This article is part of our SaaS Business Startup Guide—expert resources to help you plan, start, and grow your SaaS business!
If you’re interested in starting a software as a service (SaaS) business, you’ll want to start with the basics. Here’s a quick overview of the details, benefits, and risks.
SaaS (software as a service) means that users access software through their internet browser or a web-based app. The software maker hosts their product on their own servers, which is why SaaS products are sometimes referred to as a “hosted solution” or “web-based solution.”
It’s also common to hear SaaS products talked about as “cloud-based” solutions. In contrast, a desktop-based model is where an individual or company would install software on their computers and run it on their own servers.
Pricing models and customer acquisition
SaaS products often use a subscription-based pricing model. So instead of paying once for a lifetime of use, your customer pays on an ongoing basis—usually monthly or annually. You can think of it as a software license.
It’s a popular model because of the increased potential lifetime value of each customer. Instead of a flat lifetime value—like $120 for the single sale opportunity you have with each customer or user, you might charge $10 a month per user for as long as your customer uses your service. The longer they stick around, the higher their lifetime value.
When you build out your SaaS company’s business plan, spend some time modeling different subscription-based sales forecast scenarios so you can see how reducing churn (the number of canceled subscribers) and other variables can affect your path to profitability.
Growing SaaS companies are always testing their pricing models. There are a lot of different ways to get customers in the door to kick the tires, from offering free trials, to freemium services with upgrade options. Check out the Bplans guide to SaaS pricing models for more on how to get started.
Security and reliability
One of the objections you’ll probably hear from some prospective customers is that they’re worried about data security with SaaS products, and with apps in general. This is especially true if you’re presenting a cloud-based solution for something that used to only be available as a desktop version.
The concern is that “the cloud” has security vulnerabilities. But in actuality, legacy systems are actually more vulnerable than cloud-based apps. That said, take the responsibility of protecting your customers’ data very seriously.
What if you’re a non-technical founder?
If you have an idea for a software as a service business, but you don’t have the technical expertise to build your app yourself, it’s still possible to run a successful business. In his book “Lost and Founder,” Rand Fishkin talks about his journey as a non-technical CEO of Moz, a service company he founded and transformed into a SaaS company.
He emphasizes how important it was for him to learn (and keep learning) enough about the technical aspects of his business so that he was able to make good hires and understand technical roadblocks when they surfaced. And it’s not completely impossible to learn to code yourself—but it does take time.
Be mindful of your intellectual property—the code—whether you bring on an employee or outsource the technical work. A good contract can go a long way.
Starting with an MVP
There’s a great article in Geekwire on a Seattle founder of an app that helps parents find childcare. One of the best things about it is that it gives a clear example of what an MVP (minimum viable product) might look like for an app. In this case, it was just an Airtable spreadsheet that the founder posted online for free, where it got a lot of traffic in just a few days.
The point is that if you have an idea for a SaaS business, don’t invest all of your time and resources into creating the very best, most perfect version of your app before you start testing it. You want to use a lighter version so you can validate that the solution you’re offering is something people will pay for. You’ll waste a lot of time and energy if you skip validating your idea before you build the full-scale version.
Reid Hoffman famously said, “If you’re not embarrassed by the first version of your product, you launched too late.” The point isn’t to put out a bad product—it’s to see how it does quickly, before you invest a ton into it.
Funding your SaaS startup
Building a successful SaaS business doesn’t happen overnight. More so than in other industries, it’s easy to get the impression that SaaS companies grow very quickly—they just blow up over the course of a year. In reality, Spotify is more than 10 years old. Netflix is over 20 years old. It takes time to scale and grow a business. Keep that in mind when you’re looking for funding.
If you just have a business idea, but you haven’t tested it yet with an MVP or convinced anyone to pay for it, it’s going to be tough to make the case to angel investors or venture capitalists. They’re looking for traction in the marketplace, and that means you’re going to have to demonstrate that you can sell your product.
One of the other things you’ll hear is that some companies that take on investment run huge deficits for years on end—think Uber’s billions of dollars in losses. It’s true that lots of software companies that take on investment aren’t profitable for a long time. But investors are in it to win in the long term. You’re going to need realistic financials in your business plan, and a strategy to eventually be acquired.
But also keep in mind that depending on your end goals, it’s possible to run a profitable, healthy business for a long time without ever seeking outside investment. It all depends on your goals. Tim Berry talks about it in this article—not all good businesses are good investments. (Full disclosure, Tim founded Palo Alto Software and Bplans; Palo Alto Software makes a SaaS business planning tool called LivePlan, and a shared inbox tool for teams.)
In the meantime, you might be able to fund your business idea with your day job or your savings. Maybe you have personal collateral that you can use to get a loan or line of credit, or maybe crowdfunding is an option.
One of the best things you can do in the early stages of your SaaS business is to map out a quick business plan. We call this approach a Lean Plan. You can do it quickly, and just by doing the process you’ll have thought through a lot of the most important parts of your business. Also, check out our SaaS and subscription business startup guide for more expert how-tos.