What is software as a service?
Software as a Service (SaaS), not to be confused with CSS extension language Sass, is a software model in which software is licensed on a subscription basis and is centrally hosted (like in the cloud).
SaaS and cloud technology allow applications to be accessed on multiple devices, from desktop to mobile. The SaaS model typically entails the customer purchasing a monthly paid subscription. This business model benefits the SaaS company, as it means a continuous stream of revenue instead of a single-use purchase. An example of this kind of SaaS model is Salesforce, a sales software for customer relationship management. On the other hand, some SaaS's go the freemium route. Evernote, a SaaS for taking notes and organizing work, offers its users a free basic subscription, as well as paid "plus" and "premium" options.[bctt tweet="#SaaS is a way of delivering applications with #cloud technology - @AnnMJavier "]
SaaS companies and examples:
- Google Apps helps you to work on-the-go by providing email, online storage, shared calendars, and video meetings accessible on various devices.
- Dropbox allows you to store and sync your files. From docs to photos and videos, you can access your files anywhere and share them with others.
- Netflix provides on-demand streaming of movies and television shows with a wide range of genres to choose from, including comedies, documentaries, and foreign films.
What does it take for a SaaS to succeed?
We asked Vishal Sunak—Director of Operations at SaaS company Backupify and Startup Institute Fall 2012 graduate who recently led a class on SaaS for our summer cohort—for his thoughts on how to bring a SaaS company to scale.
From my experience at Backupify, having a great product coupled with a full team to support the customer enabled us to grow 100% year-over-year and successfully exit through acquisition by Datto.
Vishal's top tips for scaling SaaS:
- Get as much new customer growth (sign-ups of either businesses or individuals) as possible. Aim for 100% growth year-over-year.
- Reduce CAC (customer acquisition cost).
- Have patience. SaaS takes time because of the revenue payback to CAC (Backupify was founded in 2008, and was acquired by Datto in late 2014).
- Invest in customer success early. Increasing the lifetime value of a customer is key—the longer a customer is with you, the more revenue you get from them.
- Churn happens, but try to reduce it as much as possible. A SaaS business that can bring in more upsell/ cross-sell revenue than the revenue lost from churn (also known as negative churn) will have a very, very bright future.
- Try to increase the average deal price as much as possible. It is a very challenging exercise to succeed with a $5/user/month product. You'd need millions of total customers at that price point to keep afloat. It's not impossible—Spotify is doing it, but even they needed to raise $1.1B of funding to keep growing. A B2B product makes an even more convincing case for higher monthly prices.
- And, if you're considering joining a SaaS company, don't be surprised if some of the startups you talk to are not profitable—its not uncommon for that to be the case due to the business model.[bctt tweet="#SaaS companies should aim for 100% YoY customer growth as they #scale - @TheSunak"]
A few more tips from CEOs and business leaders on how to build and grow a SaaS:
Don't default to the freemium model.
While going freemium is a great way to test your product, it won't bring in revenue. Determine the basis of your product and learn the optimal way to sell and deliver it. Try to convert freemium users into paying ones. —Arie Shpanya, CEO of Wiser
Don't mix up client acquisition and retention.
Each should have its own marketing team. While obtaining new customers may seem like the right thing to do, keeping the customers you already have will be more profitable. Focus on those giving you a continuous stream of income and keep them coming. —Simon Grabowski, CEO of ClickMeeting
First impressions count.
Your clients will care about design and user experience. Ensure that your product provides both pleasing aesthetics and a fluid interface. Don't underestimate your clients and give them an experience that feels second nature. For example, having your product work well on both desktop and mobile devices will make your clients happy campers. —Jonathan Saragossi, CEO of IM Creator
Security should be a major concern for SaaS companies. Recognize that data breaches exist and can be harmful to your company's reputation. Do your research and tackle ways to alleviate these risks early on to protect your product and clients. —Igal Zeifman, Product Evangelist at Incapsula
[bctt tweet="When building a #SaaS company, don't default to the #freemium model - @AnnMJavier"]
Check out some of Vishal's favorite resources to learn more about SaaS:
- Saastr.com—Started by Jason Lemkin, founder of EchoSign
- forentreprenuers.com—David Skok from Matrix Partners' personal blog. Read the SaaS 2.0 metrics post to learn more about the terms and what they mean.
- hiten.com—Hiten Shah, founder of multiple SaaS companies (KISSMetrics, CrazyEgg) publishes a weekly email that is loaded with great articles about SaaS.