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The Basics of the SaaS Business Model

SaaS Business Model

Software as a Service is a booming market in the business industry. SaaS Businesses are known for overnight expansion, high dollar buy-outs, and attainable growth for young up and comers.

Essentially, to start a successful SaaS company, one needs three things: a marketable idea, a team of professionals, and funding. Seems easy enough, right?

Though the premise of that statement is true, some key focuses of the SaaS model make the business different from traditional software companies.

Perhaps you are new to the industry, or you are looking to throw your hat into the ring of SaaS. If so, we have outlined below a few of the basics to help you set your best foot forward.

Understanding SaaS

Software as a Service is a model of business where software is stored and operated through a cloud-based system. Users do not possess a physical product but access the service through a login or membership. These memberships are not a one-time payment upfront but are paid by monthly subscription or through contract period memberships.

The SaaS product is software, but the business’s primary focus is the second “S” in the name: Service. The focus on offering a specific service is what sets this business model apart. There is a service element involved in how customers access the product, interact with the product, and pay for the product.

Aside from being cloud-based, there are a few key elements that are unique to the SaaS Business Model.

Three Key Focuses:

Recurring Revenue

The method of revenue growth in SaaS is one of the most appealing aspects of the business. Software of the past consisted of a customer making a one-time purchase of a disk and then installing software on a desktop. SaaS entails customers continually purchasing access to a service to access the desired software.

This means that with SaaS, revenue is recurring and is therefore growing. Because of this, revenue recognition is calculated using Monthly Recurring Revenue or Annually Recurring Revenue depending on the pricing model that is offered.

SaaS Business owners can count on revenue recurring over time. They can therefore make long-term plans for how much money the business will bring in each year. They can also use this knowledge to make educated decisions for where to invest cash flow in order to expand.

Because the company does not have to focus on convincing customers to purchase again, most of the business focus is spent on keeping current customers satisfied and acquiring new lifetime customers.

Customer Attention

Customer satisfaction is always a concern of any business in any industry. Undoubtedly though, the most unique aspect of SaaS is the attention that is focused on building customer relationships and interactions. Because revenue is earned on a recurring basis, retaining customers is the number one way to ensure that your SaaS business remains profitable.

It is commonly known in the industry that it costs more to acquire new customers than to keep existing customers. Therefore, a successful SaaS company spends the most time and focus on providing a quality user interface, customer experience, and help desks or assistance programs.

Customer Churn is inescapable to some degree. Therefore, SaaS Sales and marketing dollars that focus on new customer acquisition are tailored to the degree of contact the potential customer may receive from a representative.

For instance, low-touch contact such as free or low-cost advertising for a “freemium” plan requires fewer dollars spent per individual. Whereas high touch contact such as dedicated salesmen or representatives that manage enterprise relationships may cost more but acquires a more significant number of sales.

Metrics & Adaptability

SaaS companies spending time and money developing direct relationships with their clients allow for a unique opportunity in business. This is to assess the needs and satisfaction of the clients and make necessary changes in real-time.

The SaaS business model can track many metrics that other businesses cannot track on a monthly scale, such as MRR, efficiency, and churn, among others. This opportunity allows SaaS owners to constantly develop new versions and updates, offer new programs, and work out bugs in systems to provide seamless service.

This adaptability is not only an opportunity but a necessity for SaaS companies because of the competitive nature of the business. In most cases, there are always new competitors looking to poach clients. The key to customer retention is integrating your service into your customers’ lives so that you become essential to their life and business. This involves constantly keeping a listening ear to their concerns and needs while consistently offering top-quality products and services.

Bonus: Endgame

It seems counterintuitive for a startup business or a thriving company to start with the end in mind. Still, in the SaaS industry, it is essential. The exit strategy of your SaaS business should always be a key focus. This will help you to determine where your growth strategies need to be focused throughout the process of building your company.

Because the market of SaaS business is overly saturated, for most, the trend seems to be: never stop adapting or be overtaken. Because of this, there are typically two end goal options that allow for businesses to stay on top: go public or get bought out. Many companies get acquired by large software corporations, while some seek the riskier option of going public.

Though because the world of SaaS is still fairly new, there are no written rules for how things must go. The industry itself is constantly adapting, and companies are inventing new ways to stay on top every day.

It is wise for a new SaaS business owner to have an idea of the direction they are headed in order to form a steady plan for how to get there.

Funding Your SaaS Business Model

There is a key stage for every SaaS business where funding is needed to reach the next growth level or goal. Whether a new startup seeking hypergrowth or an established SaaS business seeking to expand sales or refine a product, RevTek Capital is available for your cash flow needs.

At RevTek Capital, we have an experienced team of professionals familiar with the SaaS Business Model’s key focuses. We desire to partner with you to help your SaaS Business reach your next growth metric.

Schedule an appointment with us today at (480) 332-0399 to begin a conversation about how RevTek Capital can help you.

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