This article is part of our SaaS Business Startup Guide—a curated list of articles to help you plan, start, and grow your SaaS business!

If you’re interested in starting a software as a service (or “SaaS”) business, it’s a good idea to learn the basics of what a SaaS product actually entails. Here’s a quick overview of the details, benefits, and risks.

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SaaS defined:

SaaS (software as a service) is best described as a “hosted solution” or “web based solution.” The software application is accessed via the internet by the end user.

This delivery method previously called the “ASP” model (Application Service Provider) or “On Demand” model allows the end user access to software without owning the software or hardware by accessing it over the internet.

Software delivery option:

In the past, a small business would buy the software program needed to operate or support their business and simply install the purchased copy on their own on premise computer system. When these vital business tools needed to be updated, often more software would need to be purchased and installed. The software applications would be limited to the work station or pc where the software was installed.

Today, almost every new business will be faced with a choice that simply did not exist a few years ago. SaaS (software as a service) or hosted solutions can enable companies of any size to instantly access the newest and greatest technology. The ease of adoption and scalability of these feature rich solutions can be an intoxicating no-brainer to any excited entrepreneur. But the true cost and long term impact on your business can be much less clear. Licensed software and equipment would be the traditional option and can offer a more certain fixed cost. Equipment while depreciating can also have tax advantages that should be considered.

Why SaaS for the providers?

The software providers love the SaaS model for one main reason: profitability. The software developer has eliminated the need to pay for the cost of producing a box, CD, marketing shelf, and distribution network. This model allows for instant access to the end user and much faster “product to market” timeframes.

Residual income models are often more profitable than the single purchase options of the past and can enable a more long term relationship with their clients.

What’s the benefit to me?

As a web-based service, SaaS allows you to access business functionality at a cost typically less than paying for licensed application. Additional savings can be obtained by eliminating the need for additional hardware and equipment due to the hosted nature of the service.

The daily upkeep and maintenance of the software, as well as the human resources allocated to the application is the responsibility of the service provider and enhances the savings and benefit to the small business owner.

The pain and cost of installing new software is eliminated. Remote access is simple and easy with the SaaS model, as long as there is internet access. Software updates are made automatically and reflected in the newest, fastest version available each time a user accesses via log in.

Where is the risk?

The software provider will often sell the SaaS version directly through an online channel or a commissioned software sales representative. The profit margins can be massive and the software companies realize there is room to pay large commissions to highly skilled salesmen. There is little to no regulation on pricing and it is a buyer beware environment.

One leading company in the web conferencing space trains their inside sales reps to start with a $4,000 “set up” fee. While more than 70% of the time the entire fee is waived, it is a good example of how important negotiating can be when buying SaaS.

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