The SaaS Business Model and How It Works

Rating — 5·12 min·November 30, 2023
The SaaS Business Model and How It Works
The SaaS Business Model and How It Works
The SaaS market grew to $72.2 billion in 2018. Would you like to get a piece of this pie too? Take a look at our article and find out everything you need to know about the model, its pros and cons, and get inspiration to migrate to the cloud!
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Looking for a better way to launch your future project? You may have thought about the cloud computing concept. Diving deeper into this topic, you'll get familiar with the SaaS business model. Today, we’re going to guide you through one of the most discussed IT topics that has already won the attention of thousands of entrepreneurs worldwide. If you plan to join their list, you should know the most important facts about the SaaS model, its stages, examples, and pros and cons.

If you’re already acquainted with basics of Software as a Service, skip the intro and dive deeper into the business model itself. Now, let’s start our journey to the SaaS galaxy.

Introduction to the SaaS model

If you’ve ever worked with a software development company, you’re likely familiar with the well-known Software as a Product (SaaP) concept. In this case, you order a solution, a software provider sells its license for you, and an app is then hosted on your device. You either rent a server or buy the expensive hardware.

But with the rising demand for high-quality IT solutions, the situation has changed. Cloud computing has brought brand new solutions and software development methods. This is how we have arrived at the SaaS business model and the advancements it can bring to your company.

SaaS stands for Software as a Service. According to this business model, a service provider enables access to a particular app and its functionality, and the app is hosted on an external cloud server. In turn, a user pays a fixed recurring fee for use of the app.

What does it mean? Let’s review an example. A large logistics company needs a powerful CRM to efficiently manage incoming orders. There are 2 possible ways the company can do this:

  • On-premise solution development
    A business owner contacts a development agency and describes their idea. Together, they discuss terms and functionality, and in several months (depending on the app’s complexity) the customer receives a fully-functional solution developed for their particular needs. It is time-consuming and expensive, but the tailored functionality is worth the effort.
  • SaaS product
    There are various types of ready apps for any needs. Business owners can pay for a license, getting the opportunity to use the solution from any device with Internet access. SaaS apps are stored on the cloud and thus are safe and accessible. 

Make sure that you don't confuse two concepts: cloud computing and software as a service. We have written an article to explain the difference. It's worth your attention! 

SaaS vs. on-premise software

However, keep in mind that SaaS is now nearly as powerful as traditional on-premise apps. Traditional app development just takes more time, thus, some business owners opt for this business model as an opportunity to employ the tool immediately. In many cases, this is just a temporary replacement before ordering a scalable custom solution developed for unique business needs.

IaaS and PaaS: Similar models to be aware of

For a better understanding of how SaaS works and what advantages it can provide your company, you should know about 2 models that use cloud computing:

Platform as a Service (PaaS) enables programming solutions to be built on a cloud. This means you can rent a platform with a specific operating system, IDE, database and everything you need to build an app. Take a look at Heroku or Red Hat OpenShift to become acquainted with this business model.

Infrastructure as a Service (IaaS) means providing you with all you need to host a software app. This includes servers, IP addresses, networks, firewalls, etc. Basically, this is a digital replacement for a hardware infrastructure you would need to install and run powerful software. Windows Azure and Amazon Elastic Compute Cloud are web services that use this business model.

SaaS in 5 outstanding examples

To help you to understand what we’re talking about, below we’ve compiled a list of most successful representatives of Software as a Service world. You likely use them almost every day:

Google Apps
Everything from the good old Gmail system to scheduling events on your calendar is hosted on a cloud service. And, you can easily access your Google Photos or check your email from wherever you want.

If you are not a member of Team Google, Dropbox is a good SaaS alternative for storing files and images. Once you add a new photo to your Dropbox account, it’s visible from any desktop or web app with access to the global network.

Slack is a great tool for team communication offered as a cloud-based app. Messages are secured and the entire system is built on a cloud service.

Amazon Web Services
Amazon Web Services is now a pack of more than 70 apps that cover analytics, apps integration, cost management, development purposes, etc. They all are cloud-based as well.

If you strive to provide the clients with flawless service, you have probably employed Zendesk for your support needs. Would it be a surprise for you if we said it is a SaaS business model example, too?

There are also some prominent SaaS startups you should follow

Do you use at least some of these tools daily? If you do, you definitely understand what this is all about, and we can confidently proceed to the development process.

SaaS business model and how it works

4 stages of the SaaS lifecycle

After the introduction to the SaaS business model definition, it’s time to find out which lifecycle stages it passes until it becomes a golden goose for its founders.

1. Startup phase

The starting point of the business is when you’ll use the SaaS revenue model. With no real customers yet, founders must identify potential customers’ pain points, build a business plan, prepare a demo or an app prototype, and show how the solution will solve existing problems.

Before starting your own business based on Software as a Service, you need to make sure that the market is large enough for another IT solution.

You’ll also need to demonstrate the critical difference of your software from other existing solutions. Then, you’ll have to test the app thoroughly and address possible issues as soon as they appear.

Also, make sure to follow the best practices and trends in SaaS app development. This will give you some meaningful insights. 

Many people consider this to be the most challenging step to take towards a successful SaaS business. However, the next 2 stages can be difficult as well.

2. Engaging your first customers

During this stage, you’ll attract your first customers, employ a marketing strategy and start to make a profit. Here, several things matter:

  • A/B testing
    This is an experiment you can use to try different designs and find out how they impact your target audience. For example, 50% of visitors see the landing page with one design that is green and the other 50% see a different design that is blue. A marketing specialist measures which design appeals to users more and increases conversion rates and sales.
  • Target audience identification
    You can use tests and metrics to identify your target audience and create a user persona. This will help you meet your potential users’ needs in a better way and strengthen your market position.
  • Lead generation
    Using list building, newsletters, or other methods, you can acquire your first customer leads and build a customer database.

During this phase, it is crucial to start measuring target retention, user satisfaction, and approximate recurring revenue.

3. Growing a SaaS-based company

Your growth must be organic. Complications will arise when you experience lightning-fast customer increases. You must strengthen your databases and functionality, continuously improve the services you provide, and extend the customer service team.

One reason that customers opt for SaaS solutions is to minimize effort. Many just pay for the license and enjoy its functionality.

If you plan to start your SaaS business, you must keep in mind that comfort and stable support are things you need to provide your customers with. And the more viral your solution is, the more customers will be satisfied with your app. Be ready to give them the demanded comfort.

4. Stable success

Those who overcome the difficulties of the previous stages have created a stable and profitable business. Here, target retention and customer growth continue to increase. Your team will grow organically and contribute to solution improvement. Revenue will grow, creating even more opportunities for business expansion.

But still, it is not time to rest. Continuous improvement and upgrades are required to keep your head above the water and stay ahead of the competition.

Pros and Cons of the SaaS model

Although the revenue generated by Software as a Service businesses in 2018 was more than $72 billion, many people hesitate about its viability. This is why we’ve decided to divide this chapter into 2 different parts and highlight the good and the bad of the SaaS business model for 2 camps: vendors and customers.

Do you hesitate about whether your customers may use the app you offer? Here you can explore the top reasons they may opt for this type of product and understand how to offer a superior solution.
If you plan to break into a business and launch your own SaaS platform, you will increase your awareness of why it is a profitable option.

Why clients opt for SaaS apps

Clients should adopt this model if the following advantages sound attractive:

Reduced costs

What is SaaS revenue model? It is a subscription-based service, meaning it cuts down on initial costs and requires payment only when someone starts using the app. The subscription may vary depending on several factors:

  • Number of users
    A small digital agency with 3 or 4 workers will pay less for a SaaS product than an enterprise company with 400 staff. As the company grows, the subscription price may change, too.
  • Number of actions
    A user is free to decide how many tasks they plan to deal with when using your SaaS app. For example, you can send 50 automated emails per month for $50, or 500 emails for $300. A customer has the opportunity to regulate their costs.
  • Database needed
    Depending on the customer’s resources and capacities, the price may vary.

In general, Software as a Service is a cheaper option compared to an on-premise solution developed from scratch.

Impressive scalability

As discussed above, customers are often afraid of paying too much money for functionality they won’t need. However, they also worry that they’ll need extra features in the future. With the SaaS approach, there is always an opportunity to request additional functionality and scale up an app.

Thanks to the scalability of the support services provided by a SaaS platform, a customer doesn’t need to take care of periodical updates, both planned and requested. Everything is handled by the vendor.

Instant access

When ordering a product from an IT agency, it often takes a long for them to deliver the product. With a SaaS app, clients can benefit immediately. Once they pay the fee for an app, they get access to its features and can set it up for their particular needs.


And last but not least, there's no need to spend money on cutting-edge hardware to run and maintain an app. The infrastructure is provided by the vendors. Thus, your customers can concentrate on their own business development and can access the app from any laptop, any smartphone, anytime they want if the device is connected to the World Wide Web.

Do you want to take the most benefit from implementing SaaS business model?
Our business analyst will guide you from idea refinement to product development

SaaS app disadvantages

It all sounds great. However, many businesses fail to provide their customers with the expected level of services. Below, we’ve listed several major pitfalls that may push potential customers away:

Lack of customization

Since SaaS products are developed to match as many cases as possible, sky-high customization features may be unreachable. This solution isn’t developed for a particular company, so there may be a lack of customization.

Limited control over the product

How does SaaS work? It is developed by a vendor and hosted on an external platform. Thus, customers don’t have full control over each upgrade or added feature.

Advantages of SaaS for users

SaaS business: Benefits for vendors

If you are thinking about creating your own SaaS template, consider the following advantages:

Monthly revenue

What is the SaaS business model? This is a source of uninterrupted recurring revenue. Once you have all the functionality up and running, the processes set up, and repeat clients, revenue is guaranteed. This fact is significant for 2 reasons:

Stability is what everyone’s looking for

Stable income is the top goals of every company. After you are introduced to SaaS revenue models and employing one for your needs, you can reach this goal and take your business to a new level.

A good sign for investors

By demonstrating your SaaS business model example and proving you have a stable income from your business, you will attract more investors to contribute to your product growth. Your business will be profitable in terms of finances and overall company development.

Increased customer loyalty

As we discussed above, customers can feel the instant positive effect of this type of product. There is no need to sit and wait for an app to be built. Thus, they are more likely to stay engaged, leave positive reviews about the solution you offer, and share their impression of using this software. This leads to higher adoption, increased conversion rates, and product popularity.

More space for improvement

You are not bound to a few customers who expect you to satisfy their wishes completely. You do not have to convince users to upgrade a tool to a new version in order to make it work better. Your customers have already paid for the product, they enjoy it, and must agree to accept updates or new features. Eventually, they can scale their app down and use only the features they actually need.

You, as a SaaS business owner, have more space for critical improvements, design pivots, and product upgrades. You have an opportunity to attract new users without losing those who already use the perks of your app.

SaaS business: challenges vendors may face

Readers who get an explicit answer to the question about what SaaS model is, become its active adopters. However, before you decide to start working on your own Software as a Service business model, be aware of the following challenges:

Problems with catering to unique needs

SaaS development is about building a general solution for a variety of businesses. This means that you don’t have to customize an app according to particular needs or create special features upon request. Along with that, you may lose a sense of potential customer needs, and thus, you may become unable to solve existing problems appropriately.

Make sure to listen to your clients and turn their wishes into real app features. However, there is no need to add tons of functionality to your product. Stick to your primary business concept and augment it only with features that bring real value to your customers.

Hypergrowth stage difficulties

Handling all the processes during a growth stage may be a headache. Many business owners give up on this phase as they are not able to handle the tasks that appear. It can be extremely hard to manage the costs needed to acquire new customers while striving to provide the best services to existing ones.

Thus, you should prepare for this stage, and develop a smart well-thought-out plan on how to organically expand your business without reducing the product’s quality.

Data security

As more and more apps move to cloud services, security concerns increase, too. You may have already heard about cloud and SaaS security threats and potential dangers.

To avoid serious issues, keep an eye on the best practices of security testing and use powerful programs to protect your customers’ data.

Why to adopt SaaS business model

Final thoughts

Is SaaS something you’re looking for? Have all advantages described here convinced you to start building your corporation in this sphere? We believe they did, and we believe this is the future of software products.

Working on this type of app, you need a reliable software development partner who can deal with engineering tasks and who has experience with cloud computing technologies. Are you looking for such specialists? If so, you’ve come to the right place. We can build a vigorous SaaS app for you. Don’t miss a chance to add your name to the list of successful SaaS vendors.

Ready to hit the market of SaaS products with your revolutionary app?
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