What is SaaS ? Software-as-a-Service

Founders moving to SaaS from on-premise software products or services seem to confound a few differences that make SaaS distinct from traditional software sales.

The most basic difference between the two is that in a traditional sale it is a transfer of ownership, whereas in SaaS it is like renting. But since software is an experiential good, this distinction is not easy to internalise.

Personally, I would break down the modern SaaS movement into three distinct parts, with one of the three being most important for me to call it SaaS.

Deployment: How Products Are Distributed and Deployed

Today, software products can be deployed on-cloud, on-premise, on mobile or on the desktop. Historically, on-premise deployments were harder since they were on bare-metal. However, today with containers, hosting on-premise is not substantially different from hosting on-cloud. This allows deployments for BFSI customers who have regulatory requirements to keep data on-premise for instance. The initial deployment may be self-serve or with personalised on-boarding.

Marketing and Sales: How Software Is Bought and Sold

For some, Buyer-driven purchasing, i.e., marketing-led is deemed necessary to be called SaaS. However, Enterprise SaaS is in many cases still outbound, sales heavy, and with very little marketing. This is same in the case of vertical enterprise SaaS, where there are few customers, complex solution sales with many internal stakeholders, and ticket sizes of $250K+ annually. The buyer-driven model works well when there is only one decision-maker and stakeholder in the customer-org.

Is Self-Service A Requisite To Be SaaS?

If you’re selling sub-$1K ACV, then self-service is mandatory. $5K-10K ACV gives enough margin for personalised customer success. Above $10K ACV personalised customer success and on-boarding are critical to get high retention and up-sell. Above $100K ACV pre-sales, integrations, on-boarding, and customer success are all essential for SaaS success.

Is inbound lead-gen a requisite for SaaS? If you’re at an ACV of sub-$1K, outbound is expensive and inbound dominates. If you’re at an ACV of $10+K, then outbound becomes a critical piece of the puzzle.

Pricing Model: How Is Software Paid For

A key aspect of a subscription product is the monthly or annual recurring pricing model that scales with customer usage or value. To top it off, there may be recurring charges for services (support, consulting, optimisation), and one-off charges as well (integrations, onboarding, training).

How do you build a flywheel? The key Is being able to go round & round, faster and faster!

In my opinion, the key to becoming a SaaS business is to provide a software product with recurring subscription billing that scales with the customer value delivered. It may be multi-tenant on-cloud, or a mobile app, a desktop download, or on-premise. It may be a marketing-led buyer-driven process with an Annual Contract Value (ACV) of $10, or an outbound complex sale with multiple decision-makers and an ACV in millions.

On the flip-side, if your billing is NOT recurring, then it’s NOT SaaS. If your billing is 20% recurring, then you’re selling licenses with an AMC. If your 1st year billing is 60% recurring subscription and 40% one-time, I hope you’re selling to the enterprise at an ACV of $100K+.

With recurring billing and negative revenue churn, a SaaS business starts each year with MORE revenue than it ended with. In comparison a traditional software sales business starts each quarter with ZERO revenue (or in practice 15-20% AMCs from the previous year).

This compounding effect builds into a flywheel — storing more and more energy, very hard to start, but once you cross $1Mn ARR getting more and more momentum, and getting harder and harder to stop.

The strongest flywheels today — SalesForce, Twilio, Shopify, are not only at very high revenues, they are growing even bigger faster!

Next time you have to ask the question - “What makes it SaaS?”

Ask if there is a recurring revenue model.

Ask if you’re building a flywheel!

This story is published in The Startup, Medium’s largest entrepreneurship publication followed by +434,678 people.

Subscribe to receive our top stories here.