Cloud Maturity Overview: Business Model

It is a socialist idea that making profits is a vice. I consider the real vice is making losses -Winston Churchill

The end goal of most businesses is to earn revenue and scale in a sustainable, profitable manner, and an ideal business model goes a long way in achieving that while keeping its customer’s requirements at the core.?

The last few decades saw multiple product companies shift towards SaaS technology from traditional to on-premise software deployment. However, a SaaS business is tricky as it relies on subscription and usage, unlike the conventional license models. Operating on the core principles of data isolation, high availability, reliability, and security, a SaaS business model determines the methods a company uses to generate revenue and stay in business for the long haul. However, creating an effective and efficient structure that would justify the cost of cloud hosting requires a multi-foundational approach.

Subscription-Based Model:

OTT platforms have familiarized us with subscription-based models that form the financial fundamentals of SaaS companies. Businesses operating in the SaaS space must build their products to fit within this subscription model featuring monthly, quarterly, or annual renewal cycles.?

The recurring-bill style of business operation streamlines the post-checkout process providing better user experience and distribution. As for companies, a usage-based subscription fee structure ensures better revenue predictions and business scaling plans.?

Customer Tiers:

A tiered SaaS business structure generates more revenue and garners a greater success rate than companies that follow a standardized system.?

This can be better explained with the pyramid model.?

The pyramid's base comprises numerous customers paying a small subscription fee, but their sheer quantity results in significant revenue generation for the company. In this tier, it is important to have low-touch or no-touch self-service and article-based knowledge for support and training. Most often, SaaS products on a trial or a freemium basis are offered to customers from this tier.?

This base is preceded by the mid-level comprising far fewer but high-paying subscribers, which furthers the revenue generation, followed by the top layer of high-value enterprise-level customers paying a hiked subscription fee.?

Each tier may vary in terms of functionalities offered, the amount of usage by clients, or a combination of both factors to incorporate customization in the business functioning.?

Customer Retention and Churn:

Customer acquisition in the SaaS business is expensive. As per an HRB study , acquiring a new customer is often five to twenty-five times more expensive than retaining an existing customer, depending on the industry. The Cost of Customer acquisition plays an important role in the overall health and financial stability of the company. The lower the CAC, the better it is for any company. It's a substantial investment that must be protected by reducing the churn rate. And this is where the customer success team plays an important role.?

Customer success managers help clients attain their business goals by addressing issues, tracking usage, and identifying pain points. The team's continued collaboration with the clients builds relationships and contributes to subscription renewal and also upsell opportunities keeping the wheels of business revenue generation in motion.?

Unfortunately, many SaaS companies still don't have a strong customer success team in place and vest the responsibilities on account managers in most cases. While account managers can handle customer requirements within a traditional business model, their contributions fall short in churn, upselling, cross-selling, and revenue generation in the cloud environment.?

Usage-Based Transaction:

Usage-based transaction is the standard pricing model for SaaS companies, and according to a study by OpenView Partners , 61% of SaaS businesses will be using this model by the end of this year. To ensure a seamless operation of the metered-billing structure, every functionality within the product should support the usage-based model enabling customers to pay for the amount they are using. A classic example of this model is Google storage– users pay only for the amount of storage they are using and not more.?

Economy of Scale:

To run a successful SaaS offering, the business model must determine the financial breakeven point, considering the cost of operations, hosting, tiers, usage, and functionalities of the product before launching the business.?

SaaS companies have an initial hefty investment in setting and running the base infrastructure and operations. But as the business scales up with customer adoption, the incremental cost of running a SaaS business falls extensively.

Hyper scaler regions:?

Hyper scalers like AWS, Google Cloud Platform, and Microsoft Azure are the cornerstones of digital transformation. Primarily, hyper scalers enable companies to access infrastructure through an IaaS model, making businesses future-proof by keeping an eye on the next big trend.?

Hyper scalers offer services across vast regions; thus, as a part of the business model, companies need to choose them and their service regions wisely to avoid additional high expenditure. While organizations using the services have strong preferences for hyper scalers, SaaS companies offering the services have to balance the financial benefits of multi-cloud hosting.

Financial Forecasts:

The success of any business model boils down to financial projections; and so, SaaS businesses must track their finances while determining the growth trajectory. Metrics like ARR, CAC, LTV, and Churn Rate, among others, must be periodically monitored to make necessary changes to the business model.?

There are numerous considerations for creating a successful SaaS business model. But a business model lacking some of these key considerations will inflate the cost of development, managing, and hosting, causing organizations to go belly up. However, once the desired business model is established, the architecture and the product development team must support the model, iterating changes in the product to suit the need of the dynamic times.?