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With lower overhead costs, a simplified sales process, more efficient operations and shockingly high multiples when you sell the company, it’s hard to beat the SaaS business model.
SaaS, or Software as a Service, is a part of almost everyone’s lives today. Salesforce, Shopify and QuickBooks are all examples of these tools. So are Microsoft Office, Adobe Creative Suite and Hootsuite.
SaaS flips the traditional software business model upside down by basically renting access to the software instead of charging a one-time cost.
Initially, customers hated this.
I was one of them.
But opinions have changed because it offers numerous benefits to users.
Related article: Building Success: Insights from 7 leading SaaS companies
The most significant is that it eliminates the often high upfront price tag that some software used to have. For example, I remember when the software now known as Adobe Creative Cloud used to cost over $2,400 and you’d have to shell out another $1,000+ each time you upgraded to a newer version.
As a result, users tend to upgrade less frequently. This meant fewer features and more security vulnerabilities.
It also meant less revenue for Adobe.
Today, the entire Adobe Creative Cloud can be purchased for just over $600 per year and users get more frequent upgrades—sometimes daily. This means more features and better security for users.
For owners, the SaaS model reduces or eliminates the revenue roller coaster. That’s because instead of infrequent larger transactions, you’re now receiving smaller, but more frequent transactions. This makes revenue far more predictable. And since the monthly cost is lower, you retain more customers for a longer period of time. It’s also easier to scale a SaaS company compared to a product or service-based company.
But SaaS isn’t just any software you access online. The key differentiator is that it is a one-sided subscription model. Josh DeShong, who runs the real estate investing software platform, Trelly, explains, “In a SaaS model, customers pay a subscription fee. That might be a flat price, or one based on usage. In return, they receive a particular set of services. The difference is subtle but important.
“In other software models, like eBay, Amazon and my company, Trelly, which are based on a double-sided marketplace where buyers and sellers come together, it’s more difficult to predict growth and revenue. That’s because you have to first convert prospects into customers. Then you have to get them to engage in transactions between each other in order for you to generate revenue because your revenue is based on fees from those transactions.
“But with a SaaS model, your marketing efforts are more direct. You simply drive potential customers to your website and get them to sign up.”
SaaS relies on being data-driven organizations, rather than thinking from the gut with intuition. Amazingly, 73% of data within organizations is never even analyzed. Running as a data-driven organization can improve how predictable and disciplined your decision-making and revenue can become. There are some downsides to a SaaS business model though.
Related article: A Quick Checklist for Building SaaS Businesses
The first is that software development is no picnic. You’ll need to be able to program the software yourself or hire developers. If you hire developers in the US, be prepared to pay a premium. You can save some money by hiring overseas, but you’ll have to deal with language barriers and time zone differences. As someone who works with hundreds of overseas developers, I can tell you this is no easy task.
There’s always a trade-off.
The key to building a successful SaaS company is to find a need that’s not being met in the market and serve that need well.
This is exactly what the event streaming platform, ViewStub, did.
The platform existed prior to the pandemic in a slightly different form. But when the co-founders, Spencer Elliott and Patrick VanDusen, realized that entertainers, entrepreneurs and non-profits were struggling because they could no longer host the in-person events their organizations depended on, they stepped in to provide a virtual option.
Spencer Elliott explains, “Our team comes from the events industry, so we knew exactly what was missing. This helped us to avoid one of the most common mistakes in building a SaaS company. Often, founders build what they want. As a result, they end up adding features customers don’t want. Even worse, they end up overlooking the features customers do want.
The key to building a successful SaaS company is to first, truly understand the market you serve, and second, to start with a minimal viable product, or MVPand then add features based on customer feedback.”
He says this is essential to getting the right product to the market, developing traction quickly and saving time, manpower and money on development.
There’s another critical detail most people overlook at first when building a SaaS company, and that’s cyber security.
As we put an increasing amount of data online, as is the case with every single SaaS company, we unintentionally invite hackers and other cybercriminals into our world.
It’s bad enough that they can get into your platform and potentially get away with hundreds or even thousands of peoples’ credit card information. But if you host other sensitive data, such as social security numbers or medical information, the impact can be even more disastrous.
So it’s critical that you have a solid security plan in place.
But most developers simply don’t have the background to handle this.
Rick Jordan, the founder of the cyber security firm, ReachOut Technology, says, “While there is a lot of overlap between programming and hacking, the mindsets that drive each are vastly different. So it’s important to consult with a cyber security firm from the start of the project.
These experts should be a part of your planning process to ensure you build a secure foundation, and then conduct penetration testing throughout the development process. It’s also important that they continue to monitor your platform—both server and software, to ensure you are protected from new and evolving vulnerabilities. If you fail to do this, you could face a PR crisis as well as severe legal and financial liabilities.”
It’s easy to see how SaaS can be a powerful business model. I also think it’s equally easy to see that it’s nowhere near as simple as some make it out to be. But with a solid concept, proper planning and a structured approach to the evolution of your platform, you can build a highly profitable and rapidly scalable business.