SaaS Business Model: 6 Key Considerations for the Transition

1. Can you manage SaaS migration and deployment?

It is essential to understand that in the process of migrating an enterprise application to a SaaS service as it essentially becomes a product. Like any product, it must be effectively managed and supported. This means roadmaps, marketing, support, etc. If this will not be possible for you to manage, you may need to rethink the transition.

2. Are you application-ready for SaaS transformation?

Applications and related services designed for internal use are not usually built to run on SaaS solutions and may be less complete and robust than a client-facing application. Depending on the current state of your application, you may need to invest significant time and effort in refactoring the application and its resources. In the worst case, significant portions of the application and its supporting resources may need to be restructured or rewritten.

3. Are you ready to run multiple users and multiple instances?

An application designed for internal use is often built to support many users, but rarely to support many instances. While in its current state, it is sufficient to run one instance of the application and its resources with all the users connecting to that instance. SaaS deployment will require your application to be able to run multiple instances, each with its own space and resources.

This often requires a new way of thinking about the application in order to keep each instance virtually distinct and separate while allowing them to access hardware resources simultaneously.

4. What are the security requirements for your SaaS product?

The security of your application and its data is a crucial concern as cloud deployment opens it up to new vulnerabilities. You will need to make sure that you have taken all the necessary measures to keep your sensitive and critical data safe from malicious third parties, catastrophic data loss, and system failure, in addition to service outages.

5. Will you be able to adhere to regulatory compliance?

As SaaS migration removes an enterprise application’s geographical limitations and allows its use to expand globally, your application may become subject to different legislation, regulations, and industry standards. A notable example is the European General Data Protection Regulation (GDPR) adopted in 2018. You may need to invest significant time in ensuring that you comply with all relevant regulations and standards pertaining to your application’s functionalities.

6. Have you considered the operational costs for SaaS deployment?

SaaS-deployed applications will likely run on public cloud IaaS services. Your operations cost projections need to consider the cost of these IaaS services. You will also need to account for the personnel needed to effectively operate the application and provide user support and service.

1. Product Validation

Before developing your MVP, you must validate how many customers will actually pay money for your product. Using surveys, doing competitive analysis, having in-person conversations with your target audience, and developing landing pages are viable options to see if a market exists for your product.

2. Pricing Models

It is important to study competitors for patterns and take relevant inputs. Be sure not to imitate or simply offer a lower price. Like any pricing plan, a SaaS product should be quantified by the value your customers receive from the product.

A good place to start for new entrants is using “Freemium,” “Proof of Concept,” and “Try and Buy” models to test the market and get a foothold in your industry. This will help to gauge your customer base and decide whether to introduce a flat-rate, fixed-rate, tiered, or usage-based pricing plan.

3. Customer Segmentation

Customer segmentation in the SaaS market can either be trait-based, needs-based, or value-based. By combining these elements, you can get a complete picture of your groups to help improve customer experience through implementing bespoke product experiences. These actions will bring customers closer to realizing your product’s value and increase retention rates.

4. Customer Support

Customer satisfaction is a critical success factor for your Saas product. The SaaS business model’s success is driven by rapid growth, service velocity, bottom line, and customer retention. By implementing a “customer-first” culture, organizations can create superior customer service that could be the differentiator between you and the competition.

5. Financial Operations

The key to successfully managing the finances of a SaaS business is using SaaS-specific automation technology. Automated accounting tools can eliminate manually entering data by automating contract, subscription, revenue, and invoice schedule. The technology will also provide the benchmarks and metrics to help finance teams with operational decisions, streamline audits, and identify financial opportunities to scale the business.

6. Sales Operations

CRM built for Saas is a critical requirement for sales teams to scale your business. The right CRM solution can give you a unified view of funnel metrics, growth/velocity metrics, sales force productivity metrics, cost, churn, and cash flow. It also adds the benefits of building stronger client relationships, improving customer retention, identifying gaps in your sales process, and aligning your sales and marketing teams.

1. CAC

Customer acquisition cost (CAC) is the total cost of resources required to acquire a new customer. It is one of the most important and challenging metrics to measure for a SaaS business.

Customer LTV Calculator

Total costs of acquiring a new customer / the number of new customers.

Before calculating CAC it is important to note several factors that influence its calculation:

• CAC should only account for the costs required for acquiring new customers.
• CAC should never be a measurement of sales and marketing alone.
• A separate calculation must be made for the average number of customers acquired through Freemium and Proof of Concepts models.
• Include sales commissions, but never the entire salaries of your sales teams. A calculation must be factored in on time spent acquiring new customers and nurturing existing ones.

2. LTV

Customer Lifetime Value (LTV) is an estimate of the average gross revenue that a customer will accrue over the life of their account with your product. It is one of the most important metrics to obtain in determining the long-term success potential of your SaaS product.

Customer LTV becomes meaningful when compared to your CAC (these two numbers should never be the same). A good rule of thumb is to keep a 3 to 1 ratio on LTV to CAC. If your customer acquisition cost (CAC) comes to $1, you should be returning $3 of customer LTV.

For example, say Company X’s average sale is $1000. The average customer pays three times a year and stays with them for two years, and the company’s profit margin is 50%.

• Average sale: $1000

  Number of annual transactions per customer: 3

  Average Retention Period: 2 years

  Profit Margin: 50%

• Customer LTV Calulator

  Average Sale x # of Annual transactions per Customer x Retention Period x Profit Margin

  = $1000 X 3 X 2 X 0.5

  = $3000

4. MRR

Since most SaaS businesses work off a monthly subscription, measuring monthly recurring revenue (MRR) is one of the easiest and most important metrics to keep track of. MRR is simply the sum of recurring revenue generated by customers for any given month.

MRR is not a measurement of profitability, only revenue. However, MRR data sources should include upgrades and downgrades, lost recurring revenue, and discounts.

For example, if your SaaS product costs $200/month, you brought on four customers that month at a discount of 10% each, your MRR would be $720/month.

5. Churn Rate

Churn rate is the percentage of customers leaving or canceling their product subscription over a given period. Churn rate can also be a measurement of the percentage of downgrades for your product or service.

It should be of no surprise that a high churn rate is one of the leading reasons 30 percent of SaaS startups fail within the second year. That is why it is vitally important to measure both monthly as well as annual churn rates. Measuring both helps businesses reveal patterns and adjust accordingly to the changing market. This can be anything to changing pricing models, demonstrating a need to push marketing efforts, adding new features, addressing new competition entering the market, and answering if customers were

No matter the reason for the churn, always seek customer feedback using surveys or by reaching out to them directly. The data from customer feedback helps to understand your churn rate so you can better allocate resources to improve the customer experience.

Churn Rate Calculator

The number of subscribers lost in a month divided by total subscribers at the start of that month times 100.

For example, if your company had 100 subscribers at the beginning of the month and lost five customers, you would divide five by 100 and multiply by 100. Your churn rate for that month was 5%.

Pro tip: A good churn rate for a B2B SAAS business is below 5%. The average churn rate is 24% for B2B companies, and 31% for B2C companies.

6. Retention rate

Measuring the retention rate of customers and MRR helps to understand the effectiveness of your product, marketing, customer service, and pricing model. It is important to note that the higher your retention rate, the lower the churn rate should be.

When customers retain, you should continue to find innovative ways to improve your product or service. When customers churn, you may need to pivot and reevaluate your offerings.

Customer Retention Rate Calculator

To calculate customer retention rate, divide your active customers that are continuing their subscriptions at the end of the month/year by the total number of active users you had at the beginning of that period.

MRR Retention Rate Calculator

To calculate the retention rate of monthly recurring revenue, divide the MRR of renewed subscriptions by the total MRR of subscriptions up for renewal.

For example, if your business had $10,000 MRR at the beginning of the month, and one customer subscribing $1000 MRR churned before the period ended, your MRR retention rate would be 90%.

If the sum of Expansion MRR is greater than the sum of Churn and Contraction MRR, you can go over 100%. For example, if you had $10,000 MRR at the beginning of the month, and lost $1000 MRR to churn but gained $2000 MRR from product upgrades, your MRR Retention Rate would be 110%, showing the product is doing well.

If you simply looked at customer retention rate alone, you may have assumed you were doing better and therefore put effort and resources toward the wrong practices. That is why it is crucial to measure both retention rates to get an accurate picture of your sales and marketing efforts.