What is SaaS? Software-as-a-Service Explained to Small Businesses

Small and midsize businesses (SMBs) cut budgets across the board to survive the COVID-19 crisis. But software purchasing was the one area where SMBs decided to spend more.  

By software, we mean Software-as-a-Service (SaaS) tools such as video conferencing tools, instant messaging and chat software, file sharing software, and project management software that can be accessed online. These cloud-based solutions became essential for businesses to keep operations running during the crisis.   

The easy availability of SaaS applications, also known as cloud-based software solutions, today makes it possible for a small business to easily embrace digital automation. Unlike traditional on-premise software, SaaS applications are designed to make it easy for businesses to start using software to reap the benefits of digital automation. 

That said, SaaS is a crowded marketplace and if you’re an SMB just starting out then you need to avoid investing in the wrong software. 

The first thing to do is to get your bearings right by understanding the basics of SaaS, the potential benefits, and the risks of investing in such a solution.  

SaaS is a software delivery model that allows you to use software solutions on a pay-for-use or subscription basis. You can start using the software immediately, typically via a web browser, by paying the software vendor (the SaaS tech company) for services such as software hosting, maintenance, backup, and upgrades. 

With the rise of the internet and cloud computing in the 1990s, software companies started to offer cloud-based versions of, hitherto, on-premise tools. But since on-premise solutions were the norm back then, the SaaS model wasn’t taken seriously. 

However, the SaaS model’s popularity grew as it allowed even SMBs to easily adopt digital solutions. SaaS is now a gigantic $228 billion market that is expected to grow at a five-year compound annual growth rate of 15.5% through 2023 (content available to Gartner clients only).

Below is a table that explains the key differences between the two software delivery models:

Important aspects of SaaS 

• Subscription-based billing: Most SaaS apps are offered for a subscription fee (some vendors may offer perpetual licenses), which can be paid monthly or annually. However, SaaS pricing models have become complex over the years and vendors have started offering package-based (based on the features availed) and consumption-based (based on features and number of users) pricing models. Read this blog to find out more about software pricing models.

• No installation or maintenance: Since a SaaS application is hosted on the vendor’s servers, the software can be used immediately and requires no installation. The software service provider takes care of software upkeep and releases updates and patches for fixing bugs. A thing to note is that these don’t come for free—the charges for these services are bundled in the SaaS subscription pricing.     

What are the examples of SaaS?

SaaS applications help users automate different kinds of business tasks. An example would be automating project planning using a Gantt chart tool or the automatic generation of invoices using billing and invoicing software. 

With SaaS, you also have the choice to buy a whole suite or a single application. For instance, if you’re looking for a tool to improve employee development and learning, then you have the option of purchasing a full-suite learning management system (LMS). 

You can also piecemeal your purchase by buying smaller applications that make up the LMS. You can opt to buy only the testing/quizzing application or the course authoring application. 

A thing to note, however, is that SaaS is a type of cloud computing service model and there are other models such as Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS).

Before SaaS, only large businesses could afford digital technologies that helped improve business performance. Digitalization, which meant procuring expensive software/hardware, setting up a data center, and hiring IT experts, was simply out of the reach of SMB owners with shallow pockets. 

Enter SaaS, and buying business software became affordable than before. The cost-effectiveness of SaaS solutions allowed SMBs to buy software that were traditionally considered enterprise-bound technology. 

The fact that SMBs could reap the benefits of using digital solutions just as large companies do is a game-changing benefit of SaaS.

As SaaS adoption becomes widespread, businesses are now realizing the potential downsides. For one, companies that adopt SaaS solutions have their data stored on the vendor’s servers. This poses security concerns as software vendors are not impervious to cyber attacks and hackers can steal sensitive business data from their servers. 

The most important revelation is the fact that SaaS, while having a lower upfront cost, does not result in cost savings in the long run. SaaS vendors’ claims that software buyers need to only pay-for-use isn’t true at all. Gartner finds that “90% SaaS offerings are not pay-for-use” and the total cost of ownership (TCO) of a SaaS solution is not guaranteed to be less than an on-premise tool.

Going digital is no longer the exception but the norm for small businesses, and adopting SaaS solutions is the way forward for SMBs. However, if you’re just starting out with SaaS tools then there are a couple of considerations you must have in mind. 

What should be my SaaS budget? When analyzing the TCO of a SaaS tool you must include charges that might not be mentioned by the software vendor in the subscription fee. Third-party software integrations and add-ons, for example, can often come with extra charges. Likewise, if you’re migrating data saved on spreadsheets to the SaaS platform then the vendor can levy additional fees. Another overlooked cost can be training and priority phone support. 

How secure is my data? When you purchase a SaaS solution, you’ll need to define certain terms in the service level agreement (SLA), such as the guarantee of service and the ownership of data. You will need to examine the fine print in the SLAs to know what exactly the vendor is responsible for, which ideally should guarantee certain software uptime, support services, and cybersecurity. Likewise, you need to check if the vendor gives you the ownership of your data as there can be a hidden clause that says otherwise. 

Is SaaS right for my business? SaaS solutions are designed to fit the needs of many users. However, you need to check whether the solution offers enough customization options (such as changes in the user interface and custom reporting) to meet the specific needs of your business. Also, ensure that the tool works with your existing systems, such as operating systems and devices, to facilitate data exchange.