In this article, we will go into the heart of the issue by starting with the SaaS definition and then exploring the vantage points and pitfalls of this model.
The article will be helpful for both the entrepreneurs who want to order software development based on SaaS and those who plan to provide own SaaS services.
Software Delivery by the SaaS Model
To define the peculiarities of the SaaS model, first, we need to understand what this term means and what are its main peculiarities.
What is SaaS?
SaaS (or ‘Software as a Service’) is a business model that suggests offering web-based software products as subscription services. In contrast with the traditional software, clients can use the delivered apps without spending time on its prior installation and setup.
The main feature of SaaS is recurrent payments, or regular payments for software usage. To use the product, customers can purchase access to it for a regular subscription fee on, say, a monthly basis (or semi-annual or annual subscriptions).
Clients don't need to purchase a software license and then make contributions in the provided service. SaaS vendors include license and service support in the final cost.
The cost of attracting a client is quite high and might pay off only after several payments. Perhaps, this is the main difference between SaaS and traditional software products that require one-time payments.
SaaS brings advanced solutions to various domains ranging from food delivery and traveling to the automotive industry and business planning sector.
In SaaS, the most part of software delivery agreements explicitly suggests that a customer owns the provided data. More to it, many providers allow exporting and reserving information at any time convenient. If a company that offers SaaS services insists on the transfer of rights in the data, it's not recommended partnering with it.
Typically, the companies that provide SaaS services make advance payments for hosting providers that store client information. Thus, in case of any force majeure (for example, the provider shut down), clients won’t lose access to their data.
Such scenario is provided in the appropriate service delivery agreement. This document guarantees that a client will get the data back in the agreed format.
As we said earlier, mainly small and medium-sized companies adopt SaaS to their business models. Large enterprises operating in niche sectors are more likely to use office-administrated systems. Still, the examples of Aston Martin and TripAdvisor prove that business giants can implement SaaS as well.
To get a better idea of what SaaS is, let’s explore two examples: CRM (Custom Relationship Management) and HRM (Human Resource Management) systems. The former ones serve to optimize work with clients. Since their functionality and interface don’t require customization, they can be implemented as a program or service.
A good example of CRM-SaaS is the Salesforce.com platform. This is the world leader in the CRM-SaaS market. The research conducted by the IDC Worldwide Semiannual Tracker company in 2017 proves that Salesforce has indisputable advantages over such giants as Oracle and SAP.
HRM-SaaS, in turn, is the complex of activities focused on staff selection. They are more difficult to develop than CRM since they require more flexible settings (given local legislation). Among the examples, one may highlight SuccessFactors HCM, SuccessFactors, and others.
Having done with the introductory part, we will now explore the main peculiarities of this model. We will look at the issue from both sides: from its strengths and from its weaknesses.
Software on Demand: Pros
First, recurring payments mean stable income for business owners, which is why the model seems attractive to many businesses. Of course, only loyal customers will pay recurrently.
For clients, SaaS is profitable primarily for its low cost of ownership. They pay only for the service itself, no development and hardware costs required. No payrolls either.
Another advantage of the SaaS applications is the possibility of almost instant adoption (in contrast with the traditional ‘packaged’ software). The provided real-time services are located in cloud storage.
In fact, all that users need here is a web browser and a stable internet connection. By connecting to the appropriate cloud storage and set up their personal accounts.
Many SaaS developers need to prove that their data centers are secured according to the SAS70 Type II standard. The standard itself ensures maximum protection from any external invasion and access to physical information carriers by biometrical data. Data centers are safeguarded 24/7, equipped with backup power, and additional network access channels.
Finally, clients can use on-demand software remotely without any reference to a particular workspace or platform. Rather, these business applications are equally accessible on a PC, tablet, or a smartphone.
Besides benefits, the SaaS model has its challenges. To get a full picture, we will explore the major ones.
On-demand Apps: Cons
The main task (and, perhaps, the main challenge) for any SaaS service provider is to retain customers. Since the revenue from each user is distributed over time, the provider can profit from the venture only after a certain number of repeat client payments.
In addition, the provider will arguably have to reinvest the gained profits into further business development and scaling.
Another weakness is the lack of flexibility. Alas, traditional software is now more flexible than cloud solutions. However, development companies readily distribute human resources to overcome this obstacle.
Perhaps, the main drawback of SaaS is the dependency on the internet connection. Still, some developers already added the possibility to work offline. Working in the offline mode, the data gets synchronized upon connection.
Traditionally, the business that works on the SaaS model should inevitably go through the following development stages:
- Launch – product development, market entry, and first clients.
- Intensive growth – if the product is in demand, the business starts growing rapidly along with the number of clients. But there is another side of the coin: one needs to invest additional funds (sometimes all gained profits) in marketing, accounting, technical support, etc.
- Moderate growth (stabilization) – the business grows at a moderate pace so business owners can forecast profit margins.
As a rule, the most challenging is the second stage. If the product doesn’t meet the expectations, the users will simply unsubscribe. Thus, marketing costs won’t pay off.
Finally, SaaS cloud computing services are rather complex and require special skills in the field of programming and UI design. If you don’t have them, you will need to find a qualified specialist.
Bottom Line: A Tip for Business Owners
Since monetization in SaaS is built upon regular payments, the customer lifetime value (LTV) is of primary importance here. This indicator stands for the profit margin from one customer throughout the time.
That is, before purchasing the SaaS business or opting for the SaaS business model, calculate LTV. This will allow you to assess the cost-effectiveness of the venture along with its market value.
Whereas previously companies adjusted their business models to software, now they can customize the user interface, choose how to present data, and ask developers to add or eliminate certain features. All to provide competitive services. SaaS ensures these opportunities.