what-is-saas

What Is SaaS? Software As A Service Business Model In A Nutshell

Software as a service (SaaS) is a model where a third-party provider hosts the infrastructure and applications and make them available through the Internet. This model leverages on web-based software and on-demand applications that run centrally on the server of the provider, while the company purchasing the service will use those applications based on need and without the upfront cost. SaaS is a subcategory of a broader phenomenon and industry, based on cloud services. This also comprises other models like IaaS (infrastructure as a service) and PaaS (platform as a service).

The software industry before the internet 

The main rule of software applications between the 1970s and 1980s was centralization. In short, a company provided a centralized mainframe-based system. At that stage company needed massive resources to install, manage, and maintain the software and the hardware infrastructure required to run those applications.

That implied a high risk and expense from businesses willing to implement those solutions at the enterprise level. That means a software market only available to large corporations with large budgets.

That changed in the late 1990s when an organization could centrally run, maintain and operate the hardware and software, while any company, small or large could plug in any device to access the applications and services.

That also implied the need for more computational power. Thus, as computers got more powerful. And the internet faster, those applications could finally be run by any organization to automate and improve their services. Things like the difficulty of deployment and high costs of ownership made it impossible for small businesses to take advantage of that technology.

When the on-demand becomes possible

The internet has opened up new business models, especially in the media industry. Where content could be consumed at the fixed schedule (think of TV and Radio) with the Internet, higher computing power, lower infrastructural costs, it becomes finally possible to consume content on-demand.

Companies like Netflix, Spotify, and many others have become the rule. Those business models make it possible for small organizations to run applications to automate their marketing processes at little cost.

This is a paradigm shift, as finally companies of any size could use applications once used only by Fortune 500 companies, all becomes outsources, scalable and tailored to the business operations.

The rise of the cloud economy

cloud-industry

Sourcefinancesonline

After the success of a few large players that reached billion in market capitalization, more and more startups joined in. As of the time of this writing, thousands of small companies around the world compete to offer SaaS solutions for any corporate need a company might have. But most of all from healthcare, legal, fintech, transportation and many others provide services based on the cloud.

Other large tech companies, like Amazon, Microsoft, Google and IBM are competing to dominate the cloud space:

AWS-amazon

It all started from the CRM industry

One of the companies that lead the way in the SaaS industry was Salesforce. That is a CRM application (customer relationship management) which for a monthly fee allows automating internal processes of small and large organizations. It is worth then to look at the player the opened up the way to this industry.

SaaS origin story: Salesforce

When we started the company in 1999, we had a vision that businesses would move to the cloud and subscription-based services. Salesforce led the industry as the first to bring cloud, social and then mobile to CRM.

Marc Benioff, founder of Salesforce, incorporated the company in Delaware in February 1999 and introduced its service offering in February 2000. The aim was clear, to offer a hosted service at low-cost, easy-to-use and quick to deploy the application.

This also implied a high level of customization, integration with other software applications. While this idea might seem trivial today, it was quite visionary back then. Indeed, before a concept like that would be successful, it also needed ecosystems to be built around the cloud. Before this concept would take off would take a few years.

salesforce-financials-2001-2003

Salesforce business model today

salesforce-business-model
Salesforce main revenue generation strategy is based on a subscription-based cloud service. Over 92% of Salesforce revenues come from four categories of cloud CRM (Customer Relationship Management) services, that span from the sales cloud to a marketing cloud. The remaining revenues are primarily driven by professional services. In 2017 the company generated $8.39 billion in revenues.

With a subscription-based business model, Salesforce has finally been able to build a multi-billion company that in 2018 surpassed the ten billion dollar mark in revenues.

salesforce-financials-2014-2018

The company also reached profitability in 2017, with $179 million in net profit and $127 million as of January 2018.

Those results have been possible thanks to the ecosystems that have finally been built around the cloud applications.

The power of ecosystems

salesforce-integrations

Salesforce integrations capabilities 

The key ingredient of SaaS services is that instead of installing and maintaining software, you can access it via the Internet, freeing the company for software and hardware maintenance costs.

However, a lack of other tools that could be integrated with the cloud solution still made it relatively valuable.

Think of the case of a company that had built several systems to collect the data of its customers, each relying on a different logic and framework. That data would be valuable as soon as it got offered within the context for which it has been thought.

However, with the rise of cloud computing and SaaS services all over the world, integrations have become the norm.

In short, a company can finally go on Salesforce or any other cloud service and find countless numbers of applications that can be integrated. While this might seem trivial at first sight, it is also what had made this industry finally viable.

SaaS KPIs and Core Functions

Net Promoter Score

net-promoter-score
The Net Promoter Score (NPS) is a measure of the ability of a product or service to attract word of mouth advertising. NPS is a crucial part of any marketing strategy, since attracting and then retaining customers means they are more likely to recommend a business to others.

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Sales Funnels vs. Flywheels

sales-funnel
The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.

Engines of Growth

engines-of-growth
In the Lean Startup, Eric Ries defined the engine of growth as “the mechanism that startups use to achieve sustainable growth.” He described sustainable growth as following a simple rule, “new customers come from the actions of past customers.” The three engines of growth are the sticky engine, the viral engine, and the paid engine. Each of those can be measured and tracked by a few key metrics.

Outside Sales

outside-sales
Outside sales occur when a salesperson meets with prospects or customers in the field. This sort of sales function is critical to acquire larger accounts, like enterprise customers, for which the acquisition process is usually longer, more complex and it requires the understanding of the target organization. Thus the outside sales will cut through the noise to acquire a large enterprise account for the organization.

Inside Sales

inside-sales
Inside sales is the practice of turning leads into customers remotely. Communication between the client and the customer occurs via phone, email, or the internet. Inside sales become a critical sales acquisition strategy when a company or startup needs to convert leads into potential small and medium business paying accounts. Thus, the inside sales representative will help prospect, qualify, assess and close those opportunities.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

IaaS, PaaS, and SaaS

iaas-vs-paas-vs-saas
The “as-a-service” models are typical of the second wave of the Web 2.0, built on top of cloud computing. Indeed, these models’ basic premise is to offer a solution to the final customer without having to host it on-premise, with complex implementations and large overhead. Yet while PaaS and IaaS are skewed toward development teams. SaaS has wider applications toward end-users, also in non-technical departments.

C3.ai Business Model

c3ai-business-model
C3 AI is a cloud-based Enterprise AI SaaS company. It built a set of proprietary applications (known as the C3 AI suite) that offer its clients the ability to integrate digital transformation applications with fast deployment and no overheads. C3 AI makes money primarily via its subscription services and professional fees.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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