What is a SAAS Business Model?

This is our third installment in a series we’ve been covering on the business models that Crema has experience creating and launching. Be sure to check out our previous posts on the Crema Difference and the Multi-Sided Model, On Demand Marketplaces, and check out our videos as well.

Lets dive into SAAS (Software As A Service). This business model makes up a good portion of the B2B offerings in the tech software market. SAAS also represents some of the longest running businesses online to date.

You’ve likely heard of companies such as Basecamp, Salesforce, Dropbox, Quickbooks, Box, etc, as well as many recent success stories — Slack, Asana, Zenefits, and InVision. All SAAS.

What is SAAS?

A software delivery method in which the product is centrally hosted and maintained, and provided on a subscription basis.

Traditionally, software has been a tool for automation and communication in businesses. Early software solutions required IT management with upfront costs for networks, servers, software engineering, IT security oversight, as well as long term maintenance and upgrades. The solutions were isolated to only what the internal engineering team could provide to the company.

Software solution companies moved this model to offering licensed solutions to businesses. It removed much of the initial development costs, but required the customer to host the solution and manage the operations to keep the software running properly for the company. This was on top of licensing the use of the software. Sales cycles and initial investment in these solutions were — and continue to be — a significant upfront and ongoing cost to the company, especially when their core business is not the software itself.

SAAS changed this model by removing all of this overhead from companies while still offering the same or similar software solution. The software itself is stored offsite in cloud-based environments. Rather than charging a significant licensing fee for access to the technology, the customer pays a recurring subscription fee to access a partitioned version of the software available to their team. Team member access the solution through the a web browser, mobile app or through downloadable desktop software.

The SAAS company is responsible for creating the solution, hosting it, securing it, and managing the daily operations of maintenance, scaling, and support. They are able to take this risk because they offer the solutions to a large market of similar customers and hope for a ROI from the scale in that market.

An Example

A good example of this is Slack. Slack offers a communication platform to companies of all shapes and sizes. Their solution allows any company to create one or more teams and invite users in through email to use the application to communicate through chat channels as a part of their daily routines. Teams at a certain size pay a monthly or yearly fee to continue using the solution in their companies. The customer is able to make a decision, sign up and begin using the software in the span of minutes, rather than installing a solution on-site over the course of weeks or months. They don’t need to buy servers, purchase a software license, provision the network, and deal with bugs, maintenance, feedback, etc.

Slack sells this to freelance teams all the way up to global corporations. They are able to keep their sales overhead low given that the user can on-board themselves. The customer can choose the pricing tier that fits their needs and get started. Plus, Slack does all the training directly inside the app, which means no long training cycle to on-board customer. This model is insanely scalable given that you have a good unique solution solving a desperate need for a ready market.

Key Challenges:

The biggest challenge may be obvious, but its often overlooked when thinking about creating a SAAS business. The risk is on you! The assumption is that you’re going to remove nearly all of the investment from the customer. They will pay you less money up front, but hopefully stick with you alongside all the other customers sign ups for a long time. This ought to give you a steady and growing income over time.

You’ll be the one purchasing hosting solutions. You’ll be the one designing the user experience, You’ll be writing the code. You’ll be testing it, scaling it, securing it, and maintaining it. This upfront investment is completely on you. Not them. Can you on-board enough clients that subscribe at the right recurring price for long enough that you pay back your initial cost of development and ongoing costs of product improvement, support, scale, etc.?

Your runway to profit is not short. So, perhaps the biggest challenge is accurately evaluating whether or not you have the ability to create the right solution for the right market at the right time. Are potential customers able to find your solution, onboard, understand, use, get hooked and then refer others fast enough that you can continue to pay the costs going out?

Crema’s approach to this challenge

Much like many of our other solutions, we work with our clients to focus, stay simple and start lean. It is so important you validate that you’re solving a problem people desperately need solved. Additionally, like any other business, you must offer a unique value proposition that stands out from a very crowded marketplace of SAAS solutions.

We do our homework. We work hard to understand your customer and their problem. We research what your competition is offering. Crema avoids building “me-too” solutions. There is already a project management tool out there that does that, trust us! Our goal is to help you engage your market with a unique value prop at the right price point and with the right amount of functionality that it brings them value, and makes you money.

We use Platforms As a Service (PAAS) to create SAAS solutions. What this means is that instead of solving every feature function of your solution with custom code, we integrate existing vetted and proven services together to create a more lean initial product. We decouple (or separate) functionality of your app to allow us to spin up features quickly or iterate on sections of the app without the overhead cost of managing the entire solution. This includes using services like SendGrid for emails, Twillio for SMS, Stripe for payments, and managed hosting like Heroku or Firebase. Our team is constantly looking for services, libraries or solutions to increase the efficiencies of launching new SAAS products.

Wrapping it all up

The SAAS business model offers a huge value to the market, and can scale quickly given that the market demand is great enough. There are challenges to standing out in a crowded SAAS environment and supporting the upfront investment. Understanding your customer, their pain points and how you might stand apart from their existing solution reduces some of your risks to get started. Start small. Focus on easy on-boarding and education. Reduce your sales and training costs. Don’t build everything from scratch, and don’t build everything. Find existing platforms and services that can be pulled together to create your solution, and keep it simple.

Thanks for checking out our reviews of our top 3 business models that we serve here at Crema. If we can help you launch a Consumer (Multi Sided) experience, On-demand Marketplace, or a SAAS platform, let us know!

Cheers!

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