Software as a service, or SaaS, is a business model based on providing programs and services with no physical products. SaaS providers conduct all their business online through a third-party vendor. A user buys a product from the SaaS business, then downloads the program to their computer.

starting a saas business

Intuit, Shopify, AWS and many other companies became successful by starting as SaaS businesses. All the earnings from an SaaS company are almost entirely profit, since conducting their business online allows them to have minimal allocation of resources and materials.

SaaS is popular with customers, because they can buy only what they need, and transactions are instant. Business is simpler and quicker for the companies, as well.

If you want to start an SaaS business, here a few things to know.

1. Customers Come First

A customer-first mentality is important in any business, but doubly so for a SaaS company. Customer satisfaction is everything when your business success hinges on word of mouth. The first time your product goes out could mean early problems and lots of bug fixes, so you must have other avenues to make a good first impression.

The process starts with communication to the public about what’s going on with the program, including updates and tutorials. Make sure to take care of known bugs before launch, even pushing back the start date if necessary. There is no such thing as overcommunication in the early stages of a business, so provide a newsletter or other regular updates.

Simple, yet effective, customer service is critical for any problems the product and user may experience. Offline access to the product is also vital, even in today’s cyber-driven world.

2. Marketing Strategies

Without a physical product to sell in stores, advertising the start of a SaaS business can seem tricky. With a strong customer-first mindset, your business can build a good reputation and get referrals from the outside, but you need to get the initial customers first.

Advertising on social media or popular websites can boost sales. The target market, whoever they may be, will be on the Internet often. Try to further narrow down your target audience by finding what sites they may frequent the most.

You can also build partnerships and affiliates with other SaaS companies marketing to the same general population as you. Affiliating means easy advertisements for everyone and helping customers find everything they need. All you need to do is agree to promote for your partners’ business, too.

3. Tax Laws

Understanding tax law sounds like something to learn during tax season, instead of when starting a business. However, SaaS companies are special cases for taxes, especially if your business is in the United States.

Joshua Lawrence, a partner at Hodgson Russ, explains “At the base level, many states simply have different views on whether software of any type is taxable.  Some states consider software a form of tangible personal property for sales and use tax purposes, even if accessed or transferred electronically.  Other states consider software taxable only if transferred physically by disk, CD, etc.  To add to the complexity, states take differing approaches as to when a SaaS provider is providing a “service” as opposed to some form of “sale” of the underlying software (e.g., the transfer of a license or right to use).”

He continues, “SaaS providers also face multistate issues in how to “source” their revenues—an issue that has both sales tax and corporate tax implications.  For example, many states deem a SaaS provider’s revenues to be earned where users accessing the service are located—leaving it up to the provider with the difficult technical task of proving where those locations are.”

If your business has multiple sites, you will have to familiarize yourself with the local laws before setting up shop. The states taxing SaaS include Arizona, Connecticut, Hawaii, Indiana, Massachusetts, Minnesota, New Mexico, New York, Ohio, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington and Washington, D.C.

Doing business across state lines is a common practice for SaaS companies. Familiarize yourself with local laws before creating your business.

4. Pricing and Subscriptions

There are many ways to market your product, but you need to keep target demographic and the product’s value in mind. The main pricing technique you can use is a subscription service. Subscriptions provide constant revenue and an easy way to carry over loyal customers, since it’s simple for the consumer to remember to pay each month.

If a subscription can’t work for you, consider a flat-rate service where the customer buys your product at a good value and completes the transaction. Usage-based pricing works well for buying something continuous, like data, and is worth however much the customer uses. Tiered pricing plans require additions to your service, where the extra parts are worth the higher value.

5. Third-Party Integration

Customers will want to work with other programs easily while using yours. If they cannot, they will seek out another program doing the same job as yours, and may even pay more. To avoid losing customers, try to do more synchronization with your program to others.

The best way to make your program easily accessible is to manage data. Build multiple data feeds into your system, and streamline the data as much as possible. Another easy access option is to make a browser extension. Remember to make the program compatible with all popular browsers, such as Chrome, Firefox and Opera.

Time to Start

SaaS has proven itself as a lucrative business model. You aren’t buying anything you need to create your product, and almost all revenue is profit. It’s little wonder million-dollar companies started off by expanding from a small SaaS. The only thing you must do is find something people want or need. Market a product that can solve a potential customer’s problem. Keeping the consumer top of mind from the start will be the most crucial step in success.

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Software as a service, or SaaS, is a business model based on providing programs and services with no physical products. SaaS providers conduct all their business online through a third-party vendor. A user buys a product from the SaaS business, then downloads the program to their computer. Intuit, Shopify, AWS...