A Simple Guide To The SaaS Business Model

Hey guys, welcome back to another video and episode of SaaS District. Today I'm gonna be talking about a simple guide to what the SaaS business model is and why is it better than other business models out there, okay? I personally love SaaS, I've been in this space for the last couple of years, and that's all we do at Horizon Capital. And I want you guys to understand the real value of SaaS versus going out and building or buying another type of business model. Number one thing why I love SaaS companies and I love investing in SaaS is because of recurring payments. Okay? With real SaaS companies, when people pay you for their service, They're paying for a subscription. Okay, the subscription model is they're paying you on a month-to-month basis for as long as they use their product. Versus if you were thinking to go out there and let's say start an e-commerce product, right? Most people are gonna buy the product once, they're gonna get the object or the item, and that's it. They just pay you once and you're gonna get, and you have to keep selling to more and more people. Whereas with a SaaS product, once you sell to one customer, they're gonna stick around for as long as they see value in your product, and as long as they continue to use it. So that's the biggest thing is you're getting, you know, if a customer stays on for 2 years, 3 years, 5 years, you know, you can retain them with your product, you can guarantee yourself cash and revenue for the next couple of years, which is huge. So that's number one, recurring revenue. The second thing is there's a heightened customer retention piece of it, okay? Retention is a huge part of SaaS, okay? And like I mentioned, when it's very transactional, When you're selling a single item, maybe there's not that much kind of retention strategy for people to come back and buy more. But, you know, just like any other business, customer retention is huge, right? But in the SaaS model, it's 10 times more important because it's literally the only thing that keeps you afloat. Okay, so that goes back to churn, you know, customers who leave you after they try your business. So that means they're not really happy with your product, or the product you built is just not that valuable. So, you know, first thing I talk about is the recurring payment. You're getting that payment, and then how long can you keep them around and keep using your product? And that's the beauty of SaaS, is the software, you know, becomes better and better over time. People usually stick around longer. Once they like your product, they're going to use it for a long period of time. The third thing I like about SaaS is you don't need to build a brand new product every single time. It's just consistent updates, upgrades, little features you add here and there that's going to keep your customers excited and come back and keep paying for you on a month-to-month basis. So for example, you think of like the iPhone, right? You, you go out there and you buy the, you know, the new iPhone X or whatever it is, and you know, you're going to hold onto it for a couple of years, but you know, Apple's not getting any payments for, I think the retention time is like 3 or 4 years. So for that next 3, yes, they get like $1,000 upfront, But now for the next 3, 4 years, they're getting nothing. Okay. You're going to come back maybe 3 or 4, uh, they have to create a completely something completely new, you know, or in this case, they're not creating that much of a change. And then they have to release a new product. And now all the old ones become kind of discontinued and irrelevant. Whereas with SaaS, you know, you build the product, you build it once, and then you just iteratively add to it every single time you want to make an upgrade. But the core product is still there. And that's what brings your company more valuable versus having to build something from scratch again. And the best thing about SaaS is you don't need to, you know, push out huge changes, uh, you know, every single time. You can do this kind of on a weekly basis, talking with your customers, getting feedback, communicating with them, and just keep adding new products and features and just push them out instantly and they can start using your product. So just give you guys some examples of some SaaS companies that I really like. Out there right now doing really, really well. Obviously number one is Shopify. It's an e-commerce platform that allows people to build online stores and create their own stores without needing to know how to code. So the thing is with them is once they— you build your online store with them, you know, you're pretty much set. You're gonna stick with them for a very long time because you're making money online and you've now built an online business. Now obviously they've done really well. I think in 2018 they've made over a billion dollars. Now in 2020, their stocks have been blowing out for the last couple of months and doesn't seem to stop. So Shopify is a great example of a great SaaS company that I really like. So another one that you've probably seen that's huge right now is Zoom. So a lot of people using video conference calls during this pandemic. So that's an example of another SaaS business, right? All they're doing is building that gap for people to communicate online, but their competitive advantage is they're secure, they're easy to use, You don't need login, you don't need all this kind of complicated asking people for their usernames. Simple click, let's jump on, and you can see that in their stocks, you can see that in their valuation, it's just blown up over the last couple of years. And obviously it's been, you know, right timing, right place with what's happening, but they've been doing really, really well. A third example that I really like is HubSpot. So if you guys haven't checked out HubSpot, they've kind of invented the wheel of inbound marketing. All through their CRM, their customer relationship management. They've been doing really good. They're valued at well over $1 billion, and they've continued to grow month over month by offering a free solution. So they give a lot of free features and functionality with their SaaS product, and then from there, they hope that a small percentage of those businesses, as they grow, are going to move on to a higher-tiered product, just like Shopify, just like Zoom, right? They give all those free features for people to try out, to use it, get as much value of it. Once they start making money from it, or once they see the real value, they're willing to pay and become a paid user. And then they're, they're stuck for life. They've had them for life. That's it, guys. I mean, sounds simple. SaaS is a simple model, but once you get it to work, I really guys want you to consider it because once you can build a really good product and you can build a good solution for the market out there, you're going to have users for life. And that recurring model will continue to grow where you can sell to the entire world and hopefully scale to be worth billions of dollars just like some of these guys that I mentioned. All right, hope you guys enjoyed this video. If you like this video, I wanna hear from you. Why do you guys like SaaS businesses? Maybe is there any other ideas of what else you like to see in SaaS businesses, what makes it exciting for you? Comment below, let me know, and hope to see you guys on the next video.