SaaS Business Model: A Complete Explanation

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Every time you use the Internet, you are using some SaaS solution. Many SaaS companies now offer their services through this mode only. A wide variety of services are available from these companies. The user data of a SaaS program is stored in the cloud. Users can access their data from anywhere in the world. They only need an Internet connection to access their data and use the online application. Most SaaS programs like influencer marketing platforms are mobile-friendly and accessible through small mobile devices like a smartphone.

What is SaaS and how does a SaaS business work?

SaaS is the short form for “software as a service”. It is a business model where software is used to provide services to customers. The software has features that offer some utility to the customers. The unique thing about this business model is that the software is stored in the cloud and not on the customer’s server. Users of this application can use its features through the Internet. The services are offered on a subscription basis. The company offering this service takes responsibility for offering the promised features, maintaining data and its security, updating the software, and other matters related to the application and service.

The SaaS Business Model

This business model is dependent on recurring payments received from the customers in the form of subscriptions. The company offers different subscription plans. The users choose a subscription plan based on the features they need. The subscription plan generally requires monthly or yearly payments, but it can also be on a “pay as you go” basis. A subscription plan means the business receives upfront payments for the services it has to provide in the future. It is important to know that in accounting terms, this income is not counted as revenue. It is a liability because the customer can demand a refund.

Regular Application Updates

This is vital to retain customers. A big advantage here is that the software update is not dependent on the customers. They are not required to update the software. The centrally stored software program can be updated by the application owner. It is a big advantage of this business model for both the business owner and customers. The company operating the SaaS business does not have to worry about customers using the old version of the software. Customers do not have to worry about updating the software on time. They are always using the latest updated program. It eliminates security and technical glitch issues. Rather than update the software once or a few times a year, the SaaS business owner can update the application as and when needed. The owner can use a behavioral analytics platform like WatchThemLive and visitor tracking software/tool to learn more about the users.

Different Stages of a SaaS Business

A SaaS business has different phases. Many of these stages match those of a startup that sees explosive growth during the initial phase after it has validated its product or service. The early days of the SaaS business are when the owner/entrepreneur is trying to prove the effectiveness and features of the product. The company may run a beta phase where the application is tested by new users with the warning that they are using an untested program still under development. Once the product is validated, the business focuses on acquiring customers in large numbers and quickly. Once the business is stabilized and it starts generating revenue, the focus shifts to retaining the customers. Now it is an established business and can afford to expand its business operations.


Ecommerce platforms that allow product sellers to sell products are the most prominent examples. Most accounting programs have now moved to the SaaS model. Even office application programs of major software companies are now available in the SaaS format. Companies offering ERP, CRM, HR, CAD, content creation and other solutions now prefer this business model. Some of them continue to offer software programs that customers can use offline. Entertainment content streaming companies have achieved amazing success in recent years by using the SaaS business model. They store movies, TV shows and other digital content in the cloud. Viewers can stream the content on their devices by paying a subscription fee. The content is also available on a pay-as-you-go basis.

The Drawbacks of a SaaS Business Model

All business models have some drawbacks and this one is not an exception. This business has a high upfront cost. In some sectors, there is stiff competition due to lots of competitors. In many cases, the market is saturated with service providers and unless someone comes up with a better idea, it is not easy to establish a new venture. The software must work on a variety of devices with different configurations. It is a challenge to make the software work on all devices. Every time a change is made in the software, it must be checked across different devices to see if everything works. This business also faces other risks common to other businesses. The demand can come down due to a competitor offering a better or cheaper solution. The business can face problems like changes in government policies or the industry facing a downturn.


The biggest advantage of a SaaS business model is that it allows even a small company to achieve success in a short time and with limited investment. The business can be scaled up or down quickly because fewer physical resources are needed to start and run this business. An effective SaaS business idea can be highly profitable for its founders and investors.