SaaS Product

What is a SaaS Product?

A SaaS (Software-as-a-Service) product is a software delivery model in which remotely hosted, cloud-based software is provided on a subscription basis. Sometimes referred to as “on-demand software,” users typically access the platform via a web browser or mobile/desktop application.

Key characteristics of SaaS products include:

1. Accessibility. SaaS applications are accessible from any Internet-enabled device, allowing users to access the software from various locations.
2. Subscription business model. Unlike traditional software, which is often purchased as a one-time license, SaaS products are usually offered on a subscription basis, often monthly or annually.
3. Centralized hosting. The software is hosted on central servers, which means users don’t need to worry about maintaining or upgrading the software or hardware.
4. Automatic updates. The software vendor manages updates and upgrades, which eliminates the need for users to download or install patches and software upgrades.
5. Scalability. SaaS solutions are scalable, with different tiers of features, performance, and pricing to suit different business sizes and needs.
6. Cloud-based. The cloud delivery model offers enhanced collaboration and sharing capabilities.
7. Low cost of access. A SaaS software product doesn’t require the subscriber to purchase licenses and hardware, and the provider handles maintenance and update costs.

In 1999, Salesforce launched the world’s first SaaS product, its customer relationship management (CRM) software. Since then, cloud computing and the SaaS model have revolutionized the software industry, allowing companies and individual consumers of all sizes to access and utilize powerful software without the need for expensive infrastructure or technical expertise.

Synonyms

• Software-as-a-Service
• SaaS Application
• SaaS Platform
• SaaS Software
• On-demand software

The Rise of SaaS Products

The main contributor to SaaS products’ meteoric rise since the early 2000s is the fact it tremendously benefits businesses and customers. In fact, they were the main catalyst for the subscription economy — a marketwide shift towards product access, as opposed to outright ownership.

Growth of SaaS Products From a Business Standpoint

Since SaaS customers only pay for continuous access to a software product, the SaaS revenue model is characterized primarily by recurring revenue. For software companies, this means:

• A steady revenue stream rather than relying on one-time purchases
• Predictability in revenue forecasting and budgeting
• Greater flexibility in pricing models and packaging options
• Virtually unlimited scalability in a cloud environment
• Higher customer loyalty thanks to ongoing value and customer satisfaction

From a business standpoint, SaaS products have become a highly lucrative and attractive option for software companies of all sizes. That’s why the median SaaS valuation multiple between 2015 and 2023 is 5.1x revenue (and a quarter of companies were sold above 9.7x revenue).

In short, it’s one of the best business models if you’re looking for sustainability and predictable growth.

The Growth of SaaS Products From a Consumer Standpoint

For customers, the convenience and accessibility of SaaS products are unparalleled. With no need to install or manage software on their own servers or devices, users can easily access powerful tools and software from anywhere with an internet connection.

Think about it this way:

• When Netflix moved to a SaaS model, you could choose from thousands of movies and shows. And you didn’t have to wait to receive it in the mail.
• Thanks to CRM software like Salesforce, you don’t need to manually store and organize all your customer data at work. That’s now automated.
• With project management tools like Notion, you can organize everything at work and at home — everything from upcoming meetings/projects to your grocery list.
• Thanks to Shopify, you can start an ecommerce business from anywhere. Or, as a consumer, you can benefit from the convenience of shopping from your phone at any time (with so many options).
• Microsoft Office 365 allows you to access all the classic Microsoft Office tools *plus* cloud storage and collaboration features.

The list goes on, but you get the point. SaaS products make everyone’s life easier. So, they’re an easy sell.

SaaS Product Examples

Most SaaS products are business applications. Here’s a look at some of the most common examples:

Customer Relationship Management (CRM)

Customer relationship management (CRM) software is designed to help businesses manage interactions with customers and prospects. Popular CRM products include Salesforce, HubSpot Sales Hub, and Microsoft Dynamics 365.

Content Management Systems (CMS)

Content management systems (CMS) allow businesses to create and manage digital content, like websites or blogs. Examples of CMS platforms include WordPress, Webflow, and Squarespace.

Project Management

Project management SaaS products help teams manage tasks, deadlines, and project collaboration. Some popular options include Asana, Trello, and Basecamp.

Collaboration and Communication

Communication platforms help businesses and team members communicate with one another. Slack is the best example. Others include Microsoft Teams, Zoom, and Google Meet.

Enterprise Resource Planning (ERP)

Enterprise resource planning (ERP) software streamlines business processes and allows organizations to manage everything from human resources to finances. Examples include SAP, Oracle Financials Cloud, and Infor.

Sales Automation and Enablement

Sales enablement and sales automation software are diverse — they range from online chatbots and email automation to sales process optimization. Some popular examples include Gong’s revenue intelligence platform, SalesLoft’s sales engagement platform, Outreach’s sales automation platform, and Dealhub’s sales proposal automation software.

Marketing Automation

Marketing teams use marketing automation software to streamline tasks like email marketing and landing page creation. Examples include Mailchimp, Marketo Engage, and Pardot.

Human Resources Management

Human resources management software helps organizations manage HR processes like employee recruitment, onboarding, training, benefits administration, and performance reviews. Some popular options are Gusto (payroll) and Workday HCM (human capital management).

Accounting and Finance

Accounting software automates a range of financial tasks, including budgeting and expense tracking. The most popular finance and accounting software platforms are QuickBooks, Xero, and Freshbooks.

Procurement and Supply Chain Management

Procurement and supply chain management software helps organizations manage the process of sourcing, purchasing, and tracking goods or services. Examples include SAP Ariba, Coupa Software, and Proactis.

SaaS products also have countless uses in every industry and business application imaginable — real estate, cybersecurity, investment banking and financial modeling, legal practice management and compliance, fleet management, DevOps, healthcare, etc.

How SaaS Products are Developed

SaaS product development has a few defining characteristics: cloud computing, agile processes, and scalability. Let’s dive into each one in-depth.

Cloud Computing

Cloud computing is at the core of SaaS product development. It empowers teams to build and deliver software over the internet, rather than through traditional methods like physical servers. This allows for faster development and deployment, as well as increased flexibility and accessibility for users.

To develop cloud services, developers use a combination of Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS).

• Infrastructure as a Service (IaaS) provides virtualized machines, storage, and networks
• Platform as a Service (PaaS) creates environments for application development, testing, deployment, and hosting.
• Software-as-a-Service (SaaS) is the delivery model they use to maintain the application on an ongoing basis.

“On the cloud” essentially means that the software is being hosted and maintained on a server off-site, accessible through the internet. These servers are located all over the world in massive data centers owned and operated by cloud service providers.

Agile Processes

Agile development is a software development methodology that focuses on iterative and incremental project management. In essence, it’s an approach to creating products that involves cross-functional teams working closely together in quick iterations or “sprints.” This allows for faster innovation and release of new features.

To build a SaaS product, teams use agile processes to quickly gather feedback and make improvements. That way, they can create a product that is constantly evolving to meet users’ needs without waiting for a major release or update.

Scalability

As more users access the application, the product needs to be able to handle the increased load without crashing or slowing down. This is where scalability comes into play. SaaS products are designed to scale seamlessly, allowing for an increasing number of users and data without compromising performance.

Challenges in SaaS Product Development

The biggest challenges software companies have when building and maintaining their products include:

• Product innovation. The SaaS industry is extremely competitive. The threat of being “out-innovated” comes from all angles — large companies with resources can easily develop competing products, while new market entrants can take your customers by solving their niche’s problems more effectively.
• Matching product to customer needs. Market research is sometimes expensive and time-consuming, which adds stress and difficulty in a development process that’s otherwise time-sensitive (especially with constantly-changing technology.
• Scalability. Creating a scalable infrastructure is complex, especially if you’re serving enterprise customers that need custom-built software.
• Integration issues. According to 2022 data, the average company uses 130 SaaS applications. To sell to your ideal customers, yours has to integrate with the ones residually related to it. This means building API connections and native integrations (and leaving room for custom ones) in addition to the core product.
• Security concerns. With so many users and billions of dollars worth of sensitive business data continuously flowing through SaaS apps, security and compliance are top concerns for both users and software companies. This adds an extra layer of complexity to product development.
• User adoption. Once a customer signs the dotted line, the potential for their team members to use the software isn’t guaranteed. Providing a seamless onboarding and training process is crucial to ensuring user adoption, which ultimately impacts customer retention.
• Monetization and pricing strategies. Most SaaS companies have to use complex pricing models, which makes it hard to find the sweet spot between product value with customers’ price sensitivity.
• GTM strategy development. Figuring out the ideal marketing mix and sales strategies for your product isn’t something you can simply “guess” correctly. It takes a lot of research, testing, and data analysis.
• Price localization. If you’re selling internationally, purchasing power will vary from region to region. You’ll a system for pricing for local markets that don’t leave money on the table.

How to Launch a SaaS Product

Successfully launching a SaaS product involves a series of steps that combine software development practices with cloud-based hosting and service delivery considerations.

Here’s a general outline of the process:

1. Research your market and validate your idea.

Before building a digital product from scratch, the first step is determining whether…

• there’s a market for it
• that market is big enough to build a sustainable business
• the proposed product meets some customer need or solves a pain point

That way, you can figure out which features to build and which to axe. Otherwise, you could end up building a product nobody wants.

Market research includes:

• Understanding your target audience
• Researching potential competitors
• Identifying potential challenges to building and scaling
• Defining a target market with enough demand for the product

The best way to validate your idea is by creating an MVP (minimum viable product) or conducting surveys and interviews with potential customer personas.

2. Define the product.

Although you have a basic MVP, you don’t have a solid product roadmap yet. This step involves specifying what the software will do, its features, and how it will provide value to its users (based on your research and validation). In a way, the aim of this step is to create a user story for product development.

3. Design the user experience (UX) and user interface (UI)

UX and UI design use the product roadmap as a basis for creating a user-friendly and visually appealing experience. This step involves mapping out how your product will interact — user flows, wireframing, prototyping, and testing designs with potential customers.

1. First, you’ll create a mockup from your user flow. This is a bare-bones sketch of what your app or web page will look like.
2. Then, you’ll create a wireframe, which is the visual representation of that mockup, in Figma, Adobe XD, or other design software.
3. You’ll test the wireframe to see how customers move through it and adjust accordingly.
4. Your prototype is a clickable, working version of your wireframe. The goal is to get users to provide feedback on this before development, so you can improve and create a user-friendly interface.

Once you have a full, working prototype, your dev team can get started.

4. Choose your tech stack.

Depending on the specific functionality of your software application, you’ll choose programming languages, databases, cloud platforms, and other development tools to build it.

You’ll also have to decide whether the product is:

1. Multi-tenant (a single instance of the software serves all customers).
2. Single tenant (each customer has their own copy of the software and data stored on a shared server).
3. Hybrid multi/single tenant (at least one application component is multi-tenant, while other components are single tenant).

This all depends on the requirements of the specific SaaS product you’re building, how many customers each subscription will serve, and core development competencies.

5. Develop the product.

The actual coding and development of the product involves a series of steps, each with its own set of best practices:

• Architecture. This is the overall layout and structure of your software application.
• Frontend development. This involves creating the user interface (UI) design into actual code using HTML, CSS, and JavaScript.
• Backend development. The “behind-the-scenes” coding that powers the product. You’ll likely use one of three types of cloud services: IaaS (infrastructure-as-a-service), PaaS (platform-as-a-service), or SaaS (software-as-a-service) hosting.
• Quality assurance (QA). QA involves testing for bugs, performance issues, and overall quality.
• Release and deployment. This is the stage where your software goes live, which means you’ll need to deploy it on a server or cloud platform. Some common options include Amazon Web Services (AWS), Heroku, Azure, Google Cloud Platform (GCP), among others.

This is also the stage where you’ll build security, monitoring, and analytics into the product.

6. Develop a customer onboarding process.

Once the product is live, it’s time to onboard your first customers. Customer onboarding typically includes the following activities:

• User training
• Setting up a billing system
• Creating customer onboarding documentation or help center
• Ensuring proper integration with other tools, like CRM and marketing automation platforms

In the case of complex software, it also involves implementation and custom integrations. It may also involve building custom software for your customers.

7. Price the product.

Pricing is a critical step in launching a SaaS product. You’ll have to determine the right price point based on various factors:

• Product value
• Competition pricing
• Target market budget and purchasing power
• Perceived value of your software (based on its features and value-added services)

Most SaaS companies have to use a combination of flat-rate, tiered, usage-based, and feature-based pricing models to make their product profitable while reflecting its value.

8. Launch and promote the product.

Finally, it’s time to launch and start promoting your SaaS product.

You could create a pre-launch buzz by driving traffic to your website using digital marketing techniques. In the short term, this includes PPC ads, PR, social media marketing, and sales outreach. Long-term it also includes SEO, content marketing, email marketing, and building a community around your brand.

You’ll also need to support existing customers by providing timely updates, personalized customer support options, and creating upsell opportunities. Since customer retention is the key to long-term profitability in SaaS, maintaining a high level of customer satisfaction is critical.

Measuring Success: SaaS Product Metrics

For the most part, SaaS metrics are quite similar to the key performance indicators (KPIs) of many other businesses. Perhaps the biggest difference is that, for SaaS products, these metrics are even more important since they tend to have a direct correlation with customer retention.

SaaS marketing metrics include:

• Marketing qualified leads (MQLs) and opportunities
• Customer acquisition cost (CAC)
• Cost per lead (CPL)
• MQL:SQL conversion rate
• Engagement metrics (per channel)

SaaS product and customer metrics include:

• Active users
• Time to value
• Conversion rates from visitor to trial user, trial to customer
• Usage and engagement rates
• Customer lifetime value (CLV)
• SaaS churn rates (both customer and revenue churn)
• Net Promoter Score (NPS)

SaaS financial metrics include:

• Monthly recurring revenue (MRR) and annual recurring revenue (ARR)
• Gross profit margins
• Cash burn rate
• Annualized run rate
• Burn multiple
• Expansion revenue

SaaS sales metrics include:

• Revenue per customer
• Contract values (ACV, TCV)
• Sales cycle length
• Sales efficiency ratio
• Lead response time

Profitability: Determining SaaS Product Pricing

Pricing is critical to profitability in SaaS. However, there’s no perfect “one-size-fits-all” pricing model for SaaS products. It’s actually one of the most confusing aspects of running a software company.

There are a few common types of SaaS pricing models:

• Flat-rate pricing — Subscribers pay a fixed monthly or annual fee for unlimited access to the software and its features.
• Tiered pricing — Multiple flat-rate plans are available, depending on functionality and usage limits. As customers move up tiers, the value and complexity increase.
• Usage-based pricing — Subscribers pay based on the amount they use the software. This may include the number of users, storage space used, or a unit-based measure of actual product usage (e.g., data).
• Freemium — New users can sign up for a free, bare-bones version of the product, either to try it out or because their needs aren’t complex enough to require a paid plan. A percentage of free users typically convert to paid plans at some point.
• Feature-based pricing — Customers can choose from different pricing plans depending on the features they need. This is a good way to offer a more customized experience for each user.

Most SaaS companies use all these pricing strategies. This means they’ll need to find an optimal price point for each one individually to make up the whole product price.

The Future of SaaS Products

Digital transformation is well underway. Several critical trends will shape the future of SaaS products over the next five years:

Increased Focus on Customer Success

SaaS companies are now prioritizing customer success — they acknowledge its vital role in business profitability and customer loyalty. This requires a proactive approach to identifying and addressing customer needs, improving retention, and driving revenue growth.

Over 72% of businesses view achieving customer success as their top priority. And two-thirds of B2B customers expect the same personalization as their B2C counterparts. This indicates a significant shift towards crafting personalized experiences that foster lasting customer relationships.

AI-Driven SaaS Software and Advanced Analytics

AI platforms like GPT-4 have dramatically changed the way (and speed with which) SaaS products are developed. It’s relatively easy to build a micro-SaaS or product MVP with AI. Similarly, advanced analytics tools help SaaS businesses make better decisions based on customer data.

Over time, technological innovations like these will lower the barriers to entry for aspiring SaaS vendors, give existing ones new ways to differentiate themselves, and fuel further growth in the market. It also enables companies to create forecasting models that more accurately reflect their trajectory.

The Emergence of Vertical and Horizontal SaaS

Vertical SaaS refers to products tailored to specific industries or niches where organizations sell specialized software to manage complex industry-specific tasks. This approach allows businesses to access best-in-class technologies that cater directly to their unique needs.

Horizontal SaaS is the opposite. It provides more general capabilities used across various industries — for example, CRM software or accounting solutions. The distinction between vertical and horizontal SaaS is becoming more pronounced, which means today’s SaaS businesses have a range of options based on their specific requirements and use cases.

A Leveling Playing Field

There will always be dominant software vendors like Salesforce and Oracle. But the growing accessibility of technology and demand for SaaS development means it’s now easier than ever for small businesses to compete with established giants (or generate sizable income for themselves).

This is particularly true in the SaaS space, where companies can start selling software without needing a massive sales force or huge capital investments. Instead, they can build a niche product that solves one problem, grow it to a few million ARR, and sell it to a larger company or continue scaling independently.

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