Subscription businesses expanded by more than 300% between 2012 and 2018. The sales of S&P 500 corporations have grown at a rate five times slower than this.
After the Covid-19 pandemic, SaaS is becoming more upscale as businesses are encouraged to add subscriptions to their main product lines. This article discusses the reasons why the model was successful, the reasons why it failed in the tech industry, and the lessons learned for growth using that approach.
What is SaaS (Software as a Service)?
End customers can access software programs online thanks to the cloud-based software delivery paradigm, Software-as-a-Service (SaaS).
SaaS is a model in which software is stored on remote servers and maintained by the service provider. It can be accessed via mobile apps, web browsers, and APIs. SaaS offers several advantages over traditional software delivery methods, such as reduced upfront costs, flexibility, and accessibility.
The service provider hosts the software, so users do not need to invest in expensive hardware to access it. The end user pays a monthly subscription to access the software on demand.
How Does SaaS Work?
SaaS uses cloud computing infrastructure to offer customers a more efficient way to purchase, use, and adopt software.
All SaaS apps share these characteristics:
SaaS applications were designed to be hosted in the cloud. SaaS vendors can host their applications on their own cloud infrastructure or through a cloud provider.
Hosting with a cloud service provider allows the SaaS vendor to offer the global accessibility and scalability that some customers require.
Any customer can access SaaS applications with an internet connection and a device connected to the Internet (e.g., a computer, tablet, or mobile phone).
SaaS apps can run in most web browsers; however, on mobile devices, they may be more effective (or require) an app for mobile or tablet. Some SaaS apps, like Adobe Acrobat, may require or offer a thin client, which users must download and install.
SaaS applications use a multi-tenant architecture. This means that a single instance is used to serve each customer.
To ensure data security and privacy, each customers application data, user information, system information, and custom configurations are separated from other customers.
SaaS applications are easy to use and require minimal maintenance. The SaaS provider is responsible for:
- Provisioning, maintaining, and managing all the servers, network equipment, storage hardware, and operating software that are required to run an application
- Installing security and feature patches when needed
- Provide load balancing services, redundant infrastructure, data backups, cloud security, and disaster recovery to prevent outages and meet performance, availability, and data protection standards specified by the service level agreements (SLAs).
Most SaaS vendors offer an API that their customers can use to integrate with other SaaS applications or traditional software.
History of SaaS
SaaS has grown due to supply- and demand-side factors. Cloud technology allowed firms to offer low-priced subscriptions to software, these firms needed a low-cost acquisition model.
SaaS models with younger and less experienced salespeople reduce hiring and compensation costs compared to traditional enterprise software models. The model reduced travel, entertainment and administrative costs by having an inside sales team make outbound calls but not in-person visits.
The firms could do this as digital marketing has been a cost-effective way to generate leads for many years. Their core value proposition also simplified the task.
Customers were more comfortable with remote interaction with vendors. Pre-sale searches and online demonstrations helped facilitate this buying approach.
In a long-lasting era of low-interest rates and ample investor capital, this land-and-expand approach enabled many SaaS companies to grow without concern for near-term profitability. The pandemic forced more online interaction, which temporarily inflated the growth of many subscription-based companies.
SaaS Features and Characteristics
SaaS can be understood by comparing it to a bank. A bank provides a reliable, secure and efficient service while protecting the privacy of each customer.
SaaS is the same.
Saas helps you use your resources more efficiently. SaaS will help your business improve its customization, reduce costs, and connect better with important people.
This is achieved by the application through four SaaS features that can be customized.
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SaaS Characteristics
SaaS Multi-Tenant Architecture
Multi-tenancy architecture is a system where all SaaS vendors and their clients share a common codebase and infrastructure that is centrally managed.
This architecture allows vendors to innovate faster, as they dont have to spend time maintaining outdated code.
Saas Allows For Easy Customization
Users can easily customize applications to suit their business processes without affecting shared infrastructure.
SaaS models support each users and companys unique customizations and preserve them through regular updates. SaaS providers can upgrade more frequently, with lower costs and less risk for customers.
Improved Access from Network Devices
SaaS models allow your business to access data remotely from any networked device. This makes it easier to manage permissions, monitor data usage, and ensure that many users can view the same information simultaneously.
Saas Harnesses The Consumer Web
Anyone familiar with Amazon.com, My Yahoo! SaaS applications are typically accessed via a Web interface. SaaS allows you to customize with a few clicks, making traditional business software that takes weeks or months to update seem hopelessly outdated.
SaaS Features
To reduce costs and grow your business, you should use SaaS features. This will enable sales and business teams to engage more effectively with existing and potential clients and stakeholders.
Here are 5 ways SaaS can help your business.
- Boost lead management by better identifying and monitoring leads during the sales cycle.
- You can improve sales and marketing collaboration by capturing and sharing better insights about prospects and customers.
- Streamline your digital marketing campaigns to improve marketing automation.
- improves data management.
- Contact management is improved by better storing and tracking customer, sales leads, and prospect information.
SaaS v On-Premises Software
In the past, companies and DevOps Consulting bought and relied upon packaged Software.
However, this software "on-premises" had many drawbacks.
What are the disadvantages of on-premises packaged Software?
- Needs to be upgraded regularly by the IT department.
- Maintenance is frequently required, which can cause IT pressure and project bottlenecks.
- Integration of multiple systems can be difficult due to differences in architecture and code.
- Software, licensing and server costs are increasing.
- Small businesses may need help to afford the costs of CRM software or hardware, or it could be difficult to scale quickly to respond to change or growth.
SaaS: Advantages And Disadvantages
Advantages
SaaS has many advantages over the traditional licensing model. The licensing company does not have to invest in hardware because the Software isnt stored on their servers.
Its easy to install, update, and debug. And it can be cheaper than buying multiple software licenses.
SaaS is used for many things, such as email services, auditing, signing up for products and services automatically, managing documents, and Customer Relationship Management (CRM) Systems, which are database information about clients and prospects.
SaaS CRMs store company contact information, sales leads, product purchases, business activities, and other data.
SaaS works well with enterprise services such as human resource management. These tasks are usually collaborative and require employees from different departments to edit, share, and publish materials while they are not in the same office.
Read More: What Is Cloud Computing Services With Examples 2023?
Disadvantages
The main drawbacks of SaaS adoption are data security and delivery speed. Data is stored on an external server, so companies must ensure that it is secure and cant be accessed.
Slow Internet connections can affect performance, particularly if cloud servers are accessed remotely. Internal networks are usually faster than Internet connections.
SaaS needs more customization and control due to its remote nature.
SaaS Examples
Google Docs
Google Docs, Googles online word processor launched in 2021, is free and accessible to anyone via a web browser.
Google Docs lets you write, edit and collaborate with others from anywhere.
Download
Dropbox, founded in 2007, is a cloud-based storage service for businesses that allows them to store, share, and collaborate with files and data.
Users can, for example, back up photos, videos, and other files and access them on any device.
SaaS has expanded to support home offices, entertainment, and the daily use of Netflix, Zoom, DocuSign, and Adobe Shopify Slack.
SaaS Security
Concerns about security and privacy are increasing as companies move to cloud strategy development.
Whereas management used to be responsible for updating in-house software updates, companies now rely on a third-party manager for their encryption, data privacy, and incident response. The companies must also rely on high levels of communication and technical assistance.
SaaS Pricing
SaaS products are often more cost-effective than traditional software licenses since they do not require installation or setup.
SaaS providers use subscription-based pricing for their customers, such as per-person or group pricing or a fixed annual fee. Users can also opt for an ad model, where SaaS generates revenue from advertising in the cloud.
SaaS, IaaS and PaaS
Service (SaaS) products fall into three categories: SaaS, IaaS and PaaS.
SaaS is a subscription-based software service delivered via the Internet and managed by a third-party vendor. SaaS is well-known for its examples, such as Dropbox, Google Workspace and Salesforce.
Infrastructure as a service (IaaS) offers access to servers, storage, memory, and other services.
It allows organizations the flexibility to buy resources only when they are needed. Amazon Web Services, Microsoft Azure and Rackspace are some examples of IaaS.
A software development platform is made available online by platform-as-a-service (PaaS). It allows developers to focus on creating Software without worrying about storage or infrastructure.
Principles for Sustainable Growth
Subscription services that generate recurring revenue are not dead. The model is not dead. If you understand the core dynamics of the model and learn from the SaaS crashs lessons, it will be in its best days.
Start by observing these principles.
A Bow Tie, Not A Funnel
The traditional sales model focuses on the "funnel", or "pipeline", to acquire customers. But when it comes to recurring revenue businesses, the customer lifecycle looks more like a tie than a funnel.
Subscription models generate most of their revenue outside the marketing funnel. In the past, B2B markets have been built around products with high upfront costs.
Business development was geared towards buyers who had large budgets. It is no accident that BANT, the acronym of the IBM-developed sales methodology, which began with "B", usually means the annual capital budget for buyers, starts with the letter "B".
Most SaaS services are within the buyers operating budgets and are purchased based on the importance of the service. The cost of people using the service is often much higher than the purchase price. The life cycle framework says "commit" and not "closed/won."
This also has a pricing impact on the seller since communicating impact requires linking the price to the relevant units of customer value.
HubSpot charged a flat monthly subscription fee but later tied the price to the number of contacts in each customers database. The value of a service increases as a customers database grows. The unit is different from other subscription-based businesses.
Fintech companies typically charge per transaction. Usage is episodic and does not follow a regular marketing or sales cycle, like HubSpot. Some subscription companies price their services based on their features, which are usually part of a bundle that includes ancillary products.
The relevant value unit will affect how and who you sell.
Read More: What Are The Advantages of Using Cloud-Based Enterprise Applications?
Leads Are Not Just About Quantity But Also Quality
Most sales leaders will say they need double the leads to double their revenue. They also need twice as many people to contact those leads.
This is based on the linear relationship between leads and winning. SaaS is a complex system. Lead generation and qualification have a compound effect on conversion rates and retention.
Annual Recurring revenue (ARR) can be affected by a small difference in the number of relevant leads. This snowball effect is a lesson from the SaaS crash. It applies to subscription models both as they rise and fall.
This is like the character from Hemingways novel who replies, "Well, at first, a little at a time and then all of a sudden, " when asked how he became bankrupt.
Subscriptions can help you shift your mindset from quantity to quality when it comes to lead generation. The traditional lead source in this business model - paid search and online marketing vehicles - is becoming increasingly cluttered and expensive.
It also shows diminishing returns. Google Ads average cost per lead, for instance, increased by 20% in 2021, then another 19% in 2020. This was even higher in certain sectors, such as entertainment, travel and household goods.
Conversion rates dropped by 14% between 2021 and 2022. This reflects a decline over a number of years as the medium became more crowded. CMOs are currently making the joke: "Wheres the best place for a corpse to be buried?" Search engines only show the second page, because nobody uses it.
The shift from an ownership model to a subscription-based model has a fundamental effect on risk. When a buyer pays upfront, they assume the majority of the risks associated with installation, integration, and extracting value from the service.
A subscription allows the seller to build the infrastructure, create the software, and host the service. With fractional revenue generated quarterly or monthly, it can take many months for subscription businesses to recover customer acquisition costs.
They also need to renew their business annually to remain profitable. In this context, it is important to identify the right customers as early as possible since false positives can be costly.
Automated tools allow firms to send out thousands of template emails, such as "Hello." You can also check out our other articles.
"Experience it." Not only were there many false positives, but the problem and solution of the customer are also dynamic variables. They are not static. Pharma firms, for example, purchased online meeting software to allow their sellers and healthcare practitioners to communicate during the pandemic.
These sellers can now safely visit doctors offices and hospitals. The impact is no longer that they can do things remotely but rather that they can move things along faster.
Customer Success Is Not Just Service
Subscription models are based on recurring impact. Service is essential throughout the entire customer lifecycle.
A prospect might be visiting your website in response to an article on content marketing and clicking for more information. The service that is provided during the trial period is crucial if the product is sold. The majority of subscription-based offerings are visible through relevant usage.
This is influenced most by the onboarding phase and not a hypothetical ROI or demo during the customer acquisition phase.
In traditional sales models, service is primarily concerned with order fulfillment and problem resolution. Some SaaS companies refer to their customer service teams as Customer Success Teams (CS) because they play a vital role in closing a deal, onboarding new customers, conducting business reviews that track the impact of products, and expanding the lifecycle of a customer.
CS teams for apps such as Slack produce monthly reports that detail how many team and one-on-one conversations were held, how much was shared, and what type of content. Customers can see the value in a thriving community, which is often distributed, and CS receives data on usage to support recurring revenue.
A misunderstanding of CS is a major factor in the SaaS crash. Many executives feel that firing a CS representative is an easy decision when demand drops, and they need to reduce costs.
- Reduce churn when the customer lifetime value (LTV), which is highly correlated to subscription length, is part of a business model. Even a small increase in customer retention, such as a couple of months or more, can have a significant impact on LTV.
- Increase usage and expand the business through renewals, upsells, and cross-sells with other members of that household or company at a lower cost than acquiring a new customer.
This has implications for metrics and sales management. In a subscription-based model, Net net retention rate (NRR) is better than growth in new customers because it reflects all relevant economics such as upgrades, added services, more users, and/or downgrades.
Sales leaders often refer to their employees as "hunters" who are good at acquiring new customers or "farmers," which is a term used for account managers with an established base. These roles require cross-functional connections with non-sales teams and are more nuanced with a subscription-based model.
Sales leaders need to rethink hiring criteria and KPIs in order to accommodate this reality.
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Conclusion
We have seen the software as a service (SaaS) industry grow to incredible heights over the past decade, and it appears that this trend is only going to continue.
As more businesses look to reduce their costs while increasing their agility, they will undoubtedly turn towards SaaS solutions. This could mean great things for companies that are able to capitalize on this trend early by investing in innovative products and services.
It remains to be seen what kind of impact SaaS will have on the software industry, but one thing is certain: its future looks very bright indeed!
