The world of software as a service (SaaS) is changing fast. When Marc Andersen published in his 2011 article ‘Why Software is Eating the World”, many did not believe what he was saying. It’s now a decade later, and the reality has dawned.
Today, top tech and software companies like Microsoft and Google are reaping big and have become some of the most valuable. A recent study shows that at least 80% of companies are using some sort of SaaS applications.
Underneath the rich technology of most of these software companies is the concept of SaaS, which is the root of all their recurring revenue and dominance in the industry. According to a study by BetterCloud, 73% of companies agree that by 2020, at least 80% of their applications will be SaaS-based.
As a SaaS company looking forward to penetrating the tech industry, there is a lot you should learn about the SaaS sales funnel and business model. There is more than enough you should equip yourself if you want to compete with some of the big names in the industry.
This article makes it easy for you. Here I will explain the basics you should know about the B2B SaaS business model and what makes it that valuable.
What is B2B SaaS?
B2B Software as a service (SaaS) is a business model in which the software is provided to the user on a subscription basis. The company offering the software hosts it in the cloud and makes it available to users on the internet. Users can access the software on their desktops or as a website application.
In this model, the vendor will host and maintain the servers, databases, and code infrastructure. SaaS is different from the traditional on-premise software delivery service. In the traditional model, companies would pay a one-time fee to install the software to their computers and only pay some premiums for software maintenance.
Customers only pay a monthly or annual subscription fee to access or continue using the software when using SaaS. In some cases, the vendor will offer a freemium of the software, but this will often be available on limited access like two weeks or a month.
Also, you won’t be able to access some functionalities or features when using the free version for some software. Freemium allows customers to try the product before they can finally buy it. Other software providers may offer full access to their products during the free testing period. This is similar to what Netflix does to new users.
In most cases, SaaS products will focus on providing software applications for business (B2B) and private consumers (B2C). Most software companies tend to identify new market segments and industries to improve their customer base when they mature and earn an excellent reputation in the market.
Related: Best B2B SaaS KPIs & Metrics
How Does The B2B SaaS Business Model Work?
The SaaS business model is one of the most applicable by tech companies today. SaaS is a type of software that is managed, owned, and supplied to the final user by the providers. To enable the software to be used by users worldwide, the SaaS Company will host the software on a server.
Users can gain access to the software from any place globally as long as they have paid their subscription fees.
These are some of the most common business models that SaaS companies apply:
- Data Management: Software that protects business data and facilitates data analysis
- Project management: this software will assist those working on a project to communicate easily
- Enterprise Resource Planning (ERP): This is a type of software mostly used by large organizations.
- Human Resource: Recruitment Software that solves issues with the recruitment of workers, employee engagement, and payroll management.
- E-commerce and Web Hosting: These are remote servers that will handle the company’s online presence.
- Accounting and invoicing: This is a business software that is responsible for bulling and invoicing transactions.
- Customer Resource Management (CRM): This software allows the user to track sales records and manage client information.
Related: B2B SaaS Content Marketing Strategy Guide
Why Most Companies Prefer The B2B SaaS Business Model
The reason most companies would go for the SaaS business model is that it works smoothly. Unlike the traditional way of installing the software to the clients’ computer, having the software accessible on the internet is less harmful.
The software can easily interact with the OS and other software already installed in the users’ device and misbehave or even crash. In the SaaS model, the users do not install the software on their devices. They can access everything by logging into the software on the internet.
Managing the SaaS business model is much cheaper compared to other models. This convinces most users to adopt the product. Also, SaaS product is developed consistently and runs on the company’s infrastructure.
It means the software will always be up to date with the latest features. The revenue system on SaaS model is also recurring – another reason most investor prefers it most.
What Are The Stages In A B2B SaaS Business Model?
Every SaaS business model is likely to go through the following key stages:
- Startups: Every business starts somewhere. The startup stage will involve creating a working product for SaaS and informing customers about it through marketing.
- Growth: As clients adopt the product, the company experiences faster growth. At this stage, the company applies for data extension and increased bandwidth. They can also experience some technicalities with user accounts. Most SaaS companies fail when they experience hyper-growth because they may lack enough resources to manage millions of accounts.
- Stability: This is the stage where the business model now levels. You break even or start making some profit. The company acquires new users and experiences consistent churn.
Related: Best B2B SaaS SEO Tools That Marketers Use Secretly
The Key B2B SaaS Business Model Metrics
Identifying the key metrics in any business is the most important thing. Metrics help you keep track of your business and forecast how the future looks like for you. Some metrics are generally more useful than others, and you have to keep a close eye on them. These are some of the most crucial metrics for any SaaS business:
Churn Rate
This is generally the number of customers that unsubscribe from your SaaS product over a period of time. Every business has churn since products and services evolve, and users will shift to other companies when their options are not fulfilled.
To find the churn rate, you divide the number of customers by the total number of customers for a given period.
Customer Acquisition Cost (CAC)
One of the best ways to determine if your SaaS business is profitable or not is to know how much you can spend to acquire a new user. If the cost of acquiring a new user is low compared to the gains, then you are simply on the right track.
To calculate the CAC, you divide the total investment in sales and marketing by the total number of acquired clients.
Related: Native Advertising For B2B SaaS Businesses
Monthly Recurring Revenue (MRR)
This is the revenue your business should expect per month. When you know your MRR, you can easily determine the monthly variations in your income.
To find the MRR: multiply the number of customers by the average revenue.
Average Revenue Per Account (ARPA)
This is a metric showing how much revenue you can acquire from one client per month, quarterly, or annually. To find the ARPA, you divide the total MRR by the total number of customers.
Customer Lifetime Value (CLV)
This is the average revenue you can get from a customer for the period they are subscribed to the software. If you want to find the CLV, you can use the formula: ARPA X Gross Margin %) / churn Rate
Customer Retention Rate (CRR)
This is a metric that shows the percentage of customers that have been consistent and continued to use your software for a given period. Use this formula to calculate the CRR: (Number of customers that continue to use your software / Number of customers at the start of the time period) x100
Related: Best B2B SaaS Content Marketing Tools
What Are The Advantages Of Adopting The B2B SaaS Business Model?
Benefits To Users
- Flexibility: SaaS business model is more flexible and scalable to customers. A client pays less and gets more for every service they get. When using the usage metric model, clients will be paying more. Users have this chance to grow their business with the software. The sociability makes it less risky to invest in the software. Users avoid paying one-off fee for software they are not likely to use in the future.
- Free upgrade: Downtime may cost your business a lot when everything is not running as planned. For the SaaS business model, the vendor will manage the product upgrade without interfering with other services. The software upgrade also happens fast.
- High adoption: The fact that it is easy to use SaaS products anywhere has made it popular. Users experience instant benefits from the software, which increases the adoption rate.
Benefits To Vendors
- Instant benefits: It is much faster to gain access to SaaS products. All you may need is an email address and your name to access the product functions. The ease of access and quick benefits make it more preferable by users.
- Easy upgrade: A SaaS company owner is always in full control of their software. They control the environment the system is being developed as well as the entire system.
- Free trial support: During the 7-30 day free trial, you can guide the users on how to use the software remotely. Once the user understands the functionalities, they can now proceed to subscribe and use the software. This is not possible for on-premise software support.
- Recurring revenue: With the SaaS business model, you are assured recurring revenue because most users don’t cancel their subscriptions. In a year, only 5% of your clients are likely to cancel their subscriptions. If you only offer an annual subscription, it means you’ll be having all users intact for a year.
- Better customer relationship: Most SaaS customers tend to use the application frequently, if not daily. This means as a business. You can determine how users interact with the product and what you can do to improve their experience.
- Easy expansion: It is easy to expand your business when using the SaaS business model. This is because it doesn’t involve the physical movement of items in your company. You can easily enter new markets and locations when you commit your finances towards marketing.
- Not vulnerable to piracy: there is no better way to protect intellectual property than using the SaaS business model. Since SaaS products are only delivered in web applications, it is not easy for people to pirate them.
Related: Proven SaaS Link Building Strategies
What Are The Cons Of The SaaS Business Model?
There are some cons of the SaaS business model you should know. However, you don’t have to worry about the model’s downsides if you’ve done your research well and vetted your SaaS concept. These are some of the cons you should beware of:
- Growth may be unsustainable because of the high complexities in managing the business. To achieve growth, SaaS pricing should be optimized because of the hosting and maintenance cost.
- There is a lot of churn from failure to retain most users
- Since most SaaS companies work on building a large user base, they tend to incur a large upfront cost. They lose a lot of money when starting up, like in the first year of business but pick up once they are established.
- There is stiff competition in the market as new players enter the space. It is also easy to copy the business model, which makes it more competitive.
Final Thoughts
By adopting the SaaS business model, you are open to endless customer acquisition and business growth opportunities. Most businesses entering the tech industry will continue to adopt the SaaS business model because of its many benefits.
You need to pay attention to the industry dynamics when choosing software as a service (SaaS) business model. Focus mostly on providing unique service to your users. With stiff competition in the software market, most customers only subscribe to vendors who offer value.
