What Is Software as a Service (SaaS)?

Software-as-a-service (SaaS) is a cloud-based, on-demand software delivery model that has permanently changed the global tech space. SaaS is rapidly growing, and as an industry, is expected to reach a market volume of $344 billion by 2027. Cloud computing startups are seeing unprecedented growth, and the future is bright.

As a business model, SaaS has proven tremendously successful. Customers get the software they need optimized to their individual needs, providing a superior user experience when compared to on-premises software options. Upgrades to SaaS software happen in real-time, so there’s very little interruption to customer workflows.

Onboarding is simple and doesn’t require extensive training by the software provider. SaaS apps tend to be user-friendly with intuitive interfaces designed to streamline workflows. There are countless benefits of SaaS, and we’ll get into that in more detail later on. For now, let’s start with how software-as-a-service works.

How Does SaaS Work?

With a SaaS product, a customer only needs an internet connection and a web browser to access their business applications. Plenty of SaaS companies are now – and have been for years – integrated across dozens of industries. You’ve seen SaaS in action in places like Salesforce, a multi-billion-dollar SaaS CRM (customer relationship management) that has made its way to the top 100 companies worldwide.

Most SaaS companies offer their products on a subscription basis. Customers can take advantage of the fact that the software vendor is responsible for hosting, maintaining, upgrading, and managing their apps.

Key Features of SaaS

To understand SaaS, it helps to have an idea of what a SaaS architecture looks like. The concept is simple: it’s how the SaaS vendor gets their product to their customer. This is done online using a series of codes and databases that deliver the app over an off-site server at a data center, which is maintained by the SaaS company.

Many of the SaaS companies you’re likely already familiar with use what is known as a multi-tenant architecture, which allows the cloud service provider to minimize the resources needed to deliver a product to multiple clients. The software host’s servers only need to run one instance of the app, creating an efficient system for managing and maintaining it.

Advantages of SaaS

You want to start a SaaS company, but you’re not entirely sold on the model. That’s okay. Let’s look at some of the biggest advantages of software-as-a-service.

Onboarding is a Breeze

One of the best benefits of SaaS is how easily customers can onboard. It’s as simple as starting a subscription, navigating to the right website, and diving in. These software applications are designed to be user friendly, so there is little training required to use them.

Subscription-Based Pricing

With subscription-based models, there are no annoying software licenses for customers to worry about. Access to the software they need is guaranteed by the payment of the monthly or annual subscription cost. It takes all the guesswork out of the delivery – and use – of the app. There also aren’t typically any upfront costs for the customer with SaaS products. Traditional software has fees for purchasing the initial licenses and training, at minimum.

Upgrades are Automatic

Your customers don’t have to wait around for time-consuming upgrades. These happen in real time, are handled remotely, and don’t usually impact the customer or their access to their apps.

Accessibility

If you have a web browser and an internet connection, you can access SaaS apps. Whether a user prefers using desktop computers, laptops, smartphones, or tablets, there is an optimized version of the app available for their use at any time, day or night.

Scalability

SaaS founders often gravitate toward the model because of its scalability. Customer acquisition and retention strategies, from initial marketing to upsells and cross sells, play a big part in the scalability of your business. With the right application development team, human resources experts, and effective growth strategies, you can expect to grow your SaaS business.

Customization

A product that can be customized based on the customer’s needs is a product that sells itself. Through subscription tiers that offer individualized packages for each customer or the ability to integrate with other apps, customization options give your customer the solution they came for.

Data Protection

Cloud-based services have the advantage of storing data online versus on a local disk that can easily be compromised. No matter what happens to the physical equipment used to access your SaaS product, your clients can rest assured that their data is protected in the cloud.

SaaS vs. Traditional Software Models

As I’ve covered, traditional software comes with barriers that SaaS eliminates. Where traditional software requires the customer to provide some of the necessary framework for the software, SaaS takes care of it all at the vendor level.

There are a couple of other cloud-based delivery models that are similar to SaaS, but have qualities that make them unique. SaaS, PaaS, IaaS…each of these offer varying amounts of support to the customer depending on their needs and goals. PaaS (platform-as-a-service) and IaaS (infrastructure-as-a-service) offer cloud-based solutions with a different set of resources than SaaS.

Common Use Cases and Examples of SaaS

Now that you’re familiar with the concept of SaaS, we can look at some real-world examples of SaaS that will help facilitate a holistic understanding of the model. Keep in mind that these are real companies whose SaaS applications are currently used by businesses and individuals across the globe.

• Microsoft Dynamics 365: An enterprise resource planning (ERP) software released in 2016 which is used by businesses to streamline processes and improve workflows
• Salesforce: A CRM dating back to 1999 designed to simplify sales and marketing operations and assist customer service teams with tracking and managing their client base
• Netflix: A global streaming service for television shows, movies, and video games delivered online and hosted in the cloud since 2007
• Slack: A business messaging application founded in 2009 providing private and group chat options, video and audio messaging
• Mailchimp: A marketing platform created in 2001 for designing and delivering mass email and text campaigns to a client base
• Trello: A project organizer founded in 2011 that allows teams to collaborate with real-time updates about each project
• Hubspot: A comprehensive customer relationship management software created in 2006 to support customer acquisition, conversions, and retention
• Zoom: A video conferencing application allowing for online meetings between colleagues, cohorts, families, and friends since 2011
• DocuSign: A software for creating and utilizing electronic signatures, as well as securely transferring documents, founded in 2003
• Canva: A graphic design software company founded in 2013 for creatives, marketing professionals, and individuals to use for business or personal use.

Potential Challenges and Considerations

SaaS comes with unique challenges. Most of the challenges affect the customer, so SaaS companies should be aware of them and prepare strategies for mitigating any potential issues.

Some things you should look out for, and take steps to protect your customers from, include:

• Internal problems that affect the customer’s ability to access your SaaS applications
• Privacy and security concerns that come with entrusting large amounts of data to an external company
• Upgrades and maintenance fall on the SaaS provider, meaning the customer doesn’t get a say in the version of the apps they’re using
• Limitations in the customer’s hardware that affects compatibility with applications

From your end, you may also run into some challenges specific to the SaaS model, including:

• Scalability: SaaS experts agree that scaling is one of the toughest undertakings in the business.
• Staffing: Your staff will act as support contacts for your SaaS product and each client on your books. Their knowledge, technical skills, and customer service efforts are critical to your business’s success.
• Pricing: Research into your market, niche, and competition will help guide you to competitive pricing that works for the client and your business.

SaaS Pricing Models

The great thing about pricing for SaaS businesses is that there are quite a few flexible options, and the customer gets to choose what works for them. This gives SaaS providers the unique ability to offer all of their clients the same product while delivering an experience tailored to what the customer needs. Let’s take a quick glance at some of the pricing models SaaS companies use.

Free (With Ads) versus Freemium

Companies like Mailchimp use this option to allow customers usage of their services, and the only trade-off is dealing with advertisements while you work. Advertisements can be distracting and annoying, so it’s no wonder why people are willing to pay for an ad-free experience. But Mailchimp gets revenue from the ads, so even if you’re not paying for the service, they’re still making money. An ad-based free subscription should not be confused with a freemium one.

Freemium plans are different because they grant a much more limited free experience to the user. In a freemium subscription, the customer gets access to some of your product, but the really good stuff stays behind a paywall. The idea is to show a customer what you can do so they feel confident that a paid subscription will be worth their money.

Flat Rate versus Per User

These pricing models are self-explanatory. Under a flat rate plan, a customer pays a flat price once a month or year that gives them full access to the product. Per user options allow customers to pay a fee for each person who will be using the software.

Tiers in SaaS Pricing

Many of the most popular SaaS pricing models use some sort of tiered system to provide exactly what the customer needs without charging them for anything they won’t use. The higher the tier, the higher the price charged to the customer. This works well for B2B SaaS where a company is paying for large numbers of people to use the software, but doesn’t want to overpay.

Separating versions of your product by tier (and subsequently offering them at different prices) is a great way to engage with a wide range of customers. The option to subscribe to a tier that offers the desired features is a huge selling point.

SaaS Security and Privacy

It’s time for the million dollar question: is SaaS secure? Can it keep customer data safe?

The short answer is yes. The long answer is yes, and the customer doesn’t have to be the one to manage that side of things. With traditional software, end users are typically responsible for data security. But with SaaS solutions, the customer puts trust in their service provider to ensure their data is encrypted, any issues are met with a swift response, and integrations don’t pose a security concern.

Future Trends in SaaS

I started by telling you how quickly SaaS is growing as an industry, so it shouldn’t be a surprise that there are several exciting trends around the corner. So, what are they?

Artificial Intelligence

You’ve seen AI do a lot of things in recent years, and its limitations have yet to be discovered. In the SaaS world, it will provide cost-effective, intuitive solutions to everyday problems. From AI-assisted customer service chat bots to data analysis and pattern recognition leading to personalized service delivery, AI will continue to change technology as we know it.

Mergers and Acquisitions as Scaling Strategies

It’s not unheard of or unusual for small businesses to sell to bigger ones or for similarly-sized companies to merge. But based on recent successes, like the CRM company Salesforce’s acquisition of Slack (a messaging platform), mergers might just be the solution for two companies to scale via consolidating and sharing resources.

Developing New Pricing Strategies

It seems highly likely that SaaS companies will have to reassess their pricing strategies as inflation continues to make a global impact. Everything is more expensive, and that includes the resources it takes to make SaaS apps run. SaaS vendors will seek new strategies that will allow them to keep up without alienating their customer base with drastic pricing changes.

Conclusion

SaaS has transformed the software delivery landscape with its cloud-based, subscription-driven model. Offering unparalleled convenience, real-time updates, and scalability, SaaS provides businesses with the flexibility to access and manage applications efficiently. The subscription-based pricing models eliminate upfront costs, making it an attractive option for companies of all sizes. While there are challenges such as data security and the need for continuous upgrades, the advantages far outweigh these concerns. As the SaaS industry continues to evolve, integrating advanced technologies like AI and exploring innovative pricing strategies, it promises to remain at the forefront of digital transformation. Whether through enhanced customization, robust data protection, or seamless accessibility, SaaS continues to offer significant value to both providers and consumers. The future of SaaS is not just promising; it's a testament to the power of innovation in driving business success.