The Software as a Service (SaaS) and subscription business model

One of the biggest trends in online commerce in recent years is the growth of the software-as-a-service (SaaS) market.

Occasionally referred to as “on-demand software” or “hosted software”, the SaaS business model enables software to be licensed on a subscription basis and is centrally hosted. Instead of installing and managing software themselves, customers can access your service simply via the internet.

In the business-to-business arena, this is most commonly seen in the provision of software services such as accountancy, salesforce automation and HR, delivered through browsers with all of the functionality carried out on remote servers.

This has twin track appeal to customers. Not only can they avoid an upfront outlay on expensive software (paying perhaps £10 or £20 a month instead) but they also avoid the hassle of loading that software onto their office computers. As an added bonus, upgrades are usually part of the package.

In addition, just about any business service can be offered on a subscription basis. Some great SaaS success stories include Edinburgh-based FreeAgent, which offers cloud-based accountancy as a service, and Brightpearl, a fast-growth company specialising in business and retail management software which incorporates inventory, accounting, CRM, POS and e-commerce.

There are several compelling benefits for companies using SaaS services rather than traditional services. One of the biggest is cashflow, traditionally companies would have had to buy software or other services for a substantial sum up front – whereas with SaaS, companies simply pay monthly. This is particularly good for cash-strapped start-ups, of course!  And if you don’t like a service, don’t need it any more, or find a better, new one, you can usually change with minimal penalties. The second major benefit is that you can access the services from anywhere, whereas the older services tended to be accessible only via a desktop or local network.

SaaS companies often also link their product to other people’s, so there are often whole “ecosystems” of related services, such as Receipt Bank automatically linking to accounts software. This means that companies with niche needs can often find just what they need using a combination of different SaaS apps which all work together. This also means that there are a whole host of business services which simply didn’t exist outside the SaaS world, offering small companies in particular access to really great tools, especially for digital marketing and customer service.

The primary disadvantage for customers is that in the medium term it can be more expensive using SaaS than a software package you buy once. And even this varies – many SaaS services are considerably cheaper than traditional services, such as citrusHR, which is typically less than a third of the price of traditional HR support for smaller employers.

For companies selling their wares on a SaaS basis the main advantage is recurring revenue – once a customer has signed up, there is a good chance they will remain a customer for a long time so long as you continue to give them what they need. One disadvantage is that as they pay monthly, it can take a long time to build up a significant income – so it can be expensive to grow a new SaaS company to profitability. US SaaS company Zenefits has just raised $500m in Series B funding, but only has a run-rate of $20m revenue at the moment, despite having 10,000 customers.

The SaaS sector is growing very rapidly – Gartner predict that it will grow to a whopping $14.5 billion this year – making it a highly attractive sector for tech entrepreneurs.

This is #1 out of 10 ways to make money from your tech business idea.

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