How Your Software as a Service (SaaS) Idea Can Make Money
Do you want to make money selling Software as a Service? SaaS makes it easy to connect users with software but there are pitfalls along the way that can make it hard to turn a profit. If you’ve got an idea for a SaaS business then this short overview of three basic SaaS business models might help.
1. Self-Service
Most of us have at some point signed up for a self-service SaaS. Sign-up has to be super easy, there absolutely has to be a free trial (a self-service SaaS solution without this is doomed) and the software has to be very simple because you don’t provide any support from a real person.
The low selling price means you’ve got to find lots of customers; your cost of acquiring customers is all marketing spend.
Top Tips - Target a niche market where word of mouth might reduce marketing costs. Make sure that sign-up for the free trial is completely frictionless.
Examples - think Netflix and office productivity tools like Basecamp, Gliffy and Dropbox.
2. Transactional.
Transactional SaaS solutions sell for a higher price. Customers still sign-up but at some point there’s usually contact with a real (remote) salesperson who tries to convert free trial users into paying accounts.
Transactional SaaS solutions tend to automate well understood business processes - processes that are common to many organisations. They don’t usually require a lot of complex configuration or setup. Customers will pay more but they’ll also expect some kind of premium support from a person on a phone.
Top Tip - Reduce the need for onsite support by including online support materials, videos and tutorials.
Examples - think Salesforce or Zendesk. Sign-up for a Salesforce free trial and after a few days you’ll get a phone call from deskbound sales rep.
3. Enterprise
Enterprise solutions are more complex but they add more value for customers and they have a much higher selling price. The downsides are that selling cycle is longer - maybe even 6 months or more - and you need sales reps out on the road. Sales reps may also want support in client meetings from technical/product colleagues.
The cost of acquiring enterprise customers with a field sales team is substantial. It’s just like traditional software sales except your new SaaS clients are not now going to pay big upfront licence costs, instead they’re going to pay a smaller but hopefully long term annual subscription. Selling enterprise software as a service presents some real challenges: it hits your cash flow; enterprise clients today expect to pay less; your support costs are much higher than the other two models; it can take two years to get back customer acquisition costs (which is bad); and you have got to keep your customer churn rate as low as possible or you risk losing them before they become profitable.
Top Tips - Reduce the impact of customer churn by up-selling extra features to clients after they’re onboard. Start out with a simpler transactional model - go for low hanging fruit - before moving up into enterprise clients.
Examples - applications like Workday and Netsuite have moved core enterprise functions to the cloud.
There are some great resources on the web that are worth reading if you want to understand more about building a successful SaaS business model. There’s more on the different SaaS business models SaaS Startup Strategy | The Three Sales Models and Jason Cohen has a great post about why SaaS businesses can grow quickly but never make a profit.
