What is the SaaS model?
SaaS stands for “software as a service” and has gained mainstream use with the advent of cloud based computing. It functions by allowing users to access the service from any device with a web-browser and an internet connection although not all services have both desktop and mobile friendly interfaces. The service is centrally hosted and managed by the service provider. The aim is to cut costs by reducing the administrative demands of the client and increase the client’s accessibility and usability of the service.
The Emergence of the SaaS model
Software doesn’t quite fit into traditional models of sales and distribution. Some of us may be old enough to remember buying software in boxes in bookstores and small computer stores, but as storage space got cheaper and the Internet came along, the traditional sales model quickly got outdated. More storage and the Internet made it much easier to copy and distribute software for free, which lead to potential lost sales for software companies. Licensing was the next step, where users were effectively paying for the privilege of using a piece of software but this wasn’t ideal for many people either.
It is not just piracy that makes it tricky for software producers to sell their products, it was also user experience. Updates for most of us are, fingers crossed, a mild annoyance at best. However, for large organizations, updating their programs across many computers could take a whole weekend and there was a chance the process wouldn’t be smooth. As the Internet got more developed and the idea of storing and running programs via the Internet instead of on a local machine (effectively, “The Cloud”), companies realized they could take on the burden of updating and maintaining their software instead of the users. And this is the core principle of software as a service (SaaS).
By providing their programs over the internet, through a web browser, the clients could use the software they needed without worrying about the maintenance. Keeping everything at the software provider meant they could update their application much easier. For the software provider, fears of piracy are greatly reduced. Additionally, having the application accessible over the Internet allowed people to use it from wherever they had a computer and Internet access (and later mobile devices like smartphones and tablets.) Before, you had to purchase one license for one computer – one seat. Now, your use is not restricted to the device you are using.
SaaS Pricing Models
Because offering an application via SaaS is different than traditional sales it requires a different kind of pricing. Since distribution and maintenance costs have been cut down by the nature of SaaS, as well as the cost of setting up new users, SaaS companies tend to operate on a subscription model with monthly or annual fees. Alternate models of pricing could be based on number of transactions, number of users, or features. Usually, SaaS pricing is also tiered, with more features and/or less limits on existing features being removed in the higher tiers.
Many SaaS companies have also chosen to go with the freemium pricing model. This is a tiered model where the first tier is free. Monetization usually comes from users who want to upgrade to either gain or expand features in the application. The basic idea behind this is to gain a lot of users through the free use of the application which can then be upsold to higher tiers, either through marketing efforts or through users organically going from tier to tier.
These qualities make SaaS pricing much more competitive and scalable than software sold traditionally.
Migrating to a SaaS Model
Today, SaaS is a big business and by that I mean a lot of companies have chosen to adopt the SaaS model from the start. The SaaS model is best suited for small and medium sized companies and clients that want to outsource their business processes and efficiency tools.
As a software provider switching to SaaS, it can be extremely disruptive and may not be the best option. Of course, this depends on the size of the company – generally the bigger it is, the more impossible it becomes to switch easily. The reason for this is that while the SaaS model is generally better for the customer, it is really bad for pre-SaaS customers. It is a tough transition that most likely will disrupt the company’s cashflow, among other things, and most companies don’t survive tremendous changes to their business model.
If you have an established company and are switching to SaaS, it is extremely important that you carefully plan how to deliver your application, how to communicate it extremely well to your existing customers, and be prepared for layoffs and other minimizing measures if the company cashflow takes a hard hit due to the transition.
All in all, SaaS has been great for most customers and is a leading model in the tech industry. SaaS companies are hitting record numbers and while we might be approaching a bubble, I believe it is the next step in developing and distributing software.