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Is the SaaS Business Model just an Outsourcing Gig?

Created on 20 Jul 2022

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In India, there are over 68 thousand recognised startups, out of which more than 16 thousand are in the SaaS sector. SaaS(Software as a service) is a business where companies sell software services for a recurring charge. It is the licensing of software for the convenience of the customer. A person might not own the software but can use it for a small cost. 

Think of paying a premium on a music streaming platform to own a copy of the song. Now, replace the music with a piece of software that can perform an operation of your business. There, you have a SaaS business!

So let us understand the business model of SaaS startups and take a look at the top SaaS companies in India.

The Business model of SaaS companies:-

The majority of SaaS businesses follow the subscription model. Customers pay a small amount monthly or yearly for using the services rather than a hefty, one-time amount. 

By adopting a monthly or annual plan, SaaS companies add more & more clients because of affordability. It’s a win-win for both as it adds sustainability for the SaaS companies and affordability and accessibility for the clients as the delivery cost is almost zero. SaaS companies create software that helps client businesses save time, help them earn or save more money, automate operations, or a combination of all these things.

Let us take the example of video conferencing software like Zoom, Skype, Slack, etc. Before the popularisation of these applications, we had to travel for meetings or to meet our relatives or friends living far away. But today, we can see the emergence of remote work, where we can work without being present in an office, a phenomenon we couldn’t imagine a few years ago, made possible because of SaaS companies.

The Gold Rush for SaaS startups and what started it

Both Venture Capitalists & entrepreneurs are rushing towards investing & starting the next SaaS startup. But why is everyone and their aunt so interested in this business model suddenly? Let us find out:

Recurring Revenue:- Most SaaS companies offer subscription-based pricing where customers can pay monthly, quarterly, or annually for the services used. Many customers become loyal to these companies as no other player is offering these services & this creates high LTV(Life Time Value).

No Logistics issue:- Companies that sell tangible goods(physical products) have to deal with the product delivery challenges like Cash on delivery, high RTO(Return to origin), refunds & product damage while delivery, low recurring sales, etc. On the other hand, SaaS businesses suffer no such hindrances, as their services can be sold over the internet. Due to this reason, SaaS companies can sell their services globally.

Low cost:- When it comes to traditional businesses, the manufacturing costs are equally high for every production cycle. However, in the SaaS business, only the first instance of product development incurs the highest cost. Every other iteration of that specific software is just maintenance and new additions.

No cost for product replication:- Suppose you are a shoe manufacturer and the cost of manufacturing a single unit is ₹100. If you have to make 1,000 shoes this month, it will cost you ₹1,00,000. This ₹1,00,000 would have to come out of your pocket, and you would have to incur these costs every time you produce more shoes.

On the other hand, if a SaaS company has to produce for 1,000 customers, they have all the infrastructure ready, and the product is built with a one-time cost & a few lines of code. The only additional cost for producing new units might be server & employee salary costs, but there is no fixed unit cost of replication to sell to every customer.

Easy customisation:- If a shoe manufacturer wants to develop a new product, that person has to develop a prototype. He might require a few kinds of machines for developing different types of shoes & he might have to change the raw materials. So this makes it harder for traditional businesses to manufacture customised products as new models would need a change in raw materials, machinery and more.

But SaaS businesses have the advantage of making their services customised & according to the specific requirements of their customers with the minimal cost incurred. This is because the new product usually requires a negligible change in code to fit specific client requirements.

Top SaaS Company types

The SaaS companies operate in many categories & a few popular ones are:-

Taxes & invoicing:- Businesses often use apps & websites that help them calculate their taxes like GST & make invoices. This way, they don’t have to calculate taxes or make invoices for every product sold manually. 

ERP(Enterprise Resource Planning):- ERP is a type of software that helps organisations get insights into the supply chain, procurement, finance, etc. Big organisations use ERP software to automate their supply chain process.

Human resources:- SaaS companies create applications that can help the HR department track employee performance, hiring processes & automating payroll.

Customer Relationship Management (CRM):- Customer Relationship Management helps businesses track sales & manage the data of their customers. SaaS companies make software that can help automate and streamline the customer service process to reduce wait time and improve customer satisfaction.

Data management:- Under this category, companies provide software that helps in data analysis and decision making. Large firms use this software to help prepare statements like budgets, vision and mission statements and more.

Project & Team Management:- Project management software can help with communication between various teams of an organisation. These applications have helped fill the communication gap between employees, especially as remote work has gained popularity in recent years.

Top SaaS companies in India

Here is a list of companies with a strong presence in the SaaS industry.

Zoho:- Started in 1996 by Sridhar Vembu, it provides services like CRM, Application development, inventory management & many more. It heavily invests in the Research & development of its products & customer service.

Keka:- Keka deals in HR management software that helps companies track employees’ attendance, Leave & work time. Keka also solves the problem of payroll by providing appropriate solutions for HR. It majorly serves the USA and UK markets.

Freshworks:- Freshworks was started in 2010 by Girish Mathrubootham and Shan Krishnasam, the ex-employees of Zoho. It mainly provides customer engagement services & solutions to businesses.

Agile CRM:- Agile CRM provides CRM services to small & medium businesses. It also provides tools for automating marketing, such as email marketing & social selling tools.

Dukaan:- Dukaan helps small companies grow their businesses by providing them with a no-code platform to make & manage their e-commerce website. It was founded by Suumit Shah and Subhash Choudhary in 2020.

Conclusion

In recent years SaaS has emerged as one of the best models for both entrepreneurs & investors. But we also must remember that SaaS businesses are always at risk, as sustainability is difficult for SaaS companies. 

Companies whose only competitive advantage is based on low prices or codes can be easily disrupted. These are also the companies that might not survive in the next few years. As SaaS businesses are easy to start, the industry easier to disrupt & big players can achieve and lose a monopolistic position equally easily.

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Harsh Hingu

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Blind follower of his curiosity and loves revolving around startups, businesses, economics, and finance.

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