The SaaS Business Model: 9 Facts Everyone Should Know

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| Last Updated: September 01, 2017 |

Reading time: 6 minutes

As more businesses move towards adopting cloud solutions, it is important to know some facts about SaaS before you build your product. Below are nine facts you should know about SaaS:

1. Maintaining a healthy balance is a must

During the early stages of your SaaS startup, you will often have to wear different hats. For example, you may be in charge of reviewing content for your blog, managing leads, updating lead scoring, interviewing candidates for a job and so on.

As you build your business with a lean team, you have to determine what is important that needs to be done right away and what can wait. Your daily tasks should address the following important goals: build awareness, manage leads, create sales support and build the product.

Even as you focus on getting customers, do not forget to improve your product. Take care of your existing customers even as you prospect for new ones. Always strive to improve your product to align it with the needs of your customers.

2. Set price based on customer behavior and what they value

Growing a SaaS business is slow in the initial stages. However, in the middle age, the business becomes a predictable recurring revenue machine. Don’t be afraid to experiment with yearly plans upfront to drive in cash and reduce early churn. Moreover, strike a balance between users and revenues. If you will be offering support, avoid the freemium model.

Pricing is important as it will affect your short and long-term revenues. Do not price your product based on perceived costs but on customer behavior and what they value. Interact with your paying customers and find out why they are paying for your SaaS product. Are the reasons they signed up the same ones you think? Sometimes, customers may find your service valuable in ways you did not think of.

3. Treat customers like prospects

If you are only interacting minimally with your existing customers e.g. during their renewal period or when you need a reference, you are running your business wrong. You cannot afford to spend lots of money acquiring customers only for them to leave at the back door.

Remember, your revenue is determined by renewals and it can take several months or even years, depending on your Saas, to recover the cost of acquiring new customers. When existing customers don’t renew their subscription, the revenue stream dries up and the business model collapses. This is why you need to pay attention to existing customers.

4. Customer relationship is key

For any SaaS business, customer relationship needs to be at the forefront of operations. In perpetual software licensing business model, the sales team is mainly interested in closing the sale as this is where the final revenue is generated. With the business model, revenue is a one-time action activity.

On the other hand, the SaaS sales process needs a different approach given that revenue is recurring. You have to nurture and develop your relationship with customers to ensure continuity in the recurring revenues.

In the beginning, your app may be incomplete, buggy and difficult to use. However, that is okay for that time. What is important is that you spend time on every single customer. You can communicate with customers and learn about the problems they are dying to solve. Moreover, you can patch up the buggy parts of your product along the way, apologize to customers and provide them a vision of what is to come. Offering support with a smile will help you buy into the hearts and minds of your early customers.

5. SaaS is all about metrics

You can measure different metrics to track the performance of your business. However, for SaaS businesses, only a few metrics really matter. These metrics are related to revenue generation and customer retention.

When revenues are stagnant and churn is increasing, the business will fall no matter how good other metrics are. You should keep track or your recurring revenue, minimize churn and lower the cost of acquiring customers.

Apart from churn, check customer engagement with your product. If customers are not using your app to the maximum, there may be a disconnect between your product and their needs. Educate customers on your product and find out how you can further improve it to better solve their problems.

6. No Infrastructure to worry about

You can easily run and manage your SaaS business without incurring huge costs on deployment infrastructure. Since the applications are deployed in the cloud, they can be accessed from anywhere the customer has an Internet connection. On your part, you do not have to build the underlying infrastructure that will host your SaaS. Leave the infrastructure to IaaS providers. Focus on what you do best and outsource the rest.

There are many IaaS companies that have invested heavily in infrastructure like data centers, multiple redundant networks, databases and security to host and implement robust apps. All these benefits are passed down to you. Some companies like Salesforce, through its Force.com platform, provide ready-made solutions for application development.

Unless you can demonstrate a clear competitive advantage across every stack of the technology you want to build, you should consider outsourcing.

7. Easy Integration with Multiple Apps (API Strategy)

Integration is key for your SaaS app. Make sure you have an open API from the first day. This will make it easy for user to integrate your app with other commercial apps and legacy systems they may already be using. Moreover, third party developers can integrate other apps to your product without incurring huge extra costs.

SaaS customers have different needs and with the many apps in the market, it can be expensive for your team to create customized integration solutions. This is why you should have an open API. Opening up your API will encourage developers to create integration options for their existing customers, which can lead to faster adoption of your product.

8. You should invest in lead Generation

Getting strong early adoption and managing fixed costs are critical to jump-starting the SaaS business model. You have to find innovate ways to generate leads and close sales faster and without spending large sums on traditional advertising and marketing.

Some of the strategies you can use include email marketing, offering “test drives”, segmented marketing, evangelizing customer references and guerilla marketing efforts. All these approaches should be complemented by tracking lead metric closes.

9. Security is paramount

The security of your SaaS application can make or break your business. All customer data should be kept safe. For example, when you are taking credit card payments, you should use a PCI-compliant payment gateway to process orders. Moreover, customer usage and project data should also be securely stored and backed up.

Your data centers and infrastructures should have the latest security upgrades. If you are using an IaaS like Amazon Web Service, you will not have to spend a lot on infrastructure or upgrades.

These are the nine facts that you should know. What else did I miss?

Author of the post

John Solomon

Marketing Leader / Sales Enabler. Head of India Operations for @Infrascale / @sosonlinebackup.

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