SaaS Business Model in Simple Terms

The SaaS, or Software-as-a-Service, the industry has been experiencing tremendous growth ever since it first took the Internet by storm around 2005. Just look at how well SaaS companies like Zoom and Salesforce have been doing since their inception – and how they show no signs of slowing down.

It’s clear that the SaaS business model used by these companies is working for them, but what is it about this model that works so well? There is, of course, a long and complicated answer to this question, but who has time for that? Let’s take a quick look at the SaaS business model in simple terms.

What is the SaaS Business Model?

Essentially, the Software-as-a-Service business model allows customers to access and use cloud-based, centrally hosted SaaS software through a subscription service. The company is responsible for everything that allows customers to use their software, from the database to the servers to any other software that may be necessary.

The main thing that distinguishes SaaS companies from other software companies is that their product is hosted in the cloud. All the user needs to do is sign up for a subscription package and log into their account via a web browser, and they should have full access to the software.

What is Unique about the SaaS Business Model?

The SaaS business model is unique in a few different ways, as it’s centered around recurring payments, customer retention, and data-driven decision-making. Let’s examine each of these in turn.

Recurring Payments

Most software companies require customers to pay a one-time fee to download and use their products, but SaaS businesses are dependent on their subscribers. They don’t have to worry about selling their product to customers just once, but every single month or year.

This can be a good thing and a bad thing. It’s good in that they may be able to collect money from the same customers for years, but it’s bad in that people could suddenly up and cancel in droves if they’re not delivering on the service. Therefore, recurring payments are an important consideration in the SaaS business model.

An Emphasis on Customer Retention

Since this is a subscription-based service, it’s essential that SaaS businesses focus their energy on keeping their customers happy so that they’ll continue to use their products. Once someone cancels their subscription, the company can no longer count on them as a source of revenue.

This is perhaps why SaaS companies tend to be known for their top-notch customer service. They know how important cultivating good customer relationships is to their bottom line.

Data-Driven Decision-Making

It’s important for all companies to keep a close eye on their metrics and KPIs to get an idea of how their business is performing, but they can only get so much information from one-off purchases. What makes SaaS businesses unique is that they can watch their customers’ behaviour even more closely due to the subscription-based model.

If a customer is logging on a regular basis, SaaS businesses can track how often they’re using their product, how much they’re spending, and how these trends change over time, which lets them know whether their business is on the right track. And, if they happen to notice that something is off, they can respond to it before it becomes a bigger issue.