20 years ago, the word SaaS may have rung any bells for anyone. However, 1999 was indeed the year it was on everyone’s lips. From being an emerging technology then, to being something almost ubiquitous in the tech industry now, SaaS platform, and tools are being used across multiple industries.
But what does SaaS stand for? And is it simply a passing fad in the ever changing world of tech? Let’s take a deeper look and find out about SaaS meaning, SaaS companies, SaaS examples, SaaS platforms and business model.
What is SaaS?
SaaS stands for Software-as-a-service. In other words, it is when an entity (company) offers a particular software as a service through a paid model.
How it is offered has varied through the years. From the days when SaaS applications were available in CD ROMs or was installed through floppy disks, we have now moved to a largely cloud-based scenario.
Cloud computing refers to a service that is stored in the cloud. The cloud refers to a large distributed network of computing resources that can be pulled in on a demand basis. Within the umbrella of cloud programs, SaaS is a small part of commercial applications which can be remotely accessed.
Hence, SaaS platforms and tools can be accessed over the internet from anywhere through a browser. The tools can be logged into from any device and do not require an installation process. Due to this, SaaS tools are also called hosted or on-demand services. This ease of use means companies no longer need IT specialists to install software on all systems. Moreover, switching from one platform to another is much easier than before.
SaaS companies run on a subscription model, and some come with an upfront lifetime charge. With monthly models, custom service is included, which further reduces in-company IT department costs. Currently, the SaaS industry is projected to grow at a rate of 12% every year.
Main characteristics of SaaS Platform
By 2025, around 85% of companies will be using some SaaS platform or other to manage their workflow. SaaS tools are versatile in nature. They can be related to marketing, SEO, customer management, accounting, infrastructure management, etc. Despite this versatility, the main characteristics of a SaaS platform are:
- Cloud-hosted and accessible remotely from any device as long as the internet is available (and users can clear logging-in guidelines set by their company)
- Works on a multi-tenant basis, where multiple clients use the same cloud instance. However, each segment can be modified with different feature access. Moreover, the cloud itself can be a private, public, or hybrid cloud.
- SaaS tools are usually priced using a flexible pricing model that is billed on a monthly or annual basis. This can further be based on usage or per user basis. This makes switching from one plan to another and from one tool to another easier.
- Features can be customized with access to different levels and with the enterprise model, clients can even request custom-built plugins.
The History of SaaS Company
Initially, commuting systems saw a growth during the 70s and 80s when they began to be used by more companies. However, hardware was still expensive and considered an elite thing accessible only to larger enterprises.
In 1961, MIT introduced the Compatible Time-Sharing System (CTSS) that allowed more companies to chip in and get systems of their own. IT was still not a booming field and owning their own computers with a team of engineers to install and take care of the software was rare.
That was until Salesforce, a cloud-driven company launched the first of its kind CRM in 1999. Combining this with the rise of the internet in the late 90s, online transactions and ecommerce taking ground, cloud software took off. Now, even smaller enterprises could afford one without having the support of a full-time IT Team!
While the Great Recession in 2001 significantly affected on-site hosted software, Salesforce was able to cruise through it. Many at this point considered Salesforce to be a passing fad. In fact, Salesforce even reconsidered their subscription based model as most larger enterprises preferred to take on an entire software end-to-end.
However, over the years, SaaS tools and software have become ubiquitous. More and more larger companies today like IBM and Microsoft are moving their tools towards a cloud-based platform.
A lot of other companies moved on from a physical to a SaaS based model to improve sales such as Concur and Netflix.
With the addition of new features like license based customisation and 24×7 on-call support, SaaS tools now account for a large market share and are used by industries ranging from healthcare to construction.
SaaS platform is not an isolated tool, but a system. To understand it better, let’s look at the larger ecosystem and its services.
1. Terminologies and Services
Top terms to make you a SaaS expert in 5 minutes or less!
- What is a SaaS company?
A SaaS company is an entity that develops, markets and manages SaaS platforms. These companies can either have a single tool, or be an umbrella for multiple different types of tools. SaaS company owns the code of the software application. They offer services related to the cloud such as databases and servers, and also offer IT support on-call. SaaS examples include but not limited to:
- CRM – Customer relationship management
- ERP – Enterprise resource planning
- Resource Management
- Marketing management
SaaS subscriptions can be taken monthly or annually. The costs depend on the number of users, cloud space required and features required. One of the best features of SaaS is that a company can use different tools from different companies for all of the above departments. However, by using API keys and sometimes, company-built plugins, all data can be seamlessly merged and accessed from multiple applications.
- What is a SaaS business model?
SaaS business model is one of the most complex business models today. Essentially, SaaS companies own a cloud – physically, they own data servers. They also own code for a SaaS product.
They allow enterprises to access their products on a subscription model, and along with it, each enterprise gets their assigned place within a cloud. From the customer’s end, all they need to do is log into the tool using their web browser.
SaaS companies also typically charge around 12 – 20% of their subscription fee as maintenance fee. Hence ,they manage everything from hosting and server maintenance.
The main way a SaaS company keeps itself afloat is from recurring memberships of enterprises. This means high renewal rates are essential to keep them from falling apart. For SaaS companies themselves, their business growth trajectory is slightly different from that of other models. Their 3 stages of growth are:
- Startup Phase – the early phase that still includes developing a product and marketing it to potential clients
- Hypergrowth Phase – this is usually the make or break phase for a SaaS product. As usage of the product expands, the company too has to expand rapidly to offer tech to new users
- Stable Phase – at this stage, which few companies reach, a SaaS company reaches a stable phase and has a more of less stable income revenue. They form loyal customers and can start exploring more products.
- What are SaaS Products? Vs. on-premise products?
Opposite to SaaS products, on-premise products are those that come with hardware that are hosted on the site itself. This means, instead of a centralized cloud, each enterprise will have its own set of servers and need the software to be installed onto their system with a license ID. This of course, makes it a much more secure option than SaaS based solutions. But for traditional on-premise products, getting into it can purely be a matter of company need.
For example – the industry you work in, the amount of customisation needed in your tool and the type of tool needed can affect your decision.
Healthcare industries, for example, prefer to store confidential patient records on-premise and thus, may not use SaaS tools for this. But they can stil use SaaS products for internal team management or accounting.
Cost is another important factor that differentiates both. On-premise products require an internal IT team, familiar with the product to troubleshoot any issues and maintenance.
2. IaaS vs. PaaS vs. SaaS ?
IaaS, PaaS, and SaaS are the 3 fundamental cloud computing models. Now that we know what SaaS is, let’s look at the other 2 models:
- IaaS offers Infrastructure as a service. This means that one can get access to hardware infrastructure such as physical servers, data centers, and other network-based equipment on a rental basis. Eg: Salesforce provides virtual IaaS services.
- PaaS refers to a Platform as a Service. Here, the provider offers a complete environment including hardware and software tool sets needed by developers. In other words, it is an entire environment that is deployed, using which developers can create applications. Eg: Gigaspaces
Among these, SaaS is the one that refers to end-user software that can be used by those with no technical or coding knowledge.
3. What are the benefits of SaaS over local suppliers?
Working on totally different business models, SaaS tools have:
- Lower set-up and running costs
- One can get access to the tool directly, without having a team on the go to keep it up to date. SaaS tools have made it possible even for one-man startups to manage their workload.
- Based on the subscription model, as your team grows – so can your SaaS tool! Simply upgrade to a higher plan to get more user accounts and cloud space.
- Since SaaS tools are browser-based, they can be accessed from anywhere. This is especially important as companies experiment with hybrid situations in a post-pandemic scenario.
- Industry-level standards
- SaaS tools comply with various guidelines set by the government, be they related to data protection or general security. Hence, you don’t need to worry about data breaches or invest in cybersecurity separately.
4. What are the limitations of cloud-based software?
Given the advantages, one might wonder why SaaS is not used by everyone!
However, there are still many industries where web-based hosting is not yet an accepted solution. Banks, for example, prefer to have physical, on-site servers and not shared on cloud.
Moreover, since SaaS tools work over a browser, they can only respond as fast as the RAM consumed by the browser. This means, heavier software requiring more graphics and RAM space cannot be marketed as a SaaS tool.
Apart from this, some other limitations are:
- Reliance on other companies to keep data safe
- Vendor downtime can lead to your work being stagnant
- Account safety and fear of hijacking as there is a single point of entry
- Limited control regarding addition of custom features or APIs
Your burning questions about SaaS business model, answered!
Now that we’re familiar with SaaS and how it works, let’s take a look at some commonly asked questions.
- Can I customize SaaS software?
Most SaaS tools come with a core component. This core component is unchangeable. However, customizations can be built on top of it using plugins and APIs. SaaS businesses themselves offer various virtual marketplaces where one can buy custom-built features from verified third-party sellers. These tools can extend your arsenal of features.
Apart from this, you can use your own APIs to export data and perform further functions. However, core facilities cannot be changed – and sometimes, core code is not visible as well.
Most SaaS tools are configured to perform a particular type of work. Your choice of SaaS tools should be based on how much of your task conforms to it. In the case of large enterprises, it is possible to get custom-built features – however, it varies from company to company basis.
All SaaS tools come with trial periods, for the tier of your choice so that you can see how it works. On the whole, SaaS tools are low on core customisation, but high on additive features.
- Who owns my company data within a SaaS software?
While signing up for SaaS software, you will be required to sign an SLA or service level agreement. The SLA usually mentions terms and conditions regarding data ownership. SLAs declare that users have full ownership of the data stored on the SaaS cloud. In fact, if you own a server, SaaS vendors will allow you to get a backup of your data anytime.
SLAs also discuss various other possibilities such as the SaaS vendor going out of business, or contingency plans in case of a breach. Make sure you read the agreement carefully before signing up for a plan!
- What if my SaaS vendor goes out of business?
Based on the SLA agreement, most SaaS vendors offer either of the following options:
- They might offer to provide a backup of all your data onto a local cloud or server.
- They might offer to shift you on to another SaaS vendor with a platform that closely resembles theirs in terms of compatibility.
However, many understand that despite implying otherwise, SaaS is a model of shared responsibility. Both users and vendors must aim to keep their data safe.
Pending lawsuits aside, you’re still going to have to find a solution to keep your business running, in case of a failure. Here are some backups that companies using SaaS tools usually keep mitigating risks of their vendor going out of business:
- Keep an eye out on your SaaS vendors metrics, revenue and funding.
- Make sure the SLA covers recovery risks and details a plan of action.
- Invest in Recovery-as-a-service providers who keep backup of your data.
- What is a private cloud?
Usually, SaaS vendors offer shared spaces onto a cloud. The cloud is divided into “vaults” with each assigned to a subscriber. However, larger enterprises can opt for a private cloud. A private cloud is one where the entire infrastructure serves only 1 customer.
Private clouds are expensive, but highly safe, faster and make moving from one platform to another easier. Subscribers with a private cloud also get more additional features and benefits from the SaaS vendors themselves like assigned security or cloud management personnel.
Top 5 established SaaS companies and their products
Based on market capitalization, here are the top 5 SaaS companies.
Founded in: 1999
One of the pioneers of SaaS technology and models, Salesforce, Inc. is headquartered in California and offers all 3 types of cloud computing models – IaaS, PaaS, and SaaS. They are widely known as the earliest cloud-based CRM tools and focus on helping businesses explore their potential through streamlined workflows.
Salesforce’s CRM is targeted towards marketing, people management, sales, support and more. Apart from this, they have their own app store where they sell third party plugins for their SaaS tools. They also have their own developer platform where one can develop and sell these plugins.
Founded in: 2004
ServiceNow is dedicated to providing automation solutions for workflow management of IT companies. Their tools include those for portfolio and asset management, security operations, compliance, and IT service management.
ServiceNow offers solutions on an enterprise level – which means their products are priced on the higher side and come with the best security. Their Integration Hub offers plugins, and their performance dashboards are known to be among the best designed in the industry!
- Square (now, Block)
Type: B2B, B2C
Founded in: 2009
Brought forward at just the time when the world got used to ecommerce, Square (now, Block) is a credit card processing or mobile payment company. This means they allow any third-party seller to accept and manage payments without their own register.
Block stands out from the rest as they cater to a wide range of customers and offer both B2C and B2B services. They also offer tools for managing payroll services and accounting.
- Atlassian Corporation
Founded in: 2002
Focussed on providing work management and team collaboration solutions, Atlassian provides tools that help businesses ideate, code and ship efficiently. Their many products dabble in automation, IT service management, collaboration and analytics. Similar to the others, they offer a virtual marketplace for plugins.
As the company expands, they have expanded into the cyber security market to offer tools ensuring identity management as well. While mainly focussed on IT companies as a B2B tool, some products are also used by other industry sectors to manage workflows.
Founded in: 2005
Used by teams worldwide, Workday offers SaaS based solutions for people and financial management. Their most popular tool is the HCM system that is used by HR teams to keep track of human capital.
Apart from this, Workday is also developing solutions that can be used within schools and universities. They allow one to track performance, payroll, workdays, as well as receive reports of the same. Workday’s capabilities can be extended by using their product extensions.
Top 5 fast growing SaaS companies and their products
SaaS companies, once past the startup stage usually showcase steep growth curves. Apart from the established top-level companies, here are some that are showing great potential:
Snowflake offers a data cloud that can be used for data viz purposes. Today, to scan large amounts of data, having the right analytics and data viz tool is paramount to success.
This tool allows one to automate their data and identify performance gaps and potential opportunities. As of now their only tool is focussed towards data visualization.
Similar to Salesforce and Atlassian, ProofHub is a collaboration and project management company with tools for the same.
Their product solutions are generic enough to be used by different industry sectors ranging from marketing to event management to engineering. As of now, they have a steady user base of 85,000 teams and growing!
With cyber security becoming highly relevant in the past decade, KnowBe4 focuses on providing security training and solutions.
Their tools include various tests for phishing and malicious files, as well other email security and compliance test tools. Apart from this, KnowBe4 focuses extensively on offering training to teams regarding compliances, risk assessment and recovery programs.
- Google Cloud Platform
Google Cloud Platform is essentially a type of cloud computing service on which people can code, build and ship their own services. In other words, it is both an IaaS and SaaS.
Merging this with many other tools from Google such as Analytics, Google Cloud Platform is a great platform for those starting out on building a tool or a plugin. It is aimed towards both enterprises as well as individuals.
Similar to Snowflake, Splunk allows one to quickly assess and pick out insights from big data. However, it goes one step beyond Snowflake to provide other services such as monitoring, threat detection, automation and more.
Backed by brands like Honda and Tesco, Splunk currently works with over 2200 partners.
Top 7 SaaS metrics : How to find a reliable SaaS product
If you’re looking to start shipping your own SaaS product, or looking to find a reliable one to support your business – knowing the metrics that make or break is important.
The success of a running SaaS product is defined by the revenue it generates. But you can also keep an eye out on things like their customer renewal rates to predict their performance. Here are some top metrics that can define a good product.
- Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is a metric used to gauge the revenue generated per year for any subscription economy based model. ARR basically refers to the total recurring earnings of the company, normalized for a period of one year.
For example: Let’s say a SaaS product A has 3 users, each paying 1000 USD for a 2 year subscription. Then the ARR of the product would be (1000 x 3)/2 = 1500 USD.
Similarly, MRR or Monthly Recurring Revenue is the revenue normalized over a monthly period. Here, it would be 1500/12 = 125 USD.
ARR is a good prediction number for subscription models as it takes into account long-term contracts and does not undergo sudden changes.
- Churn Rates
Churn rates are a ratio of the new revenue/ subscribers gained over a specific time period to the newly gained revenue or subscribers over the same time period. As such, there are 2 types of churn rates:
- Customer Churn
This is a ratio of the customers lost in a time period to new starting customers during the same period.
- From Jan to Dec 2022, this is the growth of customers in a company.
- Customers started out with in Jan – 100
- Customers ended up with in Dec – 90
- Customers lost over 12 months – 15
- New customers who signed in within 12 months – 5
Here, the churn rate would be = 15/5 = 3 = 300%
Whereas, the customer retention rate would be = (number of original customers during end of time period)/ (number of customers at beginning of time period) = (100-15)/100 = 0.85 = 85%
- Revenue Churn
Similarly, this is a ratio of the revenue lost in a time period to the total revenue gained during the same period.
Revenue in 1st quarter = 2000 USD
Revenue in 2nd quarter = 1000 USD
Revenue churn = (Diff. in revenue)/ Earlier revenue = 1000/1000 = 1 = 100%
- Customer Lifetime Value (CLV)
CLV is essentially a measure of the revenue generated on average from each customer. To find a company’s CLV, we first need to find out two other variables.
Firstly, we need the Customer Lifetime Rate. CLR is the inverse of the customer churn rate. Taking an example, let’s say we have a churn rate of 10%. Hence, CLR = 1/10 = 0.1
Next, we need to find the ARPA or Average Revenue Per Customer. This is the total revenue generated divided by the total number of customers (not users).
Hence, if the revenue of a year is 1000 USD obtained from 5 customers, then ARPA = 1000/5 = 200 USD per customer.
CLV is a multiplication of CLR and ARPA. Hence, here, CLV = 0.1 x 200 = 20 USD.
- Renewal Rate
Renewal Rate is simply the percentage of the total number of users of the past year or subscription who have chosen to renew the subscription again for another time block.
It is one of the quicker and easier metrics to calculate and keep track of. Generally, a percentage above 80% is the mark of a healthy SaaS vendor.
- Expansion revenue
When a customer invests in a SaaS product, they also eventually invest in various other add-ons and plugins. This investment is usually higher for clients who take up longer subscriptions or have been long-term customers.
Over a period of time, any extra asset added on top of the core product is included in the expansion revenue generated from that customer. This can include widgets, app store purchases, up-sells, higher version purchases, etc.
- Net promoter score (NPS)
A good SaaS vendor will always stay in touch with their clients and send out regular surveys to understand their needs and future requirements. NPS is calculated from such a survey that includes both qualitative and quantitative points.
NPS measures how satisfied a client is with a product, and how likely they are to recommend it. A healthy NPS score indicates a vendor that is in touch with its customer base and its growth.
- Return on Investment (ROI)
Common across many businesses, ROI is one of the tougher metrics to calculate and keep an eye on. It is essentially the total profitability or net return, over the investment made including workforce, infrastructure, marketing, etc.
ROI is one of the ultimate performance metrics to understand the profitability and future of a company.
Conclusion: The future of SaaS industry
Cloud computing is the future, with all major tech companies now pushing for more and more customers to invest in cloud products. Even on a B2C scale, people are switching off from hardware storage options and shifting to cloud storage for everything from images to passwords.
SaaS is just one of the many solutions that this new age of technology has brought. But given its steep adoption curve, it is here to stay. On the customer side, adopting such products require low investment and even lower tech knowledge.
Currently, there are over 30,000 SaaS companies, and the number is expected to keep rising! What are your thoughts on this growing field?