not that simple, but for sure the scalability of the business has a very positive impact on profitability.
The companies considered usually have a dispersed customer base . Companies in this segment are not too often dependent on a single customer. The share of the largest ones rarely exceeds a few percent of total revenue. Thus, a situation where one or even a few of the most important customers refuse service will not be as problematic as in companies where this dependence is much higher.
The above-mentioned advantage also relates to the predictability and repeatability of revenue… At first glance, this may seem absurd. After all, customers can often quit as early as the next month, so what predictability are we talking about. However, if we have a reasonable product, the statistics, absent concentration, will allow us to reasonably forecast revenues and earnings in the coming months and quarters. And that means relatively certain cash infusions and easier expense planning. In the classic version (on-premise), customers would sometimes put off implementing a new IT system because of their worst financial or macroeconomic situation. In the case of SaaS, the risk of stopping payment for this reason is lower, because the cost itself is spread out over time and has less significance. In addition, note that in this model, customers who buy a SaaS service often (consciously or sometimes a little less frequently) outsource some of the IT functions. Thus, returning to an in-house solution (if there was one before) should not be easy, and the change should be pleasant and easy from the customer’s point of view. Consequently, if he is satisfied with the service, he will become a loyal customer rather than jumping from flower to flower in search of a few dollars in savings.
No problem with collecting payments thanks to automatic collection systems, such as credit card payments. Of course, such systems need to be built and existing solutions adapted, but if successful, collecting receivables becomes a non-issue. Payments are usually made in advance for the next month, quarter or year. Nor do we need to hire or employ an army of people responsible for collecting receivables, calling customers, and preparing lawsuits. In this model, the costs of debt collection departments are much lower than in other companies, and often approach zero.
SaaS company still retains the copyright, and the product is delivered to the customer without the source code. The risk of piracy is also lower here – copying the software is in principle impossible.