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Should You Consider the Software as a Service (SaaS) Business Model?

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Should You Consider the Software as a Service (SaaS) Business Model?

There are various business models open to an online entrepreneur. Most people are looking for an enterprise that has great potential for growth, is sustainable, and could possibly be sold in the future. One option that ticks all these boxes is the Software as a Service (SaaS) model. SaaS, in most cases, is a business that offers a software product on a subscription basis, typically hosted in the cloud. There are many niches for a SaaS business, but common examples include content management, SEO tools, accounting, project management, and customer service. Before you launch a service, though, it is worth considering the positive and negative sides of this type of business.

Advantages of SaaS

Flexible Pricing. SaaS allows for flexible pricing, with the opportunity to provide various payment levels. Initially, your price might not be optimal, so you want the chance to test different options. It may be that consumers are willing to pay more than you first thought, or they may be encouraged by a free trial offer. Offering various levels also helps you appeal to individual consumers and enterprise customers.

Long-Term Customers. Single payment products might bring greater initial revenue, but a quality SaaS business should earn more over the longer term. If the product is fulfilling a need, customers will have little incentive to leave. The business owner, along with the employees, will get used to your product, so there will naturally be a reluctance to learn something new. While it is important to continually invest in new innovations, the same product might be used by customers for many years.

Predictable Revenue. Initial revenue predictions will be difficult, but gradually you will gain enough data to assess expected revenue. When you know the average duration a customer subscribes, working out your required advertising costs is easier. You can start to get an understanding of monthly revenue based on advertising spending, affiliate traffic, and customer churn.

Disadvantages of SaaS

Low Initial Revenue. A SaaS business will take time to grow. In the early stages, you will have a limited customer base, relying on user feedback to shape the direction of your product. Early development costs can be quite high, so it may be some time before you start to turn a profit. While this is expected in many businesses, anybody looking for quick profits might choose another path.

Ongoing Promotion. Promotion for a SaaS business does not end with the first purchase. Subscription businesses require consistent promotion, with the aim of convincing customers to stay each month. While the level of promotion might not be as high for an existing subscriber, you need to promote the idea that your product is constantly improving and adapting. The promise of exciting updates and developments can be enough to significantly reduce cancellations.

Additional Investment Required. People use SaaS products for their ease and convenience. The product will be hosted in the cloud, frequently updated, and monitored for security issues. All of these factors take time and investment, so a significant portion of revenue must be reinvested into security and maintenance. Self-hosted products still require updating, but the overall maintenance costs are usually lower.

Creating a successful SaaS business will take time and investment, so it is important to weigh up your options before making the commitment. While there are risks associated with every business opportunity, SaaS can offer the benefit of sustainable, long-term income. You need to be prepared for customers that will require round-the-clock access, but a worldwide consumer base means you can attract the right users for your service.

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