SaaS Business Model: How To Make Money With SaaS

Even if you’ve never heard the term SaaS (which is pronounced like the word “sassy” but without the “y” on the end), you’ve likely used this type of service either in your business or personal life. SaaS stands for software as a service and it is delivered in the cloud. Whoa! The cloud? 

Yes, but not the type of cloud you see in the sky. Instead, when we refer to a service that is cloud-based, we mean that it is run over the Internet — so it’s typically delivered, managed, and maintained offsite (not located at your physical site) and it is usually public (or shared by lots of people).

SaaS is one of several categories within cloud computing. The idea of cloud computing is a pretty complex subject, but for our purposes here, we want to keep it simple and discuss it in very general terms. If you want to dive deeper into the subject, there are lots of information and opinions on the matter!

In a similar vein as SaaS is the mobile application (app) market. Delivered over the Internet, these apps are made for use on your mobile devices, from smartphones to tablets (such as the iPad). Whether you have an Android phone or prefer the iPhone, you’ve likely used lots of mobile apps for everything from scanning documents from your phone to monitoring the weather. 

All types of businesses, especially retail stores and restaurants, are rolling out mobile apps that make it easier to shop from your phone, receive special coupon offers, schedule in-store merchandise pickups, or order food for delivery. When you use Facebook or Twitter from your phone, or play games on your phone, all of it is done through mobile apps.

Online entrepreneurs have made a lot of money from creating and selling mobile apps and from developing and selling software as a service. In this article, we take a closer look at both the SaaS market and mobile app industry and show you why both of these areas still have plenty of room for you to get creative and make bank (that means earn a lot of money)!

Deciding to Deliver Online Services

If you’ve ever used TurboTax to complete your personal taxes, then you’ve used software delivered as a service. In fact, a lot of digital solutions, including shopping carts, credit card processors, website builders, and data backup tools are all examples of SaaS. 

Most people use cloud-based services today and don’t even give it a second thought because it has become extremely common. In 2019, the SaaS market was set to hit $100 billion in revenues, according to Synergy Research Group. By the end of 2020, the global SaaS market is expected to hit the $157 billion mark, according to Statista.

Already, the SaaS market has seen consistent double-digit growth of 30 percent or more, year over year since 2013. Some analysts consider SaaS as a mature market, meaning there’s not much more room for new growth or new competitors. Consider that some of the top U.S. companies already dominate the market, including Microsoft, Oracle, and Salesforce. However, within the broader software services market, you can still tap into other niche services areas.

One trend expected to see significant growth in the next couple of years is the micro SaaS business model. The micro-market is defined by the following characteristics:

  • Solopreneur: The business is typically owned and managed by a single, founding entrepreneur or has fewer than five employees.
  • Bootstrapped: All the money it takes to start the business comes from the entrepreneur and is usually done in a very cost-conscious manner (translation: it’s run on a shoestring budget).
  • Limited earnings: While some businesses dream of multi-million (or billion) earnings, the micro SaaS model makes from $1,000 to $20,000, per month at most.
  • No plans to scale: The micro-business is focused on its target audience and usually has limited features or capabilities — and it plans to stay that way.
  • Remain self-funded: Just as the solopreneur may have bootstrapped the start-up micro SaaS, there is no desire to seek outside funds from angel investors or venture capitalists in order to fuel expansion.

If you’re interested in starting a small online business (which is very likely given you’re reading this book), then the traits of a micro SaaS should easily ring true for you! To be successful in the micro SaaS market, there are some types of services or customers that are best to target. These include:

  • Niche: The software as a service addresses a very specific need within a much smaller market. You may not have a huge pool of customers, but you could be the preferred service that dominates that small space.
  • Industry-specific: No need to be everything to everyone. Instead of offering a service that works across lots of customer types, you focus on a particular area or customer, such as dentists (healthcare industry) or Realtors (professional services industry).
  • Gap services: A micro SaaS may address only a very specific need where another SaaS leaves off. So, you either fill in the gap or you offer a complementary service that extends the value of a larger, existing SaaS.

Putting the Software in the SaaS

Let’s recap. SaaS is expected to remain a financially strong industry over the next few years. And there’s a lot of opportunity to be had for a small, focused SaaS business. So far the news is all good, right? There’s one small detail to discuss: how to develop software.

Here’s the potential hiccup in your dream of starting a SaaS business: You have to provide usable software. 

If you’re reading this article and you are not a software developer, a programmer, or a decent amateur developer, then it may be challenging for you to immediately write a piece of software from scratch that’s developed well enough (no bugs!) to make available to a paying customer.

However, that doesn’t mean you aren’t capable of coming up with a fantastic idea — one that people are willing to pay for and that meets a real market need. So how do you transfer your idea into actual software? Here are some options:

Take the self-taught route: It’s not inconceivable to think you can teach yourself how to code. We know plenty of people who have achieved this, and there are lots of resources available to help. Try reading some popular programming books to get started.

Hire a pro: There are lots of software developers who work as freelancers and are happy to get paid to turn your idea for a software service into a real product. There are also plenty of online sites to match developers with available projects. Check out these sites:

When hiring a contractor or freelancer to create any type of content, from software applications to videos, you need a contract. Not only do you want to scope out the project and determine completion dates and payment terms, but you also want to get copyright details in writing. You may have to hire someone to execute on your ideas, but at the end of the day, you should own the complete rights to the software with no strings attached.

Understanding the SaaS Model for Making Money

Part of what makes software as a service a potentially lucrative business is the way in which you earn revenue. Most online businesses (or any business for that matter) are based on a one-time purchase. Even if you have a healthy dose of repeat customers, you probably don’t have control over when or how often they come back to buy from you.

That means your earnings are somewhat unpredictable, at least until you have enough buying history from customers to project your average daily or weekly sales. But the SaaS model is much like a subscription-based business in that customers agree to purchase your services every month, across a defined period of time. You know this revenue is going to show up in your business bank account every month, and this is called monthly recurring revenue.

As fantastic as it sounds to know exactly how much money is coming in every single month, there are some variances in this model that lend a bit of unpredictability. If you’ve ever signed up for cloud-based services, you probably know where we’re headed with this.

First, SaaS companies usually offer several different pricing plans that range from a monthly pay-as-you-go option (with no service contract) to the option for a one-year or multi-year contract. In exchange for the customer committing to a longer term of service with a contract, there is a discount offered off the normal monthly fee. If the discount on multi-year contracts isn’t a sweet enough deal, customers may prefer the month-to-month option. In this scenario, you’re assuming the customer may stick with your service over a long period of time, but you don’t know for certain.

There are ways to encourage customers to choose a multi-year contract option instead of a monthly plan. One strategy is to offer the monthly price but require that customers pay it in full for six months or for a full year at the time of registration.

Instead of charging the customer’s card for $10 each month, you charge $120 for 12 months; that way you still get a designated amount of money up front. The other strategy is to provide users with a free 30-day trial and at the end of the trial period offer a steeply discounted price on a multi-year contract if they sign up before the trial expires.

In addition to monthly and annual price plans, there’s another pricing option that is sometimes at the heart of many SaaS businesses — it’s free! This is referred to as the freemium model. You have a basic service option that is offered free, and you have add-on features or advanced (premium) services that are available for a larger monthly fee. The goal is to get a large number of customers to start using the product for free and then entice them with a more advanced service and features in the paid version. As you can imagine, the risk of this approach is whether or not you can convert enough free users to paid customers.

The next potential issue with the SaaS model is how much churn you have, or the rate at which customers drop off of your service on a monthly or quarterly basis. Churn rates could be higher if you have more customers on the monthly price plan and it’s just easier to opt out of your service. 

But churn rates can also be impacted by the number of dissatisfied customers who drop your service because you’ve not delivered services as promised, have had technical issues or service interruptions, or you oversold the capabilities and the service or features don’t work well or are too complicated to use.

Whatever the reason, a high churn rate can take a big bite out of your projected monthly revenues. While rates vary by industry or service type, generally, SaaS businesses have a target churn rate of around 1 to 2 percent; but if your product isn’t up to par, you might see rates double or triple that rate.

The other consideration that can impact your steady stream of incoming revenue is the amount of money it takes to get new customers. In the SaaS business model, the cost of acquiring a customer, or CAC, can be high compared to other types of online businesses. 

One reason for this is because there is a large amount of competition, unless you serve a specific niche, which means you may have to invest a lot more money for marketing, advertising, and sales. Complicating matters further is that it’s relatively easy for customers to churn off, or leave, your service business. You could end up with a smaller base of loyal customers, so you not only need to gain brand new customers, but you may constantly have to replace existing customers.

If managing to get and keep more customers isn’t enough to keep you busy, the last big factor in the SaaS model is the amount of money it takes to maintain your business. One of the big benefits of a SaaS business to your customers is the ease of use. Customers don’t have to install or manage the software on their computers or in their networks. If something goes wrong, the SaaS provider (you!) is the one to fix it. 

That’s great for your customers, but the flip side of that equation is that you are the one managing networks and maintaining services so they work around the clock. All of this network infrastructure and maintenance upkeep could add to up a pretty big bill each month. The trick is that you need to invest in these equipment and upkeep items first, even before you may have enough customers to cover those costs. This is why many SaaS businesses seek investors instead of self-funding.

If you can manage to keep costs low and wait for your revenues to catch up with your costs, you’ll eventually be in really good shape with steady, predictable earnings.

SaaS Term You Need To Know

  • Freemium: A combination of the words “free” and “premium,” this is a pricing strategy for a SaaS business in which a basic service is available for free, but customers must pay to access a more advanced (or premium) version of the service.
  • Lifetime value (LTV): Lifetime value refers to the amount of money a SaaS customer is worth to your business over the course of time (usually based on the length of contract terms).
  • Churn: The term to reflect the rate or percentage of customers who leave your business across a set period of time, usually measured monthly, quarterly, or annually. You might have a churn rate of 3 percent quarterly — which reflects the portion of your total customer base that has “churned off” your services.
  • Monthly recurring revenue (MRR): Monthly recurring revenue is the amount of money you take in every month for services actually provided. If a customer has paid a one-time set up fee for services, or has paid for a full year in advance, you do not count all of these funds as part of MRR. You only include the amounts for delivered services.
  • Annual contract value (ACV): Annual contract value is the amount of money you expect to collect from a customer on a 12-month contract for your services, but it is the average of all yearly contracts.
  • Burn rate: This is the calculation showing how quickly your SaaS model goes through cash to cover expenses.
  • Minimum viable product (MVP): Minimum viable product represents the most basic version of your service (or product) that can be made available to early adopters, or those customers who are willing to try your service before it is fully developed.
  • Service level agreement (SLA): Service level agreement represents the agreed upon terms of service between you (the SaaS business) and your customer using the service. It’s a contractual obligation defining the specifics of how and when services are delivered, along with other reasonable expectations of service.

Creating Apps for the Mobile Customer

The number of smartphone owners has easily surpassed the number of PCs. According to Market Data Forecast, the global smartphone market was valued at USD 378.29 billion in 2020 and is anticipated to reach USD 493.13 billion by 2026, with a CAGR of 6.85% during the conjecture period 2022 – 2027.

Of all the time people spend on digital (or online) media, adults spend an average of three hours per day on their mobile devices. And the vast majority of that time, 93 percent, is spent specifically on mobile apps. Mobile apps are a type of software that is created for use on a variety of mobile devices, including tablets and smartphones. With all this time spent on mobile apps, it’s no wonder there have been billions of mobile apps downloaded worldwide.

More than 194 billion apps have been downloaded, as of the end of 2018. Even though only one-tenth of all apps are purchased, total worldwide app revenue reached $37 billion in the first half of 2019, and that’s expected to continue to grow as mobile device usage expands. As enterprising app entrepreneurs, you could take a cut of this revenue; but, as with the SaaS market, the key is to find a smaller niche market to serve with a very specific use for your mobile app.

What types of mobile apps are people using? To answer that question, take a moment to look at your smartphone or that of friends. How many apps are installed on the device? What types are there and which ones are most used? As you might have predicted, gaming apps are by far the most downloaded, and account for nearly one-quarter of all available apps. And across all apps, iPhone users are most likely to pay for their app downloads. 

The most common price point is just over $1, but there are also spikes at the $4.99 and $9.99 price range. There are lucrative earnings potential in mobile apps, especially for games, but there are millions of gaming apps that also make little if any money. As with any endeavor, mobile apps are a business that requires having a solid, sought-after product, and marketing the product to make sure customers find you.

Mobile apps like the gaming app examples we show you, potentially take in a lot of revenue, but it’s not all necessarily from the cost of the download. Gaming apps have led the way in making add-on products and services available for purchase inside the apps. 

For example, you may download a popular mobile gaming app for a one-time fee of $2.99; once you start playing the game, you might also purchase virtual commodities (swords, gold, and special powers) to help you advance in the game. You could also purchase game “cheats” or tips to help you play better.

All of this is counted toward the daily revenue that an app earns. As a mobile app developer, these are also examples of the ongoing development work you have to do (or pay for) to keep the game interesting and expanding. So, you have more than one-time development costs to create the game itself.

Games obviously aren’t the only mobile apps getting the attention of users. Business apps make up nearly 10 percent of all available apps. Education is the next most popular category, followed by lifestyle and entertainment.

We should point out there are two main sources for downloading apps, depending on your type of mobile device. If you have an iPhone or iPad, the Apple App Store is your go-to source for apps. If you use an Android device, you likely use Google Play to get apps. The trends, of which apps are most popular and which ones generate the most revenue, match closely between the two app stores.

Budgeting and building apps

Making money with mobile apps is terrific if you happen to be a mobile developer. As with the SaaS dilemma, having a good idea for a gaming app or a business app only gets you so far — you have to develop the app, too! You can always hire a developer (check out the same resources we mention earlier for SaaS developers). 

Or, if you have some base-level programming skills and an interest in learning, you can teach yourself to develop mobile apps. To help you build your own, there are some resources available to make it somewhat easier.

Whether you have some familiarity with programming or are a complete novice, there are websites, apps, and toolkits (a collection of developer tools) that simplify the process of creating mobile software applications. Just like there are solutions that make it easy for you to build your own website, even though you don’t know HTML, XML, JavaScript, or other languages, there are similar tools for building apps.

How much can you expect to pay to have apps built for you? If you’re a savvy programmer, you can simply invest your time in building apps and it’s especially cheap (or free!). Some development resources, like those listed in this section, charge nominal fees to access their app-building platforms, while others may offer free versions. 

If you’re working directly with a hired developer, for example, then the range you may pay will vary widely. The payment range is largely dependent upon the complexity of the app and the time frame in which you want it. Prices for the completed project can rage from $50,000 to $500,000. As with any project-based contract with a developer, it’s important to have the terms of the agreement carefully detailed at the outset.

Get started by checking out these resources:

  • Appypie (www.appypie.com): Code-free mobile app development that segments its app-building resources by category (church, retail, restaurants, and so on)
  • Twilio (www.twilio.com): Provides a set of development tools and coding short-cuts to develop communications and messaging apps
  • QuickBase (www.quickbase.com): Low-code development options available for business apps
  • App Press (www.app-press.com): Code-free options for developing a range of different types of apps

When using low-code or no-code resources to help you develop an app, confirm the policy for reselling your app or using it for commercial, revenue-generating purposes. Some sites charge a fee if you plan to resell the app versus using it for yourself, or in your business.

Uploading apps for sale

The journey from coming up with a good idea for an app to developing a working mobile application available for sale is only part of the process of becoming an app entrepreneur. The final stage is to upload your mobile app to the appropriate app stores — Google Play (for Android) or the App Store (for Apple/iOS).

As you may have realized, one of your first decisions in developing an app is whether it will be developed for only one mobile device platform or for both. Development is different for each, so if you want the app to be sold in both Google Play and Apple iStore, you are essentially building two different mobile apps. There is an annual fee for developers and contributors to participate in each of these application stores. It’s $99 for Apple and $25 for Google.

Generally speaking, whether selling in Google Play or in Apple, it helps to follow these tips before officially submitting your mobile app for review:

  • Test and retest: The app must work, so complete a thorough testing process before submitting for third-party approval from an app store.
  • Understand app store policies: Educate yourself on the complete process for publishing an app in the store, and understand all policies so that you don’t get caught with a violation that could halt or delay the approval process.
  • Spell out app details: From knowing what type of audience rating your app has to pricing, you want to have these details decided before submitting an app for approval, as they will be part of the application and review process.
  • Prepare promotional material: Save some time by having promotional images, videos, and app descriptions ready to go once you gain approval.
  • Complete store listing: Follow guidelines for each app store so that you have all the information written down and ready to use for the in-store app description that users see when perusing the app store.

For specific details on the process of uploading an app for review, visit each of these stores:

Both app stores have specific requirements for accepting mobile apps into their stores. Getting your mobile app added to one of these busy online stores isn’t difficult, but it does take patience. Not only does it take a while to hear back from the stores with their approval for your app, but the review process within each app store can be tedious. Once you load your app into the store, it can take quite a bit of time to gain final approval to offer the app for sale — sometimes as much as several months!

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