How to Create a SaaS Business Model That Works

SaaS as a business model appeals to companies and entrepreneurs as it requires a substantially smaller amount of money to reach an MVP. But it’s far from being easy or problem-free.

As a business model, SaaS is relatively new and very different from other business models, even from traditional software companies. 

Traditional software companies need to build a complete infrastructure (multiple redundant networks, data centers, databases, security). Customers pay upfront in order to be able to download their software.

With SaaS, the product (software) is hosted on a cloud, which means there’s no need for an infrastructure that hosts the software. There’s also no need for an end-user license.  Customers subscribe to a SaaS product and pay a monthly fee in order to get access to the software.

What Are the Pros and Cons of SaaS?

SaaS Pros

No need to spend money on infrastructure

SaaS businesses don’t require you to build infrastructure, so you can easily start and run your SaaS business without the need for a substantial initial investment. Building an IT infrastructure is costly, so the fact that you can avoid these expenses is probably the most attractive aspect of the SaaS business model.

Easy to access and use

Clients can access the SaaS software from any Internet-connected device and location. The SaaS software is already configured so customers can start using the SaaS application the moment it is installed.

No scalability or upgradeability obstacles

If your SaaS business grows, you’ll only need to upgrade the hosting service. On the other hand, traditional software companies need to have a plan in order to increase their server capacity.

SaaS Cons

Security issues

The security of your SaaS software is of utmost importance. You need to make sure that all customer information and confidential data is securely stored and backed up. For instance, if you’re taking credit card payments, you’ll need to use a PCI-compliant payment gateway to process the orders. The same goes for project and customer usage data. Use a top-tier hosting service to ensure your SaaS is safe and resilient.

Performance complaints

You might receive complaints related to performance, but these usually come from customers with a slow internet connection of an outdated version of their browser.

Scaling-related expenses

While server capacity is of no issue when it comes to scaling, money certainly is. As your SaaS business grows, you will need to add more developers, designers, sales reps, and other team members, which requires a substantial amount of money. You’ll also need some money for storage and security. All the cash you made in the initial stages will have to be reinvested.

How to create a SaaS business model that works?

If the SaaS business model looks appealing to you too, here are a few important facts you need to be aware of before you start building your product.

1. Be Prepared to Multitask

During the early stages of your SaaS company, you (the founder and CEO) will probably need to take care of a bunch of other stuff, such as sales, marketing, managing leads, creating content, interviewing job candidates, etc.

This means that you won’t have a team to support you (or your team will be very lean), so you’ll need to prioritize your tasks. Even though your main focus will be on acquiring new customers, you should not forget about your existing ones. In addition, you must continue working on your product in order to improve it in accordance with your customers’ needs.

You should definitely expect lots of juggling and multitasking.

2. Customer Relationship is Key

For SaaS businesses, customer relationship is crucial. While for traditional software companies revenue is a one-time activity, the SaaS business model requires a totally different approach. Due to the fact that in SaaS revenue is recurring, you must develop and nurture a relationship with your customers.

Interacting with your customers only during the renewal period isn’t going to get you far. Your customers will most likely leave and it will take you months to recover the customer acquisition cost.

Your revenue depends on renewals, so if existing customers decide not to renew their subscription, the revenue flow will stop and your business model will collapse.

This means that you need to spend some time on every single one of your customers, answering their questions, explaining how your product features work, learn about any problems the product has, etc. This will not only help you secure continual revenue, but it will also give you a chance to solve buggy parts and make any necessary improvements.

No initial product is perfect, but if you approach your customers with optimism and a clear vision, you will easily win them over.

3. Experiment with Different Pricing Models

Pricing is very important because it will affect your short-term and long-term revenue. When you create your pricing model, move away from your own perception and think about your customers. What’s their behavior? What do they value? Communicate with your existing customers to determine why they are willing to pay for your product.

Once the initial stage is over, recurring revenue will become more predictable. Experiment with different pricing models, putting a strong emphasis on yearly plans to reduce early churn and drive in cash. In addition, make sure there’s a balance between revenues and users. For instance, if you’re willing to provide support, don’t offer the freemium model.

4. Invest in Lead Generation

Finding a solid number of early adopters and managing fixed costs is crucial for a successful start of any SaaS business model. Focus on finding creative lead generation strategies that don’t require you to spend tons of money on marketing and advertising. Some of the most effective approaches you can use include offering free trials, email marketing, segmented marketing, guerilla marketing, and affiliate marketing.

5. Track the Performance of Your SaaS Business

When it comes to SaaS, only a small number of metrics matters. These metrics are related to customer retention and revenue generation.

If churn is increasing and revenues are sluggish, your SaaS business model will collapse. Keep an eye on the recurring revenue, try to reduce churn, and cut the customer acquisition costs.

Furthermore, don’t forget to check whether customers engage with your product. If your metrics show that they aren’t using your software regularly, it might not suit their needs. Contact your customers to educate them about how your product works and/or learn how you can improve it to better suit their needs.