Software-as-a-Service businesses are all the rage. For some entrepreneurs, it’s the top rung of the ladder of wealth creation. For others, they’re the prime intersection between building a business and solving interesting technical challenges.
You won’t find an industry that SaaS has not penetrated yet. Plumbers organize their field service dispatching with cloud-based scheduling software. Winemakers use Point-of-Sale software suites to manage their long-term restaurant partners, and teachers speed up their administrative work using templating engines that integrate into their virtual classrooms.
Software is eating the world, and SaaS founders benefit from the incredibly versatile solutions digital businesses can sell to eager customers. If you want to build wealth, build a SaaS.
Experience this article as a podcast, a YouTube show, or as a newsletter:
What’s a SaaS?
Most businesses are software-enabled, but only a fraction can be called Software-as-a-Service.
A SaaS is a business that continuously delivers a software product to its customers.
This is but one of many ways of running a software business: before the internet made massive file transfers easy and affordable, software was distributed on mediums like disks, flash drives, or DVDs. These “boxed software” offerings often were buy-once—use-forever. Software-as-a-Service is different: SaaS customers pay a monthly fee for continuous access to the service instead of installing the software on their own computers.
This is an important distinction: traditional retail software needed to be maintained and updated by the buyer. With a SaaS solution, your customers won’t have to take care of that: they will always be able to access the latest and most advanced version of your software.
And that’s why they keep paying for it. Most SaaS businesses monetize using a subscription model. Every month, a customer pays a certain —and relatively affordable— amount to keep using the product. In exchange for their ongoing purchase —called “the forever transaction“— they receive updates and new features and don’t have to spend time or resources maintaining the service.
What are the advantages and drawbacks of SaaS businesses?
Suppose your product can solve a recurring critical problem that your prospective customers commonly have to spend a lot of time and effort on solving. In that case, you have a strong candidate for a SaaS business. You’ll find that the more frequent and painful the problem appears for your users, the less hesitation they’ll have to pay a monthly subscription. The more common the problem is in your industry, the more potential customers you’ll be able to attract.
While that promise of recurring revenue is very alluring, it comes with a few risks: in a business that depends on a steady stream of small payments instead of charging a big fee upfront, you’ll be strapped for cash more quickly. There are ways around that —like annual plans— but you’ll always have to keep an eye on your subscribers. Every month, they have to choose to keep paying you, and your job is to prevent them from churning.
Many professionals have started suffering from subscription fatigue. While it’s great that it’s normal to subscribe to services instead of buying them outright, people have to juggle so many subscriptions that, at some point, they just can’t handle more of them. Your product better is worth it. Aim at becoming the last service they cancel when things turn sour. You want to offer the service that provides such a substantial advantage that canceling their subscription would really hurt.
And once you find that sweet spot of solving a critical problem for someone, SaaS becomes a fantastic business to run. Software-as-a-Service might be the most easily scalable kind of business out there. Sure, you can hyper-optimize the logistics chain in your beverage company, but try updating the shape of a bottle while thousands of people already have your product in their fridge. You can’t change what has already been delivered. Well, with a SaaS business, making real-time improvements is a daily routine.
The digital nature of software combined with the web as a distribution medium results in products that constantly improve and adapt to changes in requirements and expectations within hours, not weeks. Many SaaS businesses deploy new iterations of their products multiple times a day. These updated versions reach all of their customers at the same time: the update is usually just a browser refresh away.
This can create a magical feeling in your customers. And they’re ready to pay for this.
SaaS businesses usually have significantly higher margins than businesses in other industries. Even in an economic downturn, SaaS businesses report 60% to 90% gross margins. That alone might want to make you start a software company.
But it gets better: SaaS businesses are incredibly cheap to run due to the inherent scaling effects of offering the same exact product to all your customers and an almost zero marginal cost for onboarding a new prospect. Often, a new customer means adding a row to your database and triggering an email onboarding process. All of that can be automated and costs you a fraction of a cent.
Low-touch vs. High-touch
This kind of SaaS is called a “low-touch business.” Ideally, you’ll never have to manually interact with your customers. If they need help, they find it in the self-help center you’ve provided. Your payment provider handles their subscription management, and any feedback comes through feature suggestion tools and automated surveys. SaaS businesses like this can reach thousands of customers without you having to hire additional help.
A low-touch SaaS business can benefit immensely from word-of-mouth marketing, particularly peer referrals. In fact, it can benefit from network effects of all kinds, both externally —when it comes to acquiring new customers— and internally, where customers can provide information and support to other customers right inside the product. They can share resources, teach each other better ways of using the product or even create a whole ecosystem of plugins, integrations, and shared documentation.
Transistor.fm is a great example of this kind of SaaS business. The podcast hosting solution is run by two co-founders and two employees, has thousands of customers, and offers integrations with tools like ConvertKit, Twitter, and Zapier. The platform allows podcasters to distribute into all kinds of popular podcast listening apps like Apple Podcasts, Spotify, or Audible. I’ve been a loyal customer for years and never needed to talk to customer support. It’s been a no-touch experience for me — the lowest touch there is.
On the other side of the spectrum, you’ll find the high-touch SaaS businesses. When your customers need premium customization options and can’t use your product without having it perfectly fine-tuned to their needs, you will have to put in a lot of up-front manual work. But it’s usually worth it: premium treatment has a premium price tag. This results in more traditional sales and marketing approaches focused on finding a bespoke custom package for high-volume and high-profile prospects.
My experience with SparkLoop fits into this high-touch category. This SaaS business offers a referral system for newsletter creators. To get it started, I had an hour-long onboarding conversation with Louis, the founder, which was so insightful that we turned it into a podcast episode. This service is also priced on the higher end: most customers end up paying $300 per month. Louis and his co-founder are providing high-efficiency fraud prevention, massive customization for outreach emails, landing pages, and more. Each customer can create the referral system they need, and they will all look differently. High value, high touch.
Both low-touch and high-touch can work well for a SaaS business, depending on the market and the service offered. A Calm SaaS business will likely fall more into the low-touch category, as the high degree of automation combined with the low impact of a single customer canceling increases the likelihood of smooth sailing. Still, either way allows you to build a calm business.
Configuration, Customization, Integration
Generally, SaaS businesses aim to follow the “configuration over customization” approach: you’ll build one product that your prospects can configure to work well for them. The moment you need to add custom features, the complexity of your product skyrockets. A calm business sells a simple-to-maintain product. Adding “configuration to serve many” usually outdoes building “custom features for the few.” It’s easier to add another config option than to build a complicated feature-flag system that only shows certain features to specific customers.
The decider on how much customization you need lies in your industry’s available integrations. If you have access to common standards and existing software interfaces, these can be integrated once and made configurable for your users. But if everyone is using their own arcane means of doing business, you won’t be able to avoid custom solutions. This is something worth investigating before you create your first prototype: what inputs do other SaaS businesses in your field support? What output formats do they offer? Are there standard integrations? Anything like this will make it very easy to make your product fit into existing workflows.
Cloud-hosted vs. On-Premise
Another facet of your specific industry that heavily impacts how well it’s suited to SaaS solutions is the level of data protection and control businesses expect to retain. If you sell software to a military branch, they will expect high levels of certifications and assurances. Also, they likely want to run your software on their own premises — or at least within the confines of a cloud they have complete control over. SaaS and on-premise solutions can work together but will make product development and distribution a high-effort nightmare. You’ll find much calmer processes and lower customer expectations in less secretive industries where the use of cloud-hosted software is commonplace, such as design agencies or beauty salons.
A word about founder mental health
If you want to run your SaaS business as a solopreneur, you should take note that while it’s straightforward to get started alone, it turns into a colossal commitment once you have a globally distributed customer base. Cloud-based software needs to run continuously, and no technical system is error-free. You’ll be on the hook for emergency server repairs and answering customer support tickets around the clock fairly quickly. A SaaS business can be highly automated, but eventually, a human being needs to solve problems as they appear. Without finding help —and eventually building a team— your state of mind will be anything but calm.
I’ve been in the middle of burnout running a SaaS before. It took me years to recover from the stress and anxiety I developed from neglecting my mental health. As much as this business lends itself to being scrappy, you can quickly underestimate the effort you’ll have to put into keeping it running and serving your customers. Make sure you have the support network and contingency plans in place for a journey that will turn into a rough ride every now and then.
But it’s worth it. Building a calm SaaS business can be incredibly rewarding, and it’s a great way to build wealth.