With more and more software companies slowly but inevitably shifting to the SaaS model during the past decade, more types of SaaS products appear. All SaaS businesses can be grouped based on their similarities and functions. Currently, there are not so many categories, but the range of these solutions already demonstrates that SaaS technologies can be applied and become successful in any industry.
Before creating a SaaS project, it is important to learn more about the types of SaaS software and how they work. In such a way, you will find out the nuances and challenges of each category, as well as their market particularities and even a little bit about end-users’ needs.
In Eleken, we work with various SaaS products, beginning from CRM and ending up with web hosting projects. Each SaaS solution requires a special approach to its development and expansion. Just like for any profitable product, you should first outline your niche and industry to move forward with your idea or plan. That is why there exists the typology of SaaS products.
SaaS basics and advantages
As a cloud-based software service, SaaS products have plenty of advantages for users compared to conventional software. We have enlisted their major benefits below:
- Available per subscription per user
- No need to download or update the software on your laptop or computer
- Can be reached from any device in any part of the world through the Internet
- Lowers costs for subscription in comparison to the price of traditional software
- Reduced time to launch the software and start using it
All of these characteristics can be found in all types of SaaS software but have slight variations depending on the preferences of targeted clients and the functionality of the very product. Furthermore, in each of the following groups, SaaS solutions slowly force out traditional software.
Let’s check the main categories of SaaS solutions and see how they differ from each other.
The types of SaaS solutions
There are many types of SaaS software. The central aspect of division into groups is the sphere or industry that the SaaS product improves, such as online banking or communication.
Probably, the most essential thing about the division of SaaS applications is the fact that in the future, new groups of SaaS products will appear. It seems that cloud-based software service can be applied in almost any sphere of human activity. As more and more people are looking for ways to work from home after the Covid-19 pandemic, the popularity of SaaS applications will be rising as you can use them anywhere in the world. If you want proofs with revenue data, see our SaaS market overview.
So, while we are awaiting the new upcoming types of software as a service, the current ones go as following:
Customer Relationship Management (CRM) software
For every business, customer data is valuable information, which is used to promote the product and increase sales. CRM software is a tool for effective management. It stores all customer data and helps improve customer relationships.
Some CRM systems help their users forecast sales, but the majority simply automate repetitive sales tasks such as emails. Modern SaaS CRMs bring to the table loads of functions. Freshworks, a CRM owned by Girish Mathrubootham, offers more than 10 other products that can be integrated into each other depending on your business needs.
Want to learn more about CRM SaaS? Read the case study describing our work with TextMagic, for whom we did UI/UX design.
Enterprise Resource Planning (ERP) software
These SaaS are used by large companies and enterprises to manage a wide range of business processes. Among them accounting, risk management, compliance, and budgeting. Such a SaaS allows combining and tracking all these processes in one place due to the big number of its services.
As an example, NetSuite, a popular ERP SaaS with more than 22 000 customers, includes e-commerce and retail solutions for your business. What is more, it even has a function of PSA (Professional Services Automation) for planning and executing projects.
Accounting software
Accounting software simplifies managing your financial operations and costs by automating them. This comes in handy when you are doing lots of financial operations per day.
All SaaS in this category differ greatly in features, so you should choose the ones that will fit your needs and expectations when it comes to handling your finance. Currently, the most used ones are Xero and QuickBooks, which have lots of effective integrations.
In Xero, for instance, you can create invoices and bills, and even see reports on your spendings. On the dashboard, you can prioritize your tasks, which makes it easier to track everything going on with your finances. Finally, you can even see your account balance and transactions in Xero due to its integrations with banks and online financial services as Stripe or PayPal.
Project management software
PM SaaS solutions enhance cooperation and progress tracking in teams. They are much faster and easier to use compared to shared spreadsheets or documents as synchronization happens in real-time.
Confluence by Atlassian is one of PM SaaS with the largest number of additional tools and functions. With only $10/user/month (1–100 users) with its Premium plan, you can make use of such features as task tracking, real-time notifications, adjustable page permissions, and even blog posting.
CMS and e-commerce platforms
E-commerce SaaS solutions are a great option for new businesses, as they allow you to start selling your products immediately, saving money on website development and UX/UI design services (if you are planning to make a website).
Shopify, the most famous e-commerce platform, has lots of cool features to help entrepreneurs sell goods and products online. First of all, it has many different themes to make your online shop unique. Secondly, it has various integrations such as POS and PayPal to simplify payment processing.
You can also create financial reports and even make blogs, which is a great solution for any business. What’s more, purchasing things online should be an easy and fun process for your clients. In Shopify, you can add your discounts, coupons, and gift cards as small gestures to attract customers and, at the same time, to reward them for choosing your service.
CMS is the Content Management System, which allows publishing and editing content, such as articles and blog posts. The most known platform of this type is WordPress, which was started as a tool for blogging but eventually evolved into a CMS and website-building tool. In WordPress, which is free, you can use templates for your website and work not only with the text itself but also with pictures, audio, and video files.
Communication platforms
These are widely used SaaS products. Their main benefit of communication platforms is instant messaging and file sharing from any part of the world. These apps are often used by businesses for communication between their employees. For instance, Slack is a favorite communication tool of more than 12 million active daily users in both large and small companies.
Very often such communication platforms also have mobile applications available, that let users reach the network of their friends/colleagues and get all the necessary information at any time.
HR/HRM solutions
These SaaS solutions are developed to manage human resources. Such products have features such as recruiting, interview scheduling, performance tracking and analysis, and employee reviews. They come in handy for organizations that are constantly growing and hiring new people, as they allow storing all information on candidates in one place.
Some of such SaaS applications also allow managing employee productivity and attendance.
Lattice is a widely known SaaS application with more than 2000 organizations using it daily. With this product, managers can make use of templates for employee reviews or create new ones. Employees, in their turn, are requested to submit feedback right in the software for effective communication and cooperation within the company.
In Lattice, you can also set up your goals as discussed with the manager, and, later on, share the results with other workers or even on a special Slack channel (if integrated). Undoubtedly, such a clear and understandable approach makes it much easier to track achievements from the sides of both management and employees.
Finally, you can measure people analytics on dashboards and, for instance, filter data by skills, age, sex, and many other metrics.
Payment gateways and billing solutions
Payment gateways enable businesses to accept payments in a fast and easy way handling hundreds of transactions each day.
Paypal is a safe and secure service to store all sensitive customer data such as numbers of bank cards. For any business, this is a convenient way to receive payments by sharing protected customer information between banks and merchants and eliminate the risks of data leakage.
One more advantage of a payment gateway is that processing transactions online is much faster than doing it manually. Furthermore, with an extended customer base of Paypal as one of the most popular payment methods, you have more chances to reach out to new clients.
One more advantage of such software is payment reporting, which allows you to mark or flag any kind of suspicious activity or payments. A fun feature in some of the payment gateways is publishing reward coupons, which is a small thing to both entertain and attract users.
Different types of SaaS for different goals
SaaS solutions resolve numerous issues in different spheres and make the lives of millions of people much easier. Each type of SaaS software has its special approach to fix the particular problem of the users, whether it is receiving a card payment, sending a file to your manager, or creating a board with tasks for your team.
If you want to find out more about SaaS business or are simply curious about different SaaS products, you can find more details in our next blog-post What makes a good SaaS product.
Top Stories
Product-Led Growth: a Customer-Focused Strategy for SaaS Business Growth
Product-led growth or PLG is a business strategy suggesting that the product itself is the main tool of user acquisition. Within the past decade, this approach has proven to be the most efficient one, especially for software companies. Dropbox, Slack, and Zoom have all chosen this strategy to reach success.
PLG is slowly forcing out sales-led and marketing-led strategies that were prevailing in the software industry just a few years ago. The recent changes of users’ needs and market caused the appearance of a new strategy with a usable intuitive product that promotes itself. Let’s look closely at the factors that facilitated this change and how PLG impacted SaaS businesses.
What is product-led growth?
With the ever-increasing number of software products, users’ requirements also changed. Something that seemed to be magical 10 years ago is now taken for granted. With so many options available, people do not want to purchase software without testing it first.
Since the beginning of the Internet era, people are constantly self-educating. Nowadays, you can find anything on the web: from cooking recipes to tutorials on how to fix your devices.
While in the past people relied on sales representatives when buying something, now, potential clients want to explore and experience the service itself to know what they will get before buying it. People don't depend on sales executives anymore. With numerous lists of helpful apps and software available on the Internet, users prefer testing the service before investing money in it.
Product-led growth allows customers to make full use of all features of the application without paying. This approach has proven to be especially effective for SaaS businesses due to their subscription model. First, you gain free access to the platform, and only after testing a product for some time, you decide if you want a paid subscription or no.
Free trial and freemium models are the two main types of free subscriptions. With the first one, you can use the service for free for some time (from 14 to 30) days. After this, you would need to pay for a subscription to continue using the software. Freemium model offers timeless access to the product but with some limitations.
For instance, Dropbox, a PLG company, has storage limitations for free accounts. Only if users make a paid account, they can store more data.
Free usage of the product becomes an essential part of the buying process with PLG. If your service satisfies customers’ requirements, paying for it is a logical next step for them.
With a “try-before-you-buy” strategy, you do not invest heavily in marketing. Indeed, SaaS companies that implement this approach rely more on the word of mouth, positive experience, and good reputation because the users who enjoy their service will definitely spread the word about it.
How to build a product for end-users
If the product itself is the key aspect of your growth strategy, it means that all the departments of the company are improving and enhancing it in close cooperation.
The next questions demonstrate how each team in the company focuses on product development:
“How can the product resolve the issues of our customers?” - customer success team
“How can the product create the demand?” - the marketing team
“How can the product boost sales?” - the sales team
“How can our product design help to resolve the problem of our users? - design team
“How do we create a product that is useful for our customers? - engineering team
Your SaaS application needs to be better at resolving users’ issues than other products available in the market. Your targeted customers can always check it by subscribing for a free trial, which comes with a product-led growth strategy.
The PLG model also shows that you respect your users and do not make them pay for something they do not need. By offering a free trial, you let your customers choose your product because it works best for them. Consequently, they do not become buyers right after registration. Indeed, the conversion from free users to paying users happens only after a positive experience with your service.
One more example of a prosperous “try-before-you-buy” business is Zoom. Only a year ago, this SaaS solution was popular mostly among people involved in the IT industry. Nowadays, this product is a must for anybody who is studying or conducting business meetings online and simply has video calls with friends now and then.
It seems that all of a sudden, everybody started talking about Zoom as a leading video-conferencing tool. However, the trick here is that with free 40-minute first video call, all the users got to know why this solution is actually great.
With a PLG strategy, where the product speaks for itself and demonstrates all the best features in action, Zoom gained worldwide recognition and popularity by the word of mouth. If you find something useful and awesome, it is quite logical to share with friends and close people.
How to make product-led growth work for you
Product-led growth seems to be a relatively easy approach, especially if your product advertises itself. However, to build a solid foundation for a freemium SaaS company, you would need the next three things:
- Understanding your value
Unfortunately, many SaaS companies fail to understand what’s special about their product for targeted customers. A core value of your product is a central part of a PLG strategy and a key to differentiating a SaaS solution in the market whether it is the lower price or one more feature that your competitors do not have.
- Communicating the value of your product clearly
Without the previous step, you will not be able to show the benefits of your product. The core value of your SaaS solution should be noticeable and stand out. In many cases, users do not understand why your application is better than the others so you need to show and explain this.
- Delivering on what you promise
Finally, providing the expected and promised services is a must for a product-led growth strategy because it relies on the performance and functionality of your application. If you do not deliver on what you promise, it may cause negative UX and, as a result, no paid subscriptions after the free trial.
Advantages of product-led growth strategy
Let’s find out why PLG strategy became so popular and effective during a short period of time. There are two main advantages of this approach:
Faster scaling
Product-led companies can grow much faster because their users immediately start testing the product within free trials. The onboarding process is almost instant and, in most cases, does not require any assistance from customer support.
Consequently, customers get familiar with the software much quicker. They do not need to read or learn about service because they can use it straight away. The point when a user creates a paid account happens pretty soon as well, due to a free trial. In such a way, the company grows and gets new customers at a surprising speed.
Lower сustomer acquisition costs
If your customers onboard themselves, the sales cycles become significantly shorter. Moreover, you do not need large customer support, sales, or marketing teams in a PLG company. The costs of customer acquisition are pretty low because new users are joining after experiencing the value of your product, not because of expensive advertisement.
Conclusion
In the 21st century, freemium models of software products have modified the rules of competition and growth for many SaaS businesses. Freemium model is the business strategy that currently works for all types of SaaS applications.
With no hidden and sophisticated marketing or sales techniques, the product-led growth approach is built upon a usable and effective product that proves its advantages at each user’s click. It does not mean that this strategy is less challenging or complicated. You still need to think of advertising, but you should do it wisely.
The company’s growth strategy, along with many other factors defines the company’s development. The role of the growth product manager is also a crucial component of a success formula as this person plans and facilitates this scaling. If you are curious about the tasks, responsibilities, and impact of a growth product manager on the company’s future, check this article in our blog.
CAC SaaS Metric: How to Calculate and Lower Your Customer Acquisition Cost
There’s no fun in tracking customer acquisition costs. Dealing with growth or customer acquisition tempo, or other dynamic metrics is much more thrilling — they float your business into the sunset of success. Nothing wrong with dynamic metrics, but let’s consider one tiny detail before you hit the gas.
Your speed and your growth don’t matter if the reward you gain from a paying customer is less than the amount burned to win that customer.
When you validate a SaaS idea, customers at any cost are okay — their existence itself proves that the idea resonates and you’re not wasting your time. When you start building your idea into a business, customers at any cost stop being okay. You need to balance the ratio of revenue and cost per customer to make a business model worth growing and scaling.
Eleken design agency specializes in designing SaaS products from scratch, but one of the most frequent requests we get is to redesign an app or a website, like it happened in cases of Gridle or Handprinter. Brilliant teams doing brilliant things but can’t reach CAC payback no matter how hard they are trying, so they ask for help.
UI/UX design can improve the situation with overblown customer acquisition costs. What else can improve the situation is understanding the fundamental driving forces of CAC and working on lowering this metric with every step you go.
That’s a bit abstract. So, let’s do some unpacking.
What is customer acquisition cost
The amount we burn on marketing and sales to win customers is called CAC (customer acquisition cost). This metric is a concern for any industry, but for SaaS, it’s crucial because the subscription model implies that reward is split into small pieces and extended in time.
You spent a ton of money to acquire new customers. FirstPageSage calculated the average customer acquisition cost by industry, and it’s impressive.
You need up to $341 to acquire one paying customer for B2B SaaS. Pretty dramatic.
All that money you spend long before you see a full return on your investment. Not to mention that a full return may never occur in case if a newcomer decides to churn after the first month.
Customer acquisition cost vs lifetime value
Let’s calm the intensity of emotions. Customer acquisition cost alone says nothing about your business, it’s a relative concept. Spending $341 for winning a customer can be too bad if that customer brings you only $300. Or, the same $341 can be a great investment if you earn $1,000 — that’s enough for a payback along with a sustainable profit.
For measuring the amount we earn from a customer, we have another metric called LTV, or customer lifetime value. In tandem with CAC, it makes a litmus test for a SaaS business model and has proved to be one of the key financial KPIs for SaaS companies.
David Skok SAAS metrics golden ratio
Venture capitalist David Skok in his blog defined that for SaaS companies, lifetime value must be at least 3x greater than customer acquisition cost. His rule of thumb became an industry standard, and now any guide on SaaS unit economics you can find will tell you that a golden ratio for SaaS is 3:1.
The chart below shows a perfect picture of your CAC payback model. All starts from spending your customer acquisition money that puts you deep into a red zone of loss. As your customer starts paying for a subscription, you slowly move towards a CAC payback point where you get your money back. That’s where you reach a 1:1 ratio. After, you build up your profit until your customer decides to churn (which is hopefully never).
If everything goes as in the picture, your business model is sustainable. You spend on acquisition less than you earn, and have enough resources to drive the startup’s growth. But things don’t always play out quite as you had intended.
When cost per customer acquisition gets out of control
A textbook case of broken LTV/CAC ratio presents Pets.com, a dotcom enterprise whose downfall was as magnificent as its rise.
Back in 1996, Pers.com was the first marketplace to push pet brands online. Realizing that their business model is operationally cheaper compared to their offline competitors, the company bloated its marketing budgets out of all proportion. Suffice to say, they spent $1.2 million on a SuperBowl ad.
Pets.com burned more cash than they were bringing in with every new customer acquired, and scaling the startup further was making it even worse. Pet.com shut down after they lost $300 Million of investor money. Not exactly what you’re hoping for when starting a business.
No need to go far for similar stories from the world of SaaS. Take Slack, which entered Silicon Valley's hall of fame as the fastest growing business app, and ended up staggering under $91 million of losses and selling itself.
Looks like Slack and Pets.com didn't do some math right.
Doing some math: how to calculate customer acquisition cost
The cost of acquiring a customer is the sum of all marketing and sales expenses over a given period divided by the number of new customers added during that same period.
The customer acquisition cost formula looks like the simplest formula ever. Divide your $500 budget for search ads on your 10 new users, and that's it — $50 for an acquisition. However, there’s still plenty of room for misunderstanding. Like, what is included in customer acquisition costs? And do your freemium users belong to acquired customers?
Patrick Campbell indicates four most common mistakes in how is customer acquisition cost calculated:
- Counting paid advertising as your only acquisition expense;
- Forgetting to include indirect costs, such as subscription for tools, services and software;
- Missing the salaries of all acquisition-related personnel;
- Considering non-paying freemium users as acquired customers — you should count only paying customers.
Any of those mistakes may dramatically affect your LTV/CAC ratio, as shown in the chart below.
Now when we know how to calculate CAC, let’s learn how to define LTV so that we can compare the two metrics.
LTV means the average amount that you expect to earn per customer over their entire lifetime. To calculate it, you need to multiply the sum you’re charging per user in a given month by the average customer lifetime.
Let’s say one user brings $20 per month, and you know that they stay with you for, let’s say, 5 months on average. Using the formula below we can figure out that the lifetime value of one user is $100.
Now when we can measure customer lifetime value ($100) and customer acquisition ($50), we can compare them and figure out that our LTV is 2x greater than customer acquisition cost. Good, but can be better. Can we influence CAC to improve the ratio?
How to lower customer acquisition costs
Nice thing about lowering your acquisition expenses is that it lowers your payback target as well and gets you on the path to profits faster.
Here we’ve got some tips to help you reduce consumer acquisition cost:
- Make user experience frictionless
Only a fraction of your landing page visitors will get curious about your product, and you can easily ruin that small fraction with a landing that creates more confusion than clarity.
Attracted by the freemium offer, users may download your app. But unable to see the app’s value from the first minutes, they’ll abandon it without thinking twice.
Even being one step away from becoming paying customers people will leave if your pricing grid is not clear enough.
Customer friction pops up on every step of your SaaS customers’ journeys. It makes these journeys long and straggly (read expensive) and forces prospective customers to leave halfway to a purchase.
So it makes sense to identify moments of friction everywhere they happen and eliminate them to reduce wastage of customer acquisition budget.
- Optimize your marketing tactics
Calculate your CAC and your LTV within each marketing and advertising channel, so that you can understand their efficiency.
Chances are you rely too much on non-recurring acquisition channels like pay-per-click advertising. Inorganic traffic costs much more money and brings immediate results that reduce to zero as soon as you stop pouring money into Google Ads.
Organic traffic is less expensive in most cases, and its positive effect lasts longer. With content marketing, for instance, it takes time to gain traction in search, but as a reward, you’ll get a compounding effect where traffic from previously published articles adds to traffic from newer articles.
- Focus on audience segments that resonate better
With your early customer acquisition marketing, you may attract a broad variety of users. Many of those people won't be well-qualified; they won’t have a real need for your product and your offer might not be a great fit for them.
If you measure CAC and LTV for all SaaS buyer personas you have, you might figure out that some of the customers are willing to pay a lot, but cost just as much to acquire. On the flipside, you have a group of customers who’re cheap, but willing to pay nothing.
To lower your expenses, focus your acquisition efforts on personas with the best LTV/CAC ratio. Check out how Superhuman pawed their way to success focusing only on the biggest project supporters and abandoning all the other segments of their audience.
Other ways to improve your LTV/CAC ratio
Customers are costly, and you want to know how costly they are to make your acquisition process shorter and more efficient. If your team can lower CAC, you’ll bring yourself closer to your payback target and make your business more profitable. But what if lowering cost per customer acquisition is not the only way to shorten your CAC payback period?
SaaS pricing strategy optimization can skyrocket your LTV/CAC ratio just as good. But that is a whole other story (that we have already written).
Your email has been submitted successfully. Check your email for first article we’ve sent you.
