The software as a service (SaaS) industry has been exploding the past few years. And it’s only expected to keep growing. In fact, by 2023, the industry is predicted to be worth $623 billion.

But even if you’ve heard the term SaaS, you still may have questions. What exactly is a SaaS company and how do they work? What is the SaaS business model like?

In this post, we’ll answer these questions and more. Keep reading to fully understand what a SaaS business is.

What is a SaaS Business?

Let’s start with the basics. What exactly is a SaaS business?

A SaaS company is an organization that uses software to provide their customers with a certain service. These companies create, develop, and update their software products themselves.

Instead of providing a physical product, they sell a completely digital offering that can be used by anyone anywhere. Because of their digital delivery, these products are available on any device that is able to connect to the internet.

Since SaaS companies create and monitor their own products, they also have more control over them, which means they can create a better user experience.

SaaS is in Demand

SaaS companies are becoming incredibly popular. And for good reason.

Think of this from the position of a business owner example. Say that you own a music store where you teach lessons to local students.

You’re growing and it’s getting hard to manage everything. You have current customers missing billing payments, prospective customers chatting with you on your website, and current students who want a portal where they can access their account information and see the performance calendar.

Instead of having to invest incredible amounts of time and money in creating an IT infrastructure to manage all of these tasks, you can instead find a SaaS solution.

This provides you as the business owner with a tool that does the job for much cheaper and faster than it would be to create it on your own. Instead, you just owe a monthly fee to the SaaS company. Voila.

From the SaaS business’s perspective, this looks like an addition to their monthly recurring revenue. This steady stream of income allows the company to continue to grow and improve.

How to SaaS Business Model Works

As appealing as SaaS companies are, you can’t just start one today and have it profitable tomorrow. There are three main phases that most SaaS businesses go through. These are setup, growth, and stabilization.

Let’s look at each of them.

Setup

Every company has to start somewhere. The setup phase is where the foundation of a SaaS business is built.

You’ll start by discovering a need for your product, identifying your target market, and then creating your software solution.

It’s also where you’ll establish other areas of your business like customer support, marketing strategy, and financial organization.

Growth

Now it’s time to scale. You’ve got your product created and launched, and now it’s time to take things to the next level.

As you grow your customer base, you’ll realize that you need to grow your internal team to keep up with demand. This often means hiring people for your marketing, sales, and accounting teams.

But the other great part of the growth phase is that with each additional customer, you’re growing your monthly recurring revenue.

This additional income will help you continue to improve your software, fixing bugs and releasing new features with time.

Stabilization

The third phase of the SaaS business model is called stabilization. It’s the phase that all SaaS owners dream about where things are steady.

Things are set up well, processes are in place, and things are running smoothly. Customer service knows what they’re doing, sales is actively growing your customer base, and development is continuously improving your product offering.

Cue the deep breath.

B2B SaaS Products

Now let’s talk about the two main markets for SaaS companies: business to consumer (B2C) and business to business (B2B).

First, let’s cover B2B.

A B2B SaaS company sells their software to other businesses to help them run their companies. Their function can vary greatly, often with a focus on running things more efficiently or automating certain functions.

In the B2B SaaS world, mutual growth is the norm. This is because when customers succeed, the SaaS business will grow as well. When a customer has a great experience, they’re going to remain loyal and refer colleagues to use your products.

This means that B2B SaaS companies are often super invested in helping their clients succeed.

Whether a business needs help with sales, marketing, operations, or finance like a subscription billing service, there’s a SaaS solution out there. Common examples include Microsoft, Salesforce, and Asana.

B2C SaaS Products

B2C SaaS companies have a lot in common with their B2B counterparts. They also want their customers to succeed and focus their energy on providing the best outcome possible.

The biggest difference is they often provide a simpler service at a smaller price point since it’s targeted to an individual instead of an entire business.

Common B2C examples include Credit Karma, LinkedIn Premium, and the premium version of Tinder. Each provides a service to individual customers for a recurring fee.

SaaS Business 101

Now you know what a SaaS business is, how they work, and the different target markets they serve. If you have a SaaS idea, why not try it out?

Want to learn more? Check out our blog for additional business tips and tricks.