The Software as a Service (SaaS) subscription model has changed not only the way individuals and businesses use software applications and services but as well their cost structure by shifting many Capex items to the Opex bracket. The model is a win-win for both the service providers and the user clients. The many benefits of the subscription model entice users to opt for it in place of traditional license-based on-premise models.
What is a subscription-based SaaS business model?
Let us examine what is a SaaS and subscription model. The software as a Service model is the way software applications are delivered to the end-user customers. In earlier days, business software applications were bought by organizations by paying one-time license fees and then installing them on the servers on their premises and paying annual maintenance fees for ensuring the software is up to date. This model also worked on customising software to the client’s specifications.
Under a SaaS model, users pay a fixed periodical (monthly, quarterly, or annual) subscription fee to access and use an application. Some models allow users to use and pay the charges based on the usage of the software – aka on-demand model – rather than a fixed fee. Usage may be calculated on different methods like time, number of users, etc., depending on the type of service.
Its pricing model allows SaaS startups generate recurring revenue and they predominately focus on enhancing the value of products and services to both new and existing customers.
A bit of history and statistics on SaaS
Many people believe that the very idea of the SaaS business model is just over a decade old, but in reality, the idea of centralized hosting of software products, the origin of the SaaS concept, dates back to the 1960s. Large enterprises including banks used to avail of computing power and database storage from data centres, though not business software.
The wider adoption of the internet in the 1990s accelerated the use of a new kind of centralized computing known as application service provider (ASP) service, which was designed to provide businesses with hosting and managing third-party business applications and infrastructure. This was, however, different from the current SaaS companies that host and manage their own software.
The 2000s saw tremendous growth in the SaaS business driven by the emergence of many startups in this segment and the high adoption of SaaS applications by organizations and individuals. This is evident from the fact that the SaaS market reached $152 bn in 2021 and is estimated to reach $ 208 bn by 2023 and grow fivefold in the next 10 years. A Deloitte report in 2021 estimated that the global SaaS industry would see rapid development and continuous innovation of products and business models.
Some key benefits customers gain from adopting SaaS
- Lower or no up-front investment and maintenance costs
- Flexibility to scale up or down, or exit the plan
- Instant deployment of new features
- Enhanced security
- Transparent pricing models
The evolving SaaS framework offers various benefits for users and software providers. While the benefits for software providers need a separate discussion, we will focus here on how it helps end-user customers.
Before the widespread adoption of the SaaS model by users, organizations used to implement software applications and infrastructure by purchasing licenses and installing them on the servers in their premises, known as an on-premise installation. The multi-tenant environment of SaaS products means the software providers don’t have to maintain, support, and upgrade multiple customer-specific versions, helping them save on full product cycle costs.
Similarly, the cost of maintenance and upgrades is shared by all the customers. These, coupled with competition, make it possible for providers to offer the best price for the users. SaaS business products are more affordable and workable for clients because renting software on a subscription basis involves less financial risk and cash outlay than buying it in full. This helps SMEs who may not have enough funds or expertise to build and maintain the application to use up-to-date technology solutions that could be afforded only by large enterprises earlier.
Improves cash flow
The license fee and implementation fee for the applications under this model used to be paid upfront, making it unaffordable for small and medium enterprises. The SaaS model has changed this scenario, by operating on a pay-as-you-go structure, helping the cash flow of small businesses. Also, cash outflow on account of implementation fees, upgrades, and maintenance are reduced or eliminated.
SaaS allows small businesses including startups convert CapEx where a large upfront amount is spent on implementing the required business applications, to Opex where they can use the same application by paying a small subscription fee in a convenient frequency. Because business clients pay a limited amount per period for SaaS subscriptions instead of spending a sizable outlay at once, they can manage their cash flow better. It also helps small businesses scale down or up depending on the external conditions or internal cash position.
In addition to the above benefits that impact bottom and cash flow positively, there are a few other advantages of the SaaS model for small businesses financially, including;
- Free trials: Potential users can use free trial versions of the application they are planning to buy. This helps evaluate the software to ensure that it meets the solution you are looking for, before signing up for a subscription.
- Flexibility: The fixed fee subscription model allows you to unsubscribe from the plan whenever you want. Likewise, an on-demand model charged based on usage allows you to increase or decrease the usage as and when you want.
- Convenience: Unlike buying a license and implementing the software application, the SaaS model allows you access to up-to-date applications by connecting to the internet and signing in, without the need for an IT expert. Most SaaS products are easily configurable by functional users according to their needs.
- Engagement: Since SaaS products are usually accessible from any device from anywhere, it provides businesses, especially small and medium-sized businesses, with an affordable solution to increase customer engagement rates leading to revenue increase.
- Updates: Clients can upgrade the application to the most recent versions easily with the click of a button, making it an easy task compared to the on-premise model.
- Data security: Technology advances in cloud technology provides high-quality data security solutions to clients, including tools like multi-factor authentication and anti-phishing programs.
- Instant deployment: Once you sign up for the subscription plan, you can instantly start using the application.
- Transparent Pricing: SaaS price plans are typically based on the number of users and the fee is paid periodically. It allows you to easily estimate your expenses and cash outflow and also predict costs if your business scale.
Both software providers and user companies that need software have multiple reasons to be happy about this model. Almost all software product and service providers have shifted to or added the SaaS subscription model to their business and those who have not yet done are in the process. It is not just the software, many services are shifting to this model – anything as a service (XaaS) -, to survive and grow. The customers are excited about the model because it gives them flexibility when businesses and economies get complex, uncertain, and volatile and are affordable.
The PACI financial analysis and management tools available on the SaaS model are built on modern technologies like AI, ML, NLP, RPA, and blockchain technology and will be part of it in the coming days. The current platform frees you from the need to spend innumerable hours understanding and analyzing your cash flows to run the operations, plan future growth, and negotiate with investors.
Paci.ai, a unified finance management platform for SMBs, looks forward to tackling the backwards-looking nature of accounting with its insights and predictor modules.
The insights module works on the concept of proactive messaging on trends ( Income, expenses, customers, and key notifications providing a small business with actionable insights at the right time.
The predictor module ( Coming soon), leverages historical data to simulate key but the day – to day decision-making on hiring, buying capital equipment and planning promotions among others.