What is SaaS? Understanding Software as a Service

Introduction: Importance of the SaaS Distribution Model

Software as a Service (SaaS) is a software distribution model that has gained immense popularity over the past couple of decades due to its many benefits.  It allows users to connect to and use cloud-based apps over the Internet.  This distribution model completely altered how most users consume and utilize applications when compared to the turn of the century.

To demonstrate the popularity change over time, during the past decade, the global SaaS industry was estimated to have grown at a Compounded Annual Growth Rate (CAGR) of 25%, from $21B in 2011 to $157B by 2020.  

In this article, we will define SaaS, explore its history, and examine the advantages and disadvantages of SaaS for buyers and software companies.

Defining SaaS

SaaS is a software distribution model in which software is provided over the internet and accessed through a web browser. It eliminates the need for installation and maintenance of the software on the user's computer. SaaS is an innovative way to access software applications as it enables users to access the software through a subscription-based model, which is usually paid on a monthly or annual basis.

History of SaaS

The concept of SaaS has been around since the 1960s, but it was not until the 1990s that SaaS began to gain traction. In the early days, SaaS was primarily used for accounting and financial software. Today, SaaS is used for a wide range of software applications, including customer relationship management (CRM), enterprise resource planning (ERP), and human resources (HR) management, and most other software based industries.

Advantages of SaaS for Buyers

1. Cost-effective: SaaS is a cost-effective solution for businesses as it eliminates the need for expensive hardware or software installations. The subscription-based model allows businesses to access software applications at a lower cost than traditional software licensing models.  In many traditional software licensing models it required companies to make large capital investments before ever using the software.  Some of the expenses associated with traditional delivery include data center space and/or servers, the software license, and staffing required to maintain all of the systems.  With the subscription model, companies typically no longer need to make whole purchases in a single year which is helpful from a cash flow perspective.  Additionally, with SaaS software, companies typically no longer have to directly pay for servers, data center space, and likely have a reduced expenditure in operational staff to keep systems running.
2. Scalability: SaaS is highly scalable and can be customized to meet the needs of businesses of all sizes. Businesses can easily add or remove users as their needs change.  Typically at any point in time should a business need more usage capacity (storage, user seats, etc.) a SaaS application can be altered to accommodate the change.
3. Accessibility: SaaS provides remote access to software applications, which is ideal for businesses with multiple locations or employees working remotely. This allows for seamless collaboration and increased productivity.
4. Automatic Updates: SaaS provides automatic updates, which means that businesses always have access to the latest version of the software without the need for manual updates. This ensures that businesses are always up to date with the latest features, bug fixes, and security updates.

Advantages of SaaS for Software Providers

1. Recurring Revenue: SaaS provides software companies with a predictable and recurring revenue stream, which is ideal for long-term planning and growth.  This is especially helpful as it relates to predicting cash flow and sustainable profit margins for the business.
2. Scalability: SaaS is highly scalable and can be customized to meet the needs of businesses of all sizes. This allows software companies to expand their customer base without the need for expensive hardware or software installations.  If a customer needs to add more usage capacity (user seats, storage, etc.) this can typically be commissioned on the fly with automated scaling processes.
3. Distribution: With SaaS the provider doesn’t not have to deal with sending versioned copies of their software to their customers any time there is a version change. 
4. Support: With typical SaaS implementations, all users are on the same version of the software.  This greatly reduces the burden on support teams as there are less variables in supporting a customer.
5. Reduced Piracy: SaaS reduces the risk of piracy as the software is accessed through a web browser and cannot be copied or distributed.

Disadvantages of SaaS for Buyers

1. Security: SaaS relies on the internet to access software applications, which means that there is always a risk of data breaches and cyber-attacks. It is important for businesses to ensure that their data is secure when using SaaS, which is not always easy to do.
2. Customization: SaaS may not be suitable for businesses that require highly customized software applications. SaaS is typically a standardized model, which may not meet the specific needs of all businesses.
3. Dependency on the internet: SaaS is dependent on the internet, which means that businesses may experience downtime or slow performance if their internet connection is slow or unreliable.
4. Proliferation of subscriptions: SaaS makes switching costs of software providers low compared to traditional software.  Companies need to ensure that they have procedures and policies in place that guide the procurement of software and the subsequent flow of the business data that is being sent to the software provider.

Disadvantages of SaaS for Software Providers

1. Customer Retention: SaaS is a subscription-based model, which means that software companies must continuously provide value to their customers to ensure customer retention.  If a customer is unhappy, or finds a better solution, they can typically cancel their subscription at any time.
2. Cash flow: While predictable recurring revenue is a big benefit of SaaS, the downside is that a provider no longer receives a large one time upfront payment, but rather receives payment periodically usually in monthly or annual payments.

Conclusion

SaaS is a popular software distribution model that provides businesses with a cost-effective, flexible, and scalable way to access software applications. It has many benefits, including remote accessibility, automatic updates, and cost savings. However, businesses must also be aware of the potential security risks and the limitations of a standardized model. Despite its disadvantages, SaaS remains a popular choice for businesses due to its many advantages. 

As a business owner, it is important to evaluate whether SaaS is the right delivery model for your business. If you decide to use SaaS, it is important to choose reliable providers and ensure that your data is secure. 

For software providers, SaaS provides a predictable and recurring revenue stream and the ability to expand their customer base without the need for expensive hardware or software installations.  On the other hand, it is important to continuously provide value to customers to ensure customer retention and growth.

In conclusion, SaaS has revolutionized the way software applications are distributed and accessed, providing businesses with a cost-effective and flexible solution to access software applications. As technology continues to evolve, SaaS will likely remain a popular choice for businesses looking to improve their operations and increase efficiency.

Frequently Asked Questions about SaaS

To further enhance your understanding of Software as a Service, we have compiled a list of frequently asked questions: