Inside the SaaS Business Model: The subscription-based service business model is growing fast. SaaS was a $227.8 billion industry in 2019 and is expected to grow as much as 17% in 2020 to total $266.4 billion, according to Gartner.
SaaS is attractive for customers because they only need to pay a small monthly fee or annual membership fee for full access to a cloud-hosted service. For SaaS businesses, the subscription model means that subscription fees are a main source of revenue. This makes customer retention crucial.
If one customer decides not to renew, the SaaS provider doesn’t just miss out on one monthly or annual fee. Instead, the SaaS company loses out on all the future revenue that they would have received from that one user. If large groups of new or previous customers regularly decide that they don’t find enough value in a service to continue paying for it, the churn can kill a SaaS business.
The SaaS business model prepares companies to properly launch their businesses, to be ready for rapid growth, and to stabilize after both. Here’s the basic SaaS business model and how you can follow it.
Inside the SaaS Business Model: Build a solid foundation.
Develop your product and a comprehensive plan for its launch. Launching a product that you’ve poured endless hours into can feel like reaching the finish line, and if you haven’t properly prepared your business for the launch and sales of your product, it will be. In addition to having a well-developed product, having a plan in place to communicate with prospective customers about the problem that your product uniquely solves is crucial.
Know your target market. Your product will not be all things to all people, nor should it be. Your target audience is the group of people that you think are most likely to buy your product or service, and you should get to know them well. Start by identifying who you think will buy your product and what value your product will provide to them. Keep in mind that you can continue to tweak your target market as you learn more about your customers.
Develop a long-term growth strategy. Marketing and sales are more than buzzwords, and you need to have systems in place for both to grow a successful business. For example, do you want to offer a lower-cost base service and then market an upgraded service? Will you use content marketing to drive potential users to your website? Along with key strategies, you should identify key metrics with which you will measure success.
Think about retention. Because SaaS companies sell solutions to customers without customization for every customer like traditional software, SaaS needs to solve a specific problem and users need to understand what that is. This requires that you not only communicate the value of your product in marketing, but also help users to understand it in their application of the SaaS. Having customer service team members that are interested in learning about user experiences and helping customers to succeed will be crucial later on.
Inside the SaaS Business Model: Be prepared for growth.
Have infrastructure ready to meet demand. If you introduce your product to the market after sufficient preparation, you should experience a surge of growth. When this happens, you don’t only want to be ready to onboard new customers, but more importantly, to develop a customer base that is loyal to your service. Not only will you need people and resources to answer customer questions, you’ll also need to be ready to expand your IT infrastructure, for example.
Keep learning from new customers. New customers are new opportunities to learn about the value that your product provides that makes different types of customers willing to pay for it. As your customer base grows, you should increasingly segment customers according to how they use and what they value about your service.
Use revenue wisely. When a wave of money starts to land, be sure to use it to prepare your business for its next phase by resolving any inefficiencies in your product. Remember that onboarding new customers will not define your success but keeping them over time will.
Inside the SaaS Business Model: Stabilize your model.
Build in smooth running automations. As revenue grows, continuously reinvest a portion of it into improving and streamlining your product and services.
Deliver product updates and upgrades. Use every opportunity to update customers about free updates to the products that they currently have and paid upgrades that they should consider.
Keep the customer first. Putting the customer first means continuously learning from the customer. After all, your company’s ability to keep subscription revenue flowing is what will determine its success
The SaaS business model requires the patience it takes to build a strong foundation, the forethought to be ready for growth, and the commitment to continuously improving your product and service once it has launched.
There is not a finish line, but rather a cycle in which your service can become increasingly integral or irrelevant to your customers. The more integral your service becomes, the greater your success will be.