The Pros and Cons of a SaaS Business Model

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The delivery and management of subscription-based software in the cloud is on the rise and shows no sign of slowing down. The traditional on-premise software model is quickly becoming a relic of the past. So what makes the SaaS business model any better or worse than traditional software offerings?

What are the Advantages of the SaaS Business Model?

There are a number of good things going for the SaaS model, including licensing flexibility, ease of deployment, the latest software versions, scalability based on users’ needs, and a more predictable revenue stream in the form of less expensive monthly subscriptions.

The ability to manage software versioning
As SaaS is hosted in the cloud, updates only need to be applied from the provider’s end. Customers will always be current on software versions and have the latest features through periodic incremental updates, all of which is built into the subscription price. Contrast this with the often expensive on-site software upgrade model, which provides less frequent updates, greater budgetary requirements, and often must enlist the help of a consultant to apply the upgrade.

SaaS is scalable
There are great demands being placed on companies to provide real-time information, which requires large amounts of data to be processed in a timely manner. Fortunately, SaaS applications can be made scalable; they have the ability to handle high data transaction volume and increased swells of activity, such as payroll processing, or month-end closures. Having this ability allows for up-to-date reporting and informed decision making.

Scalability within the SaaS model is not limited to just information processing. SaaS providers often offer several subscription tiers to meet the different needs of their user base, and a customer can usually change between options on the fly. In addition, software in the cloud allows for teams with users based in different locations to collaborate using the same solution.

Cloud deployments
With deployment and installation of software in the cloud, the SaaS company provides membership to the end user simply by granting them access through their online account credentials. All that’s needed is a web browser and connectivity. There’s no need for on-premise software installation or costly infrastructure on the part of the customer to host the software, nor is there a need for an end-user license to activate the software.

Flexible licensing

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The SaaS subscription model is much more accommodating to the needs of the customer, and offers adaptability that hosted software cannot provide. SaaS offers flexible monthly and yearly timeframes for subscriptions, and the length of subscriptions are typically on an as- needed basis. In addition, there is no need to purchase a license or install the software, unlike what is required of hosted software.

Predictable revenue
Although we can never perfectly predict revenue, when the software you provide becomes integral to the operation of a business, you’ll build loyal customers and start to see consistent monthly revenue from subscriptions. This is much more predictable than a model based entirely on one-off sales. Customers who pay for your services for longer periods of time are less likely to cancel their subscription services, leading to a more predictable revenue stream.

What disadvantages exist in the SaaS Business Model?

The SaaS model has its share of obstacles as well, compared with traditional software business models. Longer sales cycles, competitors piggybacking off of ideas and pricing structures, security concerns, ease of ability for customers to jump ship due to low costs and competitor offerings, as well as the challenges associated with consolidating marketing and business analytics efforts, should all be considered potential shortcomings.

Longer conversion funnel
In the SaaS business model, the road to turning free users into paying subscribers usually consists of a longer sales cycle — on average several months, which usually includes free trial periods and signups. You’ll spend more time courting your customers and cultivating those leads and prospects.

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Easy to copy business models
Where one SaaS company finds success, there are bound to be a slew of imitators to follow. If a company has demonstrated success with a particular sales strategy, pricing structure, or email campaign, it is very easy for competitors to emulate these successful strategies by simply navigating the web to copy the approach. In this way, pricing becomes transparent to both customers and competitors alike.

Lower barriers to entry for competition
Easy integration into the SaaS model can also mean easy replacement and lower barriers to entry for the competition. Most purchases in SaaS are subscription based, so once customers are on board, you still need to provide increasing value over competitors, while still up-selling to the next subscription level. Should a customer become dissatisfied with services or support, they can simply move on to a competitor offering a similar pricing structure without having to make a larger upfront investment like one would with other software sales.

Complex analytics
Marketing and business analytics for the SaaS business model is much more complex, as you often have data coming in from all different directions. According to Abhi Jadhav, managing partner at Bay Leaf Digital,

“Even though most SaaS marketing efforts are done online, the use of multiple marketing and automation tools create silos that that make it difficult to get a comprehensive view of marketing efforts. This is particularly exacerbated through the use of marketing automation products, web analytics services, and channel marketing services (e.g. email marketing, PPC management) that are very loosely integrated with each other.”

Security
Just like everything else that resides in the cloud, SaaS offerings are not immune to malicious threats and data loss. Trusting that mission-critical and sensitive data is safe in the hands of third-party providers should be a top concern for both subscribers and providers alike. Understand the limitations for which the software provider is responsible, with regards to keeping your data confidential and ensuring that data integrity is not compromised, can be critical.

Conclusion

Although there are some drawbacks to the SaaS business model, such as the previously mentioned lengthier sales cycles, lack of customer loyalty due to similar competitor service offerings, as well as security concerns, there also exists an even greater amount of benefits that cloud-based SaaS offerings provide. Cost efficiency, flexibility, scalability, up-to-date releases, and predictable revenue streams for providers are all compelling reasons to help explain why all signs point to SaaS continuing to being an integral part of future technology trends.