So let’s start with an easy definition of SaaS (Software-as-a-Service) by our friends at Salesforce.com
“SaaS is a way of delivering applications over the Internet”
Let’s be clear here: SaaS is a distribution model for technology.
Let’s define now what MRR (Month Recurring Revenue) or better yet, what Recurring Revenue actually is: “The portion of a company’s revenue that is highly likely to continue in the future. This is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty.” (def by Investopedia)
Now let’s go to what makes me write this post. A Slack conversation between founders.
“SaaS model doesn't have to mean cloud based, main idea is get subscription pricing and MRR”
You can see how these two concepts have been melted together as if they were one.
This is not a mistake that I have seen for the first time. Due to the fact that most SaaS companies have now a business model of MRR, people associate both as linked together.
But there is a big difference.
As I mentioned in the next text there is a difference between SaaS and RR (or MRR). One is a model for distributing technology and the other one is a monetization strategy.
Why is it important to distinguish the difference between both concepts?
Because not every SaaS model has an RR model (and vice versa).
I’m going to explain four ways technology could adapt or define a business model and its monetization strategy (there are actually more but we will simplify).
1-Technology -as a unit- sold for a fix price (Microsoft model): You buy a package of software and you install it. You pay up front and if there is a new release of the software you will buy a new package.
2-Technology -as a unit- paid by month in a year (or more): this is more commonly called a license (similar to lease). You buy a package of software you install and you pay $X amount a month. If there is a new release of the software you will buy a new package.
3-SaaS (software as a service) paid on a fixed price: An example could be the use of a platform where even if the software obtains an upgrade, you benefit from it without paying extra. The most clear example would be the software inside the Tesla. You paid once for the car, but the software updates every several months and you are not charged for it.
4-SaaS (technology as a service) paid on a monthly/annual base (RR): This is the model that is currently the most common. You get the software that updates regularly and can be modified to the need of the customer* and you pay a monthly fee while you still use it.
So let’s go deeper into number four, as it’s creating this confusion.
Why can you charge a monthly fee for a Software as a Service? Or on the other side, why should you pay a monthly fee for a Software as a Service?
So SaaS has two main components to understand:
A Static component: the software that works as the structure (skeleton) of your product. This is usually the same for every customer and won’t need any change. This is what creates scale in SaaS.
And a Variable component: the part of your software in your product that needs to be customized and be adapted to the needs of each customer (also sometimes known as “features-asked-by-client”)
Why is there a reason or need to adapt the technology? Why can't we just create one piece of software and sell it thousands of times. Well you can but someone will come and make a better product and wipe you out.
There is a need for …
Flexibility and Adaptation*:
Technology is not static. The need of our customers (and their users) is not static. Our clients will need to adapt to the new trends of the users (fashion, design, UI/UX, media,etc) and we will need to adapt with them.
SaaS variable component lets you adapt to the needs of your customers and at the same time scale to thousands of them due that the structure or base component is maintained fairly static (this is a big generalization).
So the business model where the revenue is generated on a monthly basis is actually the adaptation of the monetization strategy to the characteristics of the technology.
The monthly revenue pays in part for the base component as if it was the lease for fix-software and in part for the variable component that adapts to the customer when needed. The advantage of this model compared to the others mentioned before is that it benefits the customer with the flexibility of being able to adapt to changes (or needs) and it benefits the company with a predictable, stable and certain revenue.
So, to summarize :
1- SaaS is a distribution model for technology
2-Recurring Revenue is “the portion of a company’s revenue that is highly likely to continue in the future”
3-Not every SaaS model has a RR model (and vice versa).
4-SaaS has usually a base component and a variable component.
5-The SaaS-MRR model benefits the customer and the company.
A perfect example of two business monetization strategies combined in the same SaaS model is the one I proposed for Mattermark. You can read more about it here on “Mattermark for everyone”.
PS: If you got this far and liked the post please do three things: share it with a friend, hit the recommend button and tell me on twitter @JDcarlu or by mail jdcarluccio [at] gmail.com what you think. Thanks! ☺
