Software as a Service is something that has changed how people consume software forever. Companies that adopt the SaaS model require their clients to pay a monthly fee to access this software. Instead of end-user license and infrastructure to run the software, businesses with SaaS models offer memberships. SaaS businesses thus thrive on recurring membership revenue. McKinsey estimated that the Software-as-a-Service (SaaS) market would grow by 20% annually to reach $200 billion in value by 2024. Projected for terrific growth soon, the SaaS model features a business that hosts a piece of software on a cloud infrastructure to be operated through a web browser. SaaS business models provide an attractive recluse for business clients that shy away from investing massive capital in creating an IT infrastructure. With just a small membership fee, opting for a SaaS solution enables users to omit the risk involved in using a software service.
When a software business sets actions afloat, programs a viable product, and launches it to the market, the initial phase is labeled as the startup phase. In this phase, companies also try to acquire the first few customers for their SaaS business.
SaaS products provide backends for their clients in return for the membership they charge. In the case of an affirmative response from the target market segment, the SaaS business will require scale quickly. However, the scaling is a cost-intensive routine requiring expansion in data, bandwidth, and all sorts of technicalities to support the newly acquired customers.
In this particular stage, a SaaS business has leveled out, profiteering healthily acquiring new customers at a rapid rate. Such a company would have a well-defined target audience and a reliable product with constant timely updates. This stage of stability is where a SaaS business can review its pricing strategies for optimal profitability.
For a product as intangible as software, distribution was and is the fundamental challenge. Printing boxes, acquiring shelf space, and burning disks are stringent objectives for growing software businesses with limited resources.
What began as a novel business model, Shareware, is today a default route that software businesses take. Through decades, technology and tweaks to former business models of software companies contributed to making the SaaS models of today.
With the advent of application platforms, the software could be easily shared in their entirety in a few clicks without any installs or shareware payments. All these evolved the basic structure of software from the ones that ran on single machines to the kinds that ran everywhere. This led to software sharing being the on-trend thing to do, redefining the way it was distributed. Best software businesses today demand that their clients share them. These companies firmly believe that spike in the number of their software users is better for their business, even if not everyone pays for it. Talking of plagiarism, premium business software can not be pirated in today’s day and age.
There were times when software users would just copy software if they liked it and that is what brought about the open-source movement. However, commercial software businesses were adamant about presenting a better solution. Software business concluded that if they offer it for free or as an inexpensive solution, it is feasible for users to pay for it rather than copy it. However, the lack of digital payment systems made it difficult for businesses to charge for the software they produced. While sharing a software helped build its reputation, offering subscription plans is what fetched money home.
Conclusively, SaaS models neither charge users from the very beginning, nor do they lock them in. They keep a user paying and help discover new use-cases for their products too.
Zendesk offers software to help businesses create an impactful customer service solution. With constant innovations in the business world, there can be a new ticketing software with the potential to blow Zendesk out. Still, because Zendesk is integral to the success and process that its clients like to follow, they are unlikely to change everything for a new solution. Such is the unparalleled beauty of SaaS business models; they build insane loyalty among your client base towards your product. This loyalty is usually long-lasting and contributes healthily towards burgeoning recurring income of the SaaS business.
Another example of a SaaS business would be Salesforce. The company has helped numerous companies manage their sales teams, nurture their prospects, and effectively follow up with their best potential clients. Salesforce membership costs range between $25 per user, per month to $300 per user, per month. Every customer of the SaaS business only rents out the software every month, instead of making a one-time purchase. The SaaS business earns profit in the form of a recurring revenue stream, which is one of the most significant benefits of running a SaaS business model.
1.) Flat Rate Pricing
Touted as the simplest way to sell a SaaS solution, flat rate pricing means offering a single product with a unique set of features at a single price. It resembles a software-licensing model but is billed monthly. SaaS business models with flat-rate pricing are more comfortable to communicate, thus sell.
2.) Pay As You Go Pricing
The Pay As You Go model or usage-based model of software service pricing links the cost of a SaaS product to the software usage. It is a popular model for infrastructure- and platform-related software companies. Clients are often charged based on the number of API requests, no transactions they process, or gigabytes of data they use. Clients like this model because it represents a fair game, where price scales with usage. The absence of high up-front costs attracts more clients who deem it as a risk-free investment. The model efficiently accounts for massive user costs with fixed price packages.
3.) Tiered Pricing
Flat rate and usage-based pricing is the default SaaS model pricing strategy used by most companies. With multiple packages, different combinations of features at various price points, tired pricing entice users with diverse personas. They maximize the revenue generated from different types of customers, with distinct opportunities to upsell.
4.) Per-User Pricing
The per-user pricing model is the most popular pricing model due to its simplicity. Here a single user is expected to pay a fixed monthly price. The model is easy for customers to understand as well as comfortable for SaaS startups to manage. Here the revenue scales directly alongside SaaS adoption, and it guarantees predictable revenue generation.
5.) Freemium Pricing
This particular pricing model features a free-to-use product that gets supplemented with additional paid packages. Users are offered an entry-level tier limited across precise dimensions for free to encourage them to upgrade at a certain level of usage. The freemium model entices customers to get started with a novel product.
Sony’s Imaging and Sensing division recently announced that it would sell its proprietary AI-embedded cameras through a SaaS model, to capture more value. The AI-embedded cameras are first of their kind and can handle light machine learning tasks like identifying and categorizing objects in real-time.
Taking cognizance of the fact that image sensors will be key devices in times to come, Sony believes that it can capture way more value through the SaaS business model instead of selling these AI cameras as old-school hardware. The company would like to encash on the AI-era onset, leveraging it as an opportunity to transition its operations into a higher-margin segment. Being a top global supplier of imaging equipment for smartphones, Sony deals with a limited number of buyers that each uses considerable leverage to negotiate for lower prices. The new avatar of a ‘full-stack provider’ for imaging and sensing solutions that Sony aspires to take will enable it to obtain high margins through direct sales to enterprise clients.
In hindsight, the transition into this new SaaS model of business would not be a cakewalk for Sony, especially since it targets a market that profits from integrations into a broader software ecosystem. Sony’s clients may want imaging data to integrate right into the dashboards for optimal operation monitoring at the facility.
Instant success and popularity of SaaS business models in the software realm, is due to multiple factors that work in their favor as well as their client’s.
These models omit the need for the client to buy any hardware. Moreover, small recurring membership payments for renting out the software are easier on the client’s pockets than lump-sum one time costs of the software ownership. For SaaS businesses, customer retention is of extreme value, and the focus remains on cultivating customer relationships and upselling. For this, SaaS businesses need to provide smaller and more frequent updates to gain a competitive edge in the market.
The vivid range of applications in SaaS is merely limitless. A transition in the means of fundraising fast diversifying, the time is ripe for joining the SaaS bandwagon. With fundamental adherence to using statistics and the right tools and solutions, every SaaS business can succeed.