This article is a quick introduction to the software SaaS model for designers. This can be your starting point in expanding your understanding of the products you design for and the economies that make them attractive business models.

What Is a SaaS?

SaaS stands for Software as a Service. SaaS is a business model where a company offers a piece of software to its customers via a subscription model. It’s one of the most popular business modalities for selling software.

How Do SaaS Companies Make Money?

SaaS companies make money thanks to software’s capacity to achieve near-zero marginal cost of reproduction.

Servicing a single customer would make a SaaS company lose money due to the cost associated with designing, building, promoting, and supporting software. However, once it’s created, that software can be copied at almost no cost.

“Near-zero marginal cost means the cost of service one extra customer, once your operating expenses are covered, is almost zero.”

SaaS companies only need to charge many users a fraction of what their product costs to produce to be profitable. Ideally, they cover their cost of operation with what they make out of their first hundreds of thousands of customers. Everything above that becomes profit.

“If the cost of producing an additional good or service is nearly zero, that would be the optimum level of productivity.” – Jeremy Rifkin, The Zero Marginal Cost Society.

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Churn Rate

A percentage of the user base of every SaaS company stops using their product every month. Churn rate is the percentage of users a SaaS company loses in a given period.

SaaS companies usually track churn rate as a monthly metric.

How Do SaaS Companies Grow?

In the SaaS space, Growth comes from acquisition, which is acquiring an increasing number of customers month after month. Just like the churn rate, SaaS companies track acquisition as a monthly metric as well.

For a SaaS company to grow, its acquisition rate over a certain period has to be bigger than its churn rate.‍

How Do SaaS Companies Acquire New Customers?

New customers are the result of the right message shown to the right audience.

Of course, there isn’t just one right message. Different parts of your product can be packaged differently for various groups of people—a practice known as market segmentation.

Customer Segmentation

The process of dividing your audience into smaller groups based on common characteristics is called segmentation.

Most SaaS companies segment their users into three tiers, each with a different price. Economists call this price discrimination, and it’s just one of the techniques companies use to segment their customers.

Conclusion

So there you have it. These are the most basic concepts of how SaaS companies work. I hope this post was helpful. If you have any questions or suggestions, send me a message at ed@edorozco.com.