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The SaaS Business Model Explained

Institutional Affiliation

The SaaS Business Model Explained

SaaS model is an abbreviation of Software as a service. It is part of the software that is
hosted on a cloud infrastructure and enterprises pay a monthly fee to get access to the software. It
requires a huge coding ability with a combination of a lot of user interface design ability. The
main variation between software companies and SaaS is that SaaS is held on the cloud (Yang,
Sun, Zhang and Wang, 2015). While software requires a license to activate the software and
infrastructure required to host. Rather than the SaaS firm keeps a record of its membership
(Yang, Sun, Zhang and Wang, 2015). The customers required to log in their accounts and
obtained full access.
There is a huge demand for SaaS due to its cost-effectiveness. The enterprises that don’t
want to invest a lot of funds in developing IT infrastructure use SaaS solution regularly and
becomes a key component of their operation (Dempsey and Kelliher, 2018). For instance, the
sales department can use SalesForce while the customer relations department can use Zendesk.
Further, the use of SaaS helps the firm to transfer the risk of using the software to the SaaS
providers. Even if SaaS providers can make money in various ways their main source is a
reoccurrence of customer’s membership charge (Dempsey and Kelliher, 2018). The membership
charge is what gives the customer access to the products and features of the software. Valuation
of SaaS is different from other enterprises because the huge investment required to grow the
business can eat into its profits.
Every SaaS enterprise faces three stages, the first stage is the startup phase. The startup
stage includes getting everything ready including programming a functional product and
launching it into the market. It also includes techniques that are put in place to get the first
customers (Yang, Sun, Zhang and Wang, 2015). The second phase is hyper growth, if the
product is accepted in the market the firm will experience huge growth. However, the hyper-
growth stage is associated with high expenses in storage, data, bandwidth and other kinds of
technologies to manage the acquired customers. Since the use of SaaS prefers the service due to
cost associated with creating an IT infrastructure then the provider will have to create it for them.
The third stage is the stable golden goose, in the stage, the SaaS has leveled up (Dempsey and
Kelliher, 2018). The firm makes a lot of profit and getting more customer will not affect the
infrastructure limit of the firm like in the hyper-growth stage.
The hyper-growth stage is the determinant of the success or failure of a SaaS enterprise.

The firm may be having good products but its inability to effectively manage the hyper-growth

stage can lead to business failure (Fowley and Pahl, 2016). To effectively manage the hyper-

growth stage the firm needs to choose an appropriate growth strategy. The first growth strategy

is to increase organic traffic because the greatest profit is obtained from organic search on

platforms like Bing and Google. The second stage is the introduction of new channels for

marketing, the business should invest in the marketing channels which will give the highest

access to customers (Fowley and Pahl, 2016). The third strategy is to add product upsells, it is

the best way to serve the current customers because it will help the firm to earn more. To

improve customer satisfaction the business should ensure that the software works faster by

removing bad codes. The last strategy is to add affiliate programs that will greatly promote


Dempsey, D., & Kelliher, F. (2018). Recurring Revenue Model Through a Cloud Computing
Channel. In Industry Trends in Cloud Computing (pp. 111-128). Palgrave Macmillan,
Fowley, F., & Pahl, C. (2016, September). Cloud migration architecture and pricing–Mapping a
licensing business model for software vendors to a SaaS business model. In European
Conference on Service-Oriented and Cloud Computing (pp. 91-103). Springer, Cham.
Yang, Z., Sun, J., Zhang, Y., & Wang, Y. (2015). Understanding SaaS adoption from the
perspective of organizational users: A tripod readiness model. Computers in Human
Behavior, 45, 254-264.