SaaS 102 #1 What Is SaaS? What Are Its 4 Biggest Benefits?
Back in 2020, everyone saw SaaS as the goose that laid golden eggs. People seemed to think you had made it just because you were in the SaaS business. Similarly, in 2018 if you were in finance, especially peer-to-peer finance, people thought you were automatically set up for success.
But even though people view the SaaS industry as a good place to be, I’ve asked a lot of people the following questions: What is SaaS? Why do customers use SaaS? What type of customers use SaaS? Many people don’t have clear answers to those questions.
I want to write this series of SaaS 102 articles to share my view of the SaaS industry, and discuss matters such as how SaaS has developed, the difference between B2B and B2C SaaS, and the differences between providing SaaS services in China and in the rest of the world.
I’ll discuss these issues from a range of different perspectives, including technology, SaaS products, market promotion, laws and regulations, and recruiting talented employees. There are differences between all these different areas of the SaaS industry, so I’ll share some of the things which are specific to each.
My views and perspectives come from past 20 years experience in SaaS and eCommerce, and some conclusions I’ve drawn from my own observations. I’m aware that my views might have some bias as they come from my own particular experience. So I hope that by writing and sharing my ideas, I can also receive feedback from others.
The more I can learn from feedback, the more I can integrate the opinions of others with my own. That way, I can gain new knowledge and perspectives that might be hard to find independently. Broadening my perspective can also help me avoid costly mistakes.
I’ll discuss the following topics in this first article:
- What is SaaS?
- What are the benefits of using SaaS?
What is SaaS?
If you asked this question 10 years ago, a lot of people wouldn’t have been able to answer. Even if you ask this question today, you still might come across a lot of answers that aren’t quite clear. To address this, I’ll explain what the SaaS name means and signifies, and how SaaS has developed over the course of its history.
SaaS is an acronym for “Software as a Service.” The “as a service” part of this acronym essentially means that the SaaS company provides the software over the internet as a service.
20 years ago, most software would probably have been called “Software as a Product.”
A piece of software is, by definition, a type of product. If you’re in the internet industry these days, then even if your job is making software, your job title is still likely to be “product manager.” It’s unlikely that your job title will be “software product manager.”
Even in a SaaS company, people will be called product managers and not “software service managers” and definitely not “service managers.”
So how did the industry evolve from providing software as a product to providing software as a service?
Software, products, and services
The way that software was sold in the 1990s was a little strange (at least when we look back on it now 🤔). Software has no physical form but it needs some kind of medium to store and transfer it. Back in the 90s, software was stored on, distributed, and sold on floppy disks and CD-ROMs.
In the past, buying software meant going to a store and queueing up to buy software packaged into boxes. When you got home, you then had to unpack the software and install it onto your computer.
But with the speed of technological advance, and especially improvements in internet speed, all you have to do these days is download the software. I expect that a lot of young people born after the year 2000 hardly know what a CD is, and definitely couldn’t recognize a floppy disk. 😅
In the past, software was a product, but even that definition wasn’t absolutely correct. What we were actually buying was the software license. I’ll go into greater detail on this topic at a later date.
How can software change from a product into a service?
Software, at its most basic level, is created from lines and lines of code. It differs from a lot of other types of products because it has several key properties which make it easy to provide as a service:
- Cheap to copy
- Can be standardized
- Can be stored in the cloud
- Intangible
In fact, software also shares a lot of qualities with digitally stored music and movies.
The iPod used to be the best product to listen to music on. Back in the day, everybody knew how to use one. But in a space of less than 20 years (the iPod was first released in 2001) the iPod almost became a relic of a previous technological age. Kids born after the year 2000 all use Spotify and Apple Music and hardly know what an iPod is. Below is a great video that illustrates this perfectly.
What if almost anything could be provided as a service. Could cars, houses, and offices be provided as services?
The problem is, it’s very difficult for things like cars, houses, and offices to have those same key properties:
- Cheap to copy
- Can be standardized
- Can be stored in the cloud
- Intangible
You might be able to rent a room on Airbnb, but houses can’t be reproduced cheaply, and they’re very difficult to standardize.
For SaaS companies, standardizing services is very important. If a SaaS service includes too many customized functions, and is only suitable for some customers, then not only is that not good SaaS, it might not even be SaaS at all. A SaaS product with too many functions will be hard to reproduce widely at very low cost. And because of the extra functionality, you won’t be able to bring costs down.
According to the 80/20 principle, 20% of the functionality you can develop can be enough to satisfy 80% of customer needs, so the best strategy is to focus on that 20% and make those functions well enough to satisfy the majority of customers. It’s really difficult to make a product that all customers will want to use, but if you can capture 80% of the market then you’re doing pretty well by any standards.
Software can be made that can be used in 80% of applicable scenarios, and that can solve common problems. It can be deployed quickly from the cloud, and be ready for customers to use immediately.
For the company that created the software, it’s easy to reproduce it at an extremely low cost. At most, the company may have to pay some extra server and broadband costs in order to reproduce the software.
To take the iPod as an example. If I want to provide music as a service, I need to think of a way to send that music to my customers. Before it was possible to distribute music easily online, that would have been a very expensive process.
But a special property of software (and digitally recorded music) is its intangible nature. It can be sent across the internet for almost no cost. This is what made the iPod possible.
So why wasn’t SaaS around 25 years ago, in the age of Windows 95?
At that time the internet had just started. The normal internet speed was 14.4 kbps. This meant that it was hard to distribute much meaningful content. It could take an hour just to download a single song. Most people wouldn’t have the patience to download at those speeds.
But once you had 4G internet and speeds of 100 Mbps and above, then as long as the song you were after was available online, all you had to do was pay a fee, and you could listen immediately. With those internet speeds, even a movie wouldn’t be too much of a problem.
There are some objective reasons, too, that sped up the development of SaaS and strengthened the industry. Pirated software, MP3s, movies, and more were a big problem. But changing software to a service helped resolve problems around authentication and software piracy.
Because the user needs to be connected to the internet, the provider can use information such as the IP address and number of connected devices to tell whether or not users are properly authenticated. This feature of SaaS helped some software companies to increase revenue quickly and in a short space of time.
The development of online payment systems is also a big help to SaaS. If you sell a piece of software for a one-time payment of one or two thousand US dollars, the payment system isn’t so important. But if you receive a monthly payment of 200 US dollars, it becomes very important to make sure you can receive that payment reliably and at low cost.
What are the benefits of using SaaS?
Low start-up costs
- There’s no guarantee that the total fees SaaS customers pay will be low. But it costs much less to get started with SaaS than with traditional software. To get started, SaaS customers don’t need to pay the full amount in one go, and also don’t need to spend three months developing their own system.
- There are many types of cost (such as financial, labor, and time) to consider when looking at software. If a SaaS company can provide the same functionality and service that a customer could develop independently, the SaaS company could certainly do it at a lower cost than the customer. If they can’t, the customer would have no reason to use the SaaS company long-term.
Low barriers to entry
- For SaaS companies to be successful, they have to meet some challenges. They have to provide software with functionality that suits the needs of most companies, and that software has to be easier to use than traditional software. For example, it should have features such as one-click installation and a simple, easy-to-use interface. As a result of all this, many successful SaaS companies are crowded into the same vertical markets. Simply put, they follow the principle of “less is more” by focusing on small niche areas and trying to do things simply and well.
Low maintenance costs
- High reliability, flexibility, and scalability are essential to all systems. But it’s hard for a customer to develop and maintain a system themselves, meet these requirements, and do so at low cost. This is because if only the customer is using the system, they cannot reach economies of scale. But for a SaaS company, the more customers they have, the lower the average costs to maintain reliable, flexible, scalable systems.
Low investment risk
- When calculating costs, many people only calculate the costs that must be paid, whether in time, labor, or money. But few people calculate the cost of fixing faults in the system or changing the system entirely. For SaaS customers, the cost of changing the system you use is very low. Customers can pay as little as one month’s fees to use SaaS services, with free installation. If one solution isn’t working out, you can simply find another with Google and see if it suits your needs better. But if you develop your own software internally, fixing faults or changing the software will be much more complex.
Summary
In summary, SaaS works because of four main properties that software has:
- Cheap to copy
- Can be standardized
- Can be stored in the cloud
- Intangible
And customers are willing to use SaaS because of four main reasons:
- Low start-up costs
- Low barriers to entry
- Low maintenance costs
- Low investment risk
When you do your work in SaaS, do you think about the features of SaaS and the reasons people use SaaS that I mentioned in this article?
About Author:
Teddy Chan is a serial entrepreneur with 20+ years of experience in SaaS and eCommerce. His latest venture is AfterShip, a SaaS post-purchase experience platform that empowers eCommerce retailers like Amazon, eBay, and Gymshark to improve their customer experience, drive sales, and increase brand loyalty.
SaaS 102 is a series of articles where I share my thoughts and experience with SaaS. My fundamental belief is that a great team with an average idea will always go further than an average team with a great idea. If you want to be part of this great and growing team, check out careers at AfterShip here—I’m currently on the lookout for superstar sales talent.