If you've been thinking about launching a SaaS product, now is the time to do it. More and more companies are adopting the Software as a Service model.
Organizations use an average of 80 SaaS apps as of 2020. This is a 5X increase in just three years, and a 10X increase since 2015.
Additionally, the SaaS industry is expected to be worth roughly $172 billion U.S. dollars by the end of 2022.
Unfortunately, there's bad news, too.
The SaaS market is becoming saturated fast. Many new entrants will face challenges winning against established brands.
And, even if a new company achieves a staggering 60% growth annually, according to McKinsey & Company, "its chances of becoming a multibillion-dollar giant are no better than a coin flip."
In short, the SaaS market offers an incredible opportunity, but to succeed in it, you'll need at least some basic knowledge about its dynamics and intricacies.
Luckily, that's what you'll learn in this guide. We'll help you understand how the SaaS industry works. You'll also discover what you need to know to launch and start growing a SaaS product.
Keep reading to learn more, or use the chapter links below to jump ahead.
What is SaaS?
Software as a Service (SaaS) is a relatively new software distribution model giving customers access to applications over the internet, rather than requiring a physical media and custom installation. SaaS products are centrally hosted by a provider, who also maintains and updates the software automatically. Customers access and use them via the web and mobile browsers.
Without a doubt, SaaS has revolutionized the software delivery model.
In the past, it was a hassle to introduce a new application to an organization. From the lengthy sales process to complex on-site installation to custom development to training, it could easily take weeks — if not longer — before employees could start using a new tool effectively.
With SaaS, this can happen in a matter of days or less.
As a result, SaaS is rapidly becoming the model for the delivery of core business applications. In fact, even traditional on-premises software vendors are building SaaS products, and often expand their offering by acquiring SaaS companies. A few examples include Microsoft Teams, Amazon Chime, or Oracle buying Opower for $532 million.
What is a SaaS company?
A SaaS company is a type of business focusing on creating, developing, hosting, and maintaining a proprietary Software as a Service product or products. The core benefits of running a SaaS company include instant access to an unrestricted, global market and the ability to scale without having to raise product delivery cost proportionally.
Although they often share the same name, SaaS companies aren't synonymous with their products.
A typical SaaS company develops and maintains their product. A great deal of its operations, however, also revolves around sales, marketing, and customer success.
Types of SaaS Products
SaaS applications come in different sizes, shapes, and serve various purposes. Most, however, fall under one of the three categories:
1. Packaged SaaS are products that help manage a specific process in an organization — improving employee engagement, strengthening customer relations, or boosting marketing effectiveness, for example.
HubSpot is an example of a packaged solution. We offer tools companies use to manage sales, marketing, and customer relationships.
2. Collaborative SaaS applications help improve how teams work together. From messaging and video conferencing to collaboration on documents, these platforms support collaborative efforts.
Zoom, Paper, and Basecamp are some examples.
3. Technical SaaS applications offer tools to manage or improve development or technical processes.
Cloudsponge, for example, allows developers to include a contact importer in their products effortlessly. Algolia offers a search API that helps other apps improve the search experience.
Venture investor Tomasz Tunguz categorizes SaaS products by the value they deliver, as well.
For him, some apps assist in increasing a company's revenue. HubSpot helps companies to more effectively market, sell, and service prospects and customers. This, in turn, leads to higher growth and revenue.
Other apps reduce costs. Basecamp, for example, offers multiple tools in a single package, eliminating the need for using additional products.
The third group, productivity software, falls somewhere between the two. These products also help increase revenue or reduce cost. However, their effect is less obvious.
For example, Zoom.us allows companies to run meetings over the Internet. While using the product will likely reduce costs and could provide a platform for new revenue-generating ideas, this result is not as evident as in the case of products in the other two categories.
Let's dive into five examples of SaaS companies to give you a better understanding of what SaaS is.
Slack offers an incredibly popular chat tool for businesses, which can be used for internal messaging, video conferencing, and productivity bots. The tool is used by major brands, including Netflix and Uber.
With an internet connection, you can easily install and begin using Slack's application. No special hardware or software is required, and because the application is web-based, security and performance is managed by Slack directly.
Zoom provides video conferencing tools for hosting remote meetings. The company has seen exponential growth in the past two years as the world adjusted to a primarily remote workforce as a result of the pandemic.
In fact, as of September 2021, Zoom had a market capitalization of $88 billion, compared to roughly $30 billion at the onset of the pandemic.
The platform is cloud-based, so it's easy to install and begin using across devices.
Square is a credit card processing app that lets businesses easily accept credit payments without a cash register. Square's software can be easily plugged into a computer or tablet to transform it into a credit card processor, and the company offers various products for commerce, banking, payroll, and more.
Square's expected to see roughly 80% annual revenue growth at the end of 2021 — much faster than its growth has been historically at roughly 40% year-over-year for the past five years.
Atlassian's products, including Jira, Confluence, and Trello, are aimed at improving software development, project management, collaboration, and code quality. Many Atlassian products are cloud-based, while others are server and data center products.
Atlassian emphasizes the importance of transparency by creating tools that enable teams to work openly — so everyone within a team or organization at-large has visibility into what's happening.
HubSpot offers a CRM platform complete with all the tools and integrations you need for marketing, sales, content management, and customer service. HubSpot's Marketing hub was awarded one of G2's Top 100 Highest Satisfaction Products in 2020.
Since HubSpot's product infrastructure is hosted on Amazon Web Services (AWS), a cloud platform, it is an example of a SaaS company.
For more examples, take a look at What is a SaaS Company? [+ 36 Companies & Products to Watch in 2021].
SaaS Sales and Marketing: How Do SaaS Brands Attract Users?
For a new SaaS company to take off, it needs to find, attract, and convince new people to try their product.
Moreover, it needs to do so fast.
According to a McKinsey report, SaaS companies must achieve annual growth rates greater than 20% if they want to survive.
That speed of growth is hardly a small task when you consider how much SaaS marketing differs from other industries.
In SaaS, you promote a product with nothing tangible to show for it. Your potential customers can't hold it in their hands. As a result, your marketing efforts must convince them that your product works and can solve their problem.
Users decide whether to try out a SaaS product in a blink. They often conduct a quick online search, compare some solutions, and make their selection. It can all take no more than a couple of hours.
Your marketing, therefore, must target every stage of the buyer's journey and offer relevant information that can convince someone to test your product.
So many consumers, however, commit little effort to discovering the new tool. Many new users log in to an app once, never to return to it again. Most don't realize the full value of the app before moving on to another solution.
Your promotional efforts must also help customers realize your activation point — the true value your product delivers.
You also rely on different sales models. Buying a self-serve SaaS product, one which customers sign up to by themselves, can take hardly any time at all.
In a sales-driven approach, a customer goes through most of the process on their own. However, in the last stage, they typically engage with a sales team that helps guide and recommend the best plan. This process can naturally take longer and might require additional resources.
Finally, the enterprise cycle could easily take months, if not longer, before a contract is signed.
All in all, however, typically, SaaS companies have the following objectives for their marketing strategies:
Objective 1: Attract the right audience.
To kickstart its growth, a SaaS company must connect with potential users and bring them to their site first.
However, these shouldn't be any visitors. Rather, people who already experience a specific problem your product aims to solve.
So, the first objective is to understand what challenge you're solving for your users. Then, devise a strategy to entice them to learn more about the product.
Objective 2: Build a relationship with leads.
Marketers are responsible for nurturing leads. Using a combination of content, emails and other channels, a new SaaS company should position themselves as an authority, and convince leads to test their product.
Objective 3: Remove roadblocks to sign up.
In SaaS, marketers often optimize conversions around various website goals — from trial sign up to on-boarding to converting free users into paying customers.
Objective 4: Engaging users.
For most SaaS apps, users sign up for a trial, free, or demo version of the product first. It's often a marketer's job to ensure they convert into paying customers.
Typically, marketers accomplish this by optimizing the free or trial plan to help a person get to the activation point, where they realize the true value of the product.
Objective 5: Increase customer lifetime value.
Since most SaaS companies charge customers on a subscription model, it's imperative that a person remains a user for as long as possible.
SaaS marketing strategies are often aimed at increasing customer lifetime value by reducing churn and moving customers to higher priced plans.
SaaS Marketing in Practice: The Most Effective SaaS Marketing Channels
SaaS companies have a plethora of opportunities to introduce their products to potential users and achieve initial traction. Below, we've listed the most effective SaaS marketing channels that can help spark initial growth.
Inbound marketing strategies aim to attract strangers to your product and convert them into new customers. And it all starts with content. Blog posts, guides, resources, and other content types help attract new visitors and then convert them by adding value at every stage of the buyer's journey.
Search Engine Optimization (SEO)
Today, almost everyone turns to search engines for answers. It doesn't matter whether a person is looking for a product recommendation or guidance on solving a problem, they know that they can find it on Google.
SEO is a practice that helps position your site and content in front of potential users at every stage of the buying cycle.
Publishing engaging content helps you position your brand or product as a credible authority and helpful resource in the industry. And, in turn, you'll build meaningful relationships that can convert prospects into paying customers.
SaaS companies place online ads to attract and entice potential users to sign up.
Many also use paid ads, from pay-per-click (PPC) channels like Adwords to social media ads to display or banner advertising to drive potential users to lead generating assets or a product sign up.
These days, PR is more than just publishing and distributing press releases. Modern public relations focuses on improving almost every aspect of a brand's online visibility. From search results to brand mentions, online reviews, and much more, PR strengthens brand awareness and recognition.
Viral strategies focus on getting existing customers to refer and promote your product to others. These programs focus on getting your users to invite their friends, family, and connections to sign up and try out the product as well. Common types of viral marketing strategies in the SaaS space include referral, or affiliate, programs or viral loops.
For some apps, users can naturally expand a customer base by introducing the product to their clients. For example, Xero discovered that, on average, a single accountant using their product introduces anywhere from 6 to 31 new users to the platform.
App Stores, Resellers, and Affiliates
Some SaaS companies can also take advantage of app marketplaces like Intuit, Apple Appstore, or Google Play to promote their products to new audiences.
Many others launch affiliate or reseller programs that reward anyone willing to promote their products with cash or other rewards.
SaaS Customer Service
When you work for a customer support team within a SaaS company, the types of complaints you field are going to look different than they would for another type of business, such as an e-commerce brand.
For instance, with e-commerce you're primarily dealing with customers who are unhappy with their purchases and would like to make exchanges, or who need help making a purchasing decision.
With SaaS customer support, on the other hand, you're helping customers use your product to solve for their unique challenges, and assisting them in both their pre- and post-sale journeys. Ultimately, good SaaS customer service will make or break the success of your business, since many SaaS customers will require advanced support to see results from your software.
Additionally, SaaS businesses can see higher churn rates than normal — in fact, the average churn rate in the SaaS industry is 5%, while a "good" churn rate is considered 3% or less. SaaS customer support can help reduce churn rate and increase customer satisfaction by communicating your brand's values and mission to your customers, demonstrating empathy, and going above and beyond for your customers.
If you're interested in learning more about SaaS customer service, take a look at our post, The Beginner's Guide to Building a SaaS Customer Service Team, which explores the differences between SaaS customer service and traditional support, building a strong SaaS customer support team, and optimizing your SaaS customer service workflow.
SaaS Pricing Models
Before attracting any visitors, a new SaaS company must decide how it is going to charge for their product. This is important for two reasons:
A pricing model will affect a potential user's willingness to consider their solution.
And it could affect a company's rate of growth. As PwC reported, it takes two years for a typical SaaS company to break even.
So, let's review various pricing models you could use in your product.
The freemium model offers a significant number of features for free, along with additional paid packages. Slack, Dropbox, or Airstory are examples of freemium-based SaaS products. Most users can use them at no cost. But when they need more than the basic feature-set, they must upgrade to a premium package.
2. Flat-Rate Pricing
In this pricing model, a company offers a single product with a standard feature set for a flat rate.
Basecamp, for example, charges a flat fee of $99 per month for which a person can use all its features.
3. Tiered Pricing
By far, the most common pricing practice among SaaS brands is to offer multiple packages. Each package includes a different feature set, designed to suit various user needs.
This is the model we use here at Hubspot.
4. Per-User Pricing
Some SaaS companies offer a different option depending on the number of users. Instead of paying a flat fee or choosing a feature-set, they can pay per user. Asana, for example, charges companies a flat rate for every person they sign up to the app.
5. Usage-Based Pricing
Finally, some products charge for usage, rather than feature sets or users. Companies using Stripe, for example, pay for every transaction processed.
SaaS Learning Resources
Want to learn more? We've pulled together some of the top online resources that cover everything SaaS to help you expand your knowledge.
Tomasz Tunguz is a venture capitalist at Redpoint Ventures, and writes extensively about SaaS on his website — including topics such as "the identity crisis facing open source companies in the cloud" and "How a Merger of Salesforce and Slack Would Change the SaaS Landscape". You can subscribe to the newsletter to ensure you never miss a post, or scroll through his SaaS posts to learn more about the SaaS industry.
Hiten Shah has started three successful SaaS companies: Crazy Egg, KISSmetrics, and Quick Sprout. He also offers a weekly SaaS newsletter, Hitenism, and writes compelling SaaS-related articles such as "We Haven't Hit Peak SaaS" and "3 Lessons that SaaS Founders Should Learn from David Cancel". As someone who has a proven record in the SaaS space, Hiten is a fantastic resource to learn from.
SaaStr is the world's largest community of SaaS executives, founders, and entrepreneurs. The company offers a variety of SaaS content in the form of blog posts, ebooks, podcasts, and videos, plus annual events for 15,000+ SaaS entrepreneurs. Whether you're looking for content to get started or seeking out industry connections, SaaStr is a great starting place.
If you're interested in starting your own SaaS business, Startup School is a powerful online program to check out. Startup School offers a curriculum, a progress tracker to analyze the progress of your startup, a co-founder matching program, and access to more than $100,000 worth of deals on AWS, GCP, and more.
Voted #2 on Forbes List of 100 Best Websites for Entrepreneurs, For Entrepreneurs was started by David Skok, a serial entrepreneur who has founded four companies. Here, you'll find articles aimed at helping both startup founders and SaaS entrepreneurs.
6. Chaotic Flow
Chaotic Flow stands out in this list due to its segmentation of four separate SaaS categories: SaaS Marketing, SaaS Product, SaaS Sales, and SaaS Metrics. It's easy to find highly technical and specific topics for any of your SaaS needs, whether you're looking for articles on aligning SaaS customer acquisition or SaaS product-market fit. The website offers SaaS go-to-market strategies and tactics, and was started by Joel York, who has spent 20+ years in the SaaS industry.
In the "Library of Awesomeness" on Sixteen Ventures site, you'll find articles ranging from good SaaS churn rate to emotional disconnect during customer onboarding. The website, created by customer-centric growth expert, consultant, and thought leader Lincoln Murphy, is a great starting place when looking for customer-centric strategies in the SaaS industry.
8. On Startups
We may be biased (the founder of this site is also the founder of … well, HubSpot … ) but On Startups, a website created by Dharmesh Shah, stands out as an impressive website if you're looking for content about software startups. The website includes a list of software startups Shah has invested in, videos such as "From Day 0 to IPO: What Went to Plan, What Most Certainly Didn't", and content for both startup founders and investors looking to learn what's next in the SaaS startup space.
Predictable Revenue offers content in a variety of formats, including podcasts, webinars, blog posts, and ebooks, and even provides case studies so you can learn how other SaaS companies have succeeded. If you're interested in consuming video or audio content, this is a good option for you, with podcast episodes like "How to write proposals that sell" and videos like "How To Not Suck At Demo Calls".
SaaS offers an incredible business opportunity. Adoption of the software as a service model continues to grow rapidly. However, with high demand and competition, founders must understand the intricate dynamics of the market and work to stand out by providing unique solutions and immense value to users.
As you continue to explore SaaS and make your introduction into this multi-billion dollar industry, remember to keep these goals at the core of your offering.