Software as a Service is much more than just "the cloud"! Learn how to recognize true SaaS and get some tips on what it takes to succeed as a B2B SaaS company.
Before Solfi, I spent over 20 years at the company behind one of Norway's first and most widely used SaaS solutions. We ran a cloud service before AWS and Azure existed. We sold licenses that were renewed annually, and which included future updates to the platform - without anything having to be installed at the customer's premises. We monitored networks and servers, ordered more hardware when we thought it was needed, and fought to provide good quality of use even when growth far exceeded our own forecasts.
What kind of company were we? The closest label we could find was “ASP” - Application Service Provider. But that lumped us in with vendors who ran third-party software for customers on dedicated servers, a far cry from the way we delivered our services.
Then, sometime in the mid-2000s, we came across a new terminology that fit like a glove: “Software-as-a-Service”. Software as a Service. In the early years, we didn\t feel like there where many others like us out there. Today, almost all the software we use in our daily work (or for our own pleasure) is a form of “SaaS”. Social media, email, website solutions, imaging software, accounting software, word processors, travel agencies, messaging services, CRM systems, etc. The list is endless.
Let's take a look at the different forms of SaaS, what can make it difficult to become “SaaSy” and what needs to be in place to succeed.
Why traditional software companies struggles with becoming SaaS-like
In retrospect, it's easy to understand the massive growth in SaaS. For the consumer or customer, the benefits are obvious. No complex installation routines. Few hardware requirements for the client. No specialized technical expertise needed to operate and secure the solutions. These advantages, in turn, mean that SaaS companies can both scale up quickly and over a large geographical area without major obstacles. In addition, the business model provides more predictability on both the revenue and cost side.
Traditional Software | SaaS |
High up-front cost for customer | No/low up-front investment |
Inhouse (or outsourced) expertise to maintain and secure | No technical expertise needed to maintain and secure solution. |
Future updates to software costs extra $$$. | Includes future updates. |
Yet many small and medium-sized software companies struggle to make the transition from delivering traditional software to becoming a well-run SaaS company. Why? Because SaaS businesses look completely different to traditional software houses.
It's difficult to go from being a book publisher to becoming a daily newspaper. As a reader, it's easy to think that it's much the same. After all, it's just words printed on paper! But you can't put together a newspaper editorial team in the same way as a publishing editorial team. In the same way, it's demanding for a software house to become a true SaaS company.
SaaS is about more than just subscriptions.
Everything that can be bought can be rented. But not everything that can be rented can be bought. It's easy to take any piece of software, put a “SaaS” sticker on it, install it on a cloud service and send out a periodic invoice. Perhaps you can even continue to sell the software to those who still want to run their own version?
But true SaaS solutions can't be bought, they are optimized to be delivered as a service. Yes, the source code exists, maybe even some documentation, but a true SaaS solution is not optimized to be sold to ONE customer, but to be rented out to many.
SaaS is a business model that reaches into every part of the company. But in a simplified way, we can say that it essentially revolves around three areas:
Monetization. “The go-to-market strategy, how the service is marketed and sold, pricing, customer follow-up and which KPIs are set for commercial success.
Product development. Product strategy, development processes and architecture.
Operation and delivery model. Quality processes around scalability, quality and architecture, cost control.
We'll take a closer look at what this means, but first let's look at the two main types of “SaaS” that exist.
Different flavours of "Software as a Service".
Broadly speaking, there are two types of SaaS.
B2C SaaS - delivery of software as a service to consumers.
B2B SaaS - delivering software as a service to businesses and government agencies.
While the last decade has seen many attempts to blur the lines between the consumer and business markets, this traditional distinction between selling to consumers and businesses has stood firm. Why is that? After all, the needs are often the same - words printed on paper?
Let's draw another paper-related comparison. When the pandemic shut down much of the world in 2020 and put millions of workers at home, a curious news story emerged. Stores (especially in the US) were sold out of toilet paper. The media was convinced that widespread hoarding of toilet paper was the reason. However, the explanation was somewhat less dramatic. The consumption of paper in thousands of homes increased drastically, while there was a paper drought in the workplace. For reasons related to supply chains, distribution, packaging dimensions and wrapping paper, it wasn't easy to redistribute toilet paper from the corporate to the private market.
Put simply, it's the same reason why SaaS companies rarely sell to both markets. Businesses have very different requirements when it comes to privacy and security, internal policies, industry standards or legislation. End users have different rights than businesses when purchasing services. Organizations buy large volumes of licenses, end users buy for themselves or a family package. And purchasing in a larger company or public sector organization can be very cumbersome, while you as an end user make quick decisions.
(Yes, there are BigTechs like Google and Microsoft that seems to sell the same solutions in the B2B and B2C markets. But there are many “invisible” differences when it comes to distribution, agreements, functionality and pricing).
The business model of B2B SaaS
Foundational to SaaS is that you don't buy the software, but subscribe to it. Included in the subscription is usually a limited right of use, operational services, support and future updates.
There are different ways of pricing SaaS, but the principle is: simplicity! The best SaaS companies have pricing models that are easy to understand and transparent to the customer, as a kind of counterweight to earlier times when only IT departments could understand the pricing model that came with the software or hardware installed in the server room. This is largely due to the fact that end users today are much more involved in the decision-making process when it comes to purchasing, or perhaps even handle the purchasing themselves.
SaaS companies try to lower the threshold by making the product affordable (or free) to adopt. Then, through the pricing model, ensure that the more the customer succeeds, the more the revenue increases. Ideally, the price should reflect the value the customer derives from using the service and change in line with the customer's success. This can be done in different ways, for example through the number of users using the solution, the level of service the customer wants and how much functionality they need.
Here I must emphasize that it's not about the highest price, but hitting the right price level. Good SaaS companies know that it's not what the customer paid last month, or last year, that's most important. The most important thing is LTV - “Lifetime Value”. Having sustainable pricing that retains customers over the long term is the key to success. It costs much more to aquire new customers than to keep the existing customer base happy.
Product development and architecture for SaaS
Software is software. Aren't the development processes the same? Hardly.
For regular software, the software is as good as finished when it is delivered to the customer. But in SaaS, it's sold with future upgrades included. Or to put it another way - in the traditional model, the sale is complete, whereas for a SaaS business, it's just starting!
This is where product owners have an important role to play. What should the product strategy look like to keep existing customers happy? What will it take for more customers to successfully grow into the solution? What areas can be improved to increase the use of the service? And are there modules that can be developed that the customer might be willing to pay more for?
This also means that good SaaS product development teams have a slightly different view of what constitutes a successful delivery.
Traditional software | SaaS |
Did we deliver on time? | Did we increase the adoption of the solution? |
Did we deliver on quality? | Did we increase our users and customers satisfaction? |
Did we deliver on budget? | Did we increase future earnings? |
The business model also affects much of what happens under the hood of the service. The architecture must ensure that the solution is scalable, secure and robust, while also being cost-effective. To achieve this, it is essential that the customer runs the same instance of the application. In the B2B SaaS world, this is often referred to as a “Single Instance, Multiple Tenant” architecture. All customers run the same code base but have their own physical or logical data stores.
The architecture must ensure that the solution is scalable, secure and robust, while also being cost-effective. In the 2000s, when software and hardware were closely linked, this was almost a contradiction in terms; when you had more simultaneous users and higher demands for quality of service, you needed more expensive hardware and databases. The result was often a higher price per compute or per GB of storage.
But that doesn't scale! So the solution for SaaS is to build scalability and robustness into the software as much as possible, so that you can make use of cheap hardware with few requirements for robustness. In this way, you prevent the unit cost from going up. The unit price does not increase when the number of users or customers increases.
This means that scalability, robustness and security in a SaaS company to a much greater extent involves the product development organization. The transition between software development and operations is blurred to a much greater extent. And out of this has been born a new discipline: DevOps.
Ops and service delivery
This brings us to how operations and service delivery works differently in a SaaS company. To understand why this is the case, we can look at some of the characteristics of a SaaS service that we have already mentioned.
The perceived quality of the service has a direct and indirect impact on revenue.
The service comes with an SLA and customer support.
The service is updated frequently.
Multiple users should preferably drive down the unit cost.
Scalability, robustness and security are closely linked to the software.
Firstily, this requires close collaboration with the product development organization, architects and security experts. If there are problems with scalability or robustness in the solution, it is likely that it involves the software. New updates are frequent, and the ops team must be a kind of gatekeeper in relation to what can be accepted to be put into production. At the same time, it must be possible to update the software without disrupting customers, at least if you have a large customer base. It's hard to find a good time for planned downtime for a SaaS service!
Comprehensive, proactive monitoring of the solution is also important to identify issues before critical failures occur and to continuously identify areas that can be optimized.
Twenty years ago, building data center services that could run a SaaS solution could be technically complex, but today much of this work is done by cloud services such as AWS and Azure. The complexity has now shifted to how to utilize the cloud services in the most efficient way, and have predictable costs that no one is surprised by when the bill comes from Jeff Bezos.
This requires both DevOps and good collaboration with the product organization. The return on investment is often sky-high when DevOps works continuously to optimize both the solution and how the cloud services are used.
A checklist to identify "true SaaS"
To sum it up, here is a checklist I've created to assess how “true” a SaaS business is.
Assessment | Score (1-5) |
Revenue is largely recurring, driven by subscription sales. |
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The pricing model is easy to understand and revenue increases in proportion to the customer's success with the solution. |
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The company works systematically to ensure that existing customers are satisfied and successful with their use of the solution. |
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Revenues and expected lifetime value from existing customers are highly predictable. |
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The product development organisation measure success in terms of user adoption, user satisfaction and revenue. | |
All customers run on the same instance of the software. |
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The product development organisation takes responsibility for the robustness, scalability and security of the service. |
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With each new customer or user, our unit costs go down. |
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There is a high degree of control over operating costs and the organisation works proactively to lower unit costs over time. |
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Issues and problems are identified and fixed before the customers are aware of them. |