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How The SaaS Business Model Works

An ever-growing $150 billion market that shows no signs of slowing down, to say that the SaaS business model is proven would be the ultimate understatement. That said, making that model work is much, much easier said than done. It’s no secret that most software startups struggle to get off the ground (let alone thrive).

This is all despite what you might hear via LinkedIn or the latest SaaS “guru” (ugh). Understanding the fundamentals of the SaaS business model should be the bare minimum for any founder or business owner interested in throwing their hat in the ring. In this guide, we’ll break down the basics for anyone totally new to SaaS.

Perhaps the most significant aspect of running a SaaS business is in the name. That is, software as a service. You aren’t just selling a product. You’re a full-blown service provider. And so your customers aren’t a one-and-done affair. Once someone becomes a user, they’re your customer for the foreseeable future (and ideally forever).

This directly impacts everything from how you market your product, communicate with customers and approach sales. Below are three details that set the SaaS business model apart from a more “traditional” business. Your goal is to keep customers around for the long haul. This means that your product needs to go beyond meeting an initial pain point or customer need.

Instead, it needs to become integral to your customers’ life. Sounds a bit dramatic, right? But think about SaaS tools like Gmail, Trello or Slack which many companies couldn’t imagine themselves living without. The fact that there are alternatives to all of the above popping up left and right signals the importance of keeping customers satisfied so they don’t jump ship.

This means regularly touching base with customers, gathering feedback and answering questions to ensure that everyone’s on the up-and-up. SaaS companies are often the gold standard when it comes to customer satisfaction, offering self-help channels and speedy social support so users are never left waiting.

It’s well-documented that it costs way more to acquire new customers than it does to retain the ones you have. The SaaS business model is centered around this concept. This might seem contradictory to the point above, but let’s break it down. Let’s say you run a SaaS company and you just hit the milestone of 10,000 users.

Now, at this point are you going to consider your business “finished?” Or are you going to start brainstorming ways to score your next 10,000 users? Long-term survival in SaaS means constantly bringing new users into your funnel. Whether it’s through paid advertising, SEO or social media (often all three), your business’ survival depends on a constant influx of new users.

This is especially true given that most SaaS companies operate on a free or freemium model, meaning that not every user is actually a paying one. Although some of those free users will eventually convert, many of them won’t. That’s reality. Meanwhile, you also have to consider how many customers churn (stop using your service) on a month-to-month basis.

Whether it’s due to their budgets or a competing product on the market, churn is inevitable. All of this speaks to how much the SaaS business model relies on numbers and data to ensure customers are coming through at a healthy rate, leading us directly to our next point.

Another reason that SaaS companies can grow quickly is due to remote hiring. The fact that SaaS teams are inherently tech-savvy and remote-friendly means not only that they can hire talent from anywhere and everywhere, but they also aren’t tied down by the expenses of a traditional office.