Dan Martell - What Is SaaS？ Software As A Service Explained (In 9 Minutes)

00:00:00.080 Hey there, I'm Dan Martell,

00:00:01.080 serial entrepreneur, investor, and creator of SaaS Academy.

00:00:03.440 In this episode, I'm gonna share with you

00:00:04.840 the definition of SaaS.

00:00:06.840 Why is it hot?

00:00:08.040 Why are people creating them? 0.96

00:00:09.520 Why are they so valuable?

00:00:11.400 And be sure to stay at the end,

00:00:12.480 because if you're interested in this topic,

00:00:13.640 I'm gonna tell you how to get access

00:00:14.760 to my idea to exit mini course

00:00:17.000 on how you can build your own SaaS product.

00:00:20.280 Let's get into it.

00:00:30.000 So I've been building software as a service company,

00:00:37.520 SaaS, for the last 23 years.

00:00:40.720 Yes, I know I look so young.

00:00:42.380 And you're like, how is that possible?

00:00:43.580 Did you start when you were five?

00:00:45.180 No, I am older.

00:00:46.840 But, no, I know I look older.

00:00:48.260 I got gray hair.

00:00:48.900 But I want to tell you this

00:00:50.020 because my friend Marty recently,

00:00:51.120 I was at his house

00:00:51.820 and I've known Marty literally since I was 12.

00:00:54.420 And he goes, hey man, can I ask you a question?

00:00:56.720 I'm like, yeah, what's up?

00:00:57.880 And he goes, what does SaaS mean?

00:01:00.620 Again, I've known him my whole life.

00:01:02.660 I share about it on social media, on Instagram,

00:01:05.020 on Facebook, on TikTok, on all these social platforms.

00:01:07.160 And he never felt comfortable enough to ask me.

00:01:09.840 So for Marty, even though I already explained it to him,

00:01:12.760 SaaS stands for software as a service.

00:01:15.260 I'm gonna get into the definition.

00:01:16.620 I'm gonna get into why it's interesting,

00:01:18.200 but here's some cool facts, okay?

00:01:20.220 40% year on year growth, okay?

00:01:22.880 It's an industry that's growing like crazy.

00:01:25.340 and the valuations, if you have a software company,

00:01:28.640 the valuations are five to 10 times top line revenue.

00:01:32.980 So just to give you context,

00:01:33.960 if you're in the restaurant industry,

00:01:35.780 you may get away with one times top line revenue.

00:01:38.660 If you're in the service industry,

00:01:39.820 it's usually 0.7 top line revenue.

00:01:42.660 Most of those businesses focus on EBITDA,

00:01:44.820 earnings before interest tax and amortization.

00:01:48.140 Anyways, EBITDA.

00:01:49.520 The reason why SaaS is so powerful

00:01:51.040 is because of the subscription concept.

00:01:53.080 But I gotta tell you what it is first

00:01:54.660 before I tell you about the financial economics

00:01:57.220 and why it's so powerful, let's get into it.

00:01:59.860 Number one, what is SaaS?

00:02:01.880 So software as a service is essentially a new method

00:02:05.520 for delivering software applications.

00:02:07.900 So at your work, okay, or on your computer,

00:02:10.400 you probably have tools that you use.

00:02:12.820 Back in the day, they used to be installed on local servers

00:02:16.740 and you use sometimes a client server window

00:02:20.020 to get access to the server.

00:02:21.920 And that's why if you went to the,

00:02:22.980 you know, you go to the bank

00:02:24.740 and they'd have like these terminals

00:02:25.920 with black screens and text

00:02:27.360 and they would just like hit F1 and all these buttons.

00:02:29.680 That's because that computer was connected

00:02:31.800 to a more powerful server.

00:02:33.620 What's changed now in the delivery method

00:02:35.400 is it's using the internet for you to get access

00:02:38.360 to these applications, okay?

00:02:40.320 These softwares as a service.

00:02:42.560 Now, and a lot of people make the mistake,

00:02:44.100 they think anything subscription is SaaS.

00:02:45.900 It's not, it's not subscription as a service.

00:02:47.860 It's software, okay?

00:02:49.360 So it has to be a tool

00:02:50.640 and it's usually either delivered

00:02:52.020 through a web interface or a mobile app.

00:02:55.220 But that is the big idea

00:02:57.060 is that it's using the internet now,

00:02:58.680 not a local network and it's not client server

00:03:00.920 to deliver the software.

00:03:03.580 Number two, why is it new?

00:03:05.200 Well, back in the day,

00:03:06.640 you used to have to like buy the hardware.

00:03:09.200 So you had to buy servers.

00:03:10.440 You had to buy the software from the software creators

00:03:12.860 and you had to install it in a server room

00:03:15.000 and then set up the terminals

00:03:16.700 and get people access to the server

00:03:19.000 and they could do the applications, the accounting,

00:03:21.960 the management of the business, whatever it was.

00:03:24.880 What's changed now is that,

00:03:27.460 and in the middle, there was this thing called ASP,

00:03:29.380 Application Service Providers,

00:03:30.920 where as a business, if I didn't wanna invest

00:03:32.840 millions of dollars in servers and software licenses, et cetera,

00:03:36.420 I could just pay another company to host it all for me

00:03:40.020 and then they would charge me a subscription for it, right?

00:03:42.840 So that's the beginning of,

00:03:44.720 and sometimes it was a multi-year contract,

00:03:46.280 so it wasn't necessarily a monthly subscription,

00:03:47.900 but they would not make me have to pay

00:03:50.280 for the whole upfront investment.

00:03:51.600 And then I could just pay for the amount of usage I had.

00:03:55.320 So if I had 10 employees today and 100 employees next year,

00:03:58.260 I'd only have to pay for the 10 today.

00:03:59.840 The challenge with the ASP model

00:04:01.940 was is that these application service provider,

00:04:04.060 these companies would then have all these different versions

00:04:06.980 of software and systems across all these different servers

00:04:10.700 because some companies would upgrade,

00:04:12.460 some other companies would configure and change the code.

00:04:15.440 and essentially they had literally just a server farm

00:04:18.380 full of different installs.

00:04:19.940 So there was no efficiencies.

00:04:21.560 What happened with software as a service

00:04:23.340 when you're connecting in to the same code base,

00:04:26.940 even though they will provide security separations

00:04:29.680 called multi-tenant,

00:04:31.060 not gonna get into the technical terms,

00:04:33.160 but with software as a service now,

00:04:35.080 instead of having a company

00:04:36.920 that manages all these different softwares,

00:04:38.840 the software company says,

00:04:40.180 look, we'll host it for you.

00:04:41.900 We'll put it up on the internet.

00:04:43.520 that will give you the ability to add your team members

00:04:46.180 and security and all this stuff.

00:04:47.520 And you just pay us a monthly subscription for it.

00:04:50.920 So that's where software as a service

00:04:52.860 allows you to essentially pay by the drink.

00:04:55.580 You don't have to pay for the glass or the jug of water.

00:04:58.120 You can just say, if I take a drink,

00:04:59.440 you're gonna charge me this month.

00:05:00.880 If I take a lot of drinks,

00:05:02.180 you're gonna charge me a little bit more.

00:05:03.520 And that's called metered pricing. 0.83

00:05:04.560 So software as a service essentially allowed us

00:05:06.840 to not have to make a big investment upfront

00:05:09.120 and have somebody else host it for us.

00:05:10.940 Number three, why is this preferred?

00:05:13.180 There's four main reasons why software as a service

00:05:15.560 is preferred as a business buying software.

00:05:19.540 Number one, OPEX versus CAPEX.

00:05:21.900 Operating expenses are things you can write off, okay?

00:05:25.900 A capital expense, typically you can't write it off.

00:05:28.560 You have to depreciate it over time.

00:05:32.080 Well, servers and software and all that stuff,

00:05:34.820 those typically in the past were CAPEX, capital investments.

00:05:38.880 Now what happens is as software as a service

00:05:41.260 becomes something that you pay for to deliver the business,

00:05:45.740 like you use the tool to deliver value to your customer,

00:05:48.720 you can now transfer this over to operating expenses.

00:05:52.500 Operating expenses you can write off

00:05:54.100 so it's actually more tax efficient.

00:05:55.420 So that's number one.

00:05:56.540 Number two is time value of money.

00:05:58.800 Instead of having to have two, $3 million

00:06:01.460 or go borrow two or $3 million

00:06:02.840 to buy what's called an ERP, an enterprise resource planning tool

00:06:07.840 to run your company,

00:06:08.740 now I can just pay a little bit every month

00:06:11.920 and get that going.

00:06:12.980 So I don't have to put a lot of capital today

00:06:16.060 into a big investment.

00:06:17.380 I can put little pieces so I have more capital

00:06:19.480 to invest in marketing, in sales,

00:06:21.500 in customer success to grow my company.

00:06:23.920 Number three, we need to focus on speed of deployment.

00:06:27.020 If I need to procure the hardware,

00:06:29.360 install the operating system,

00:06:30.760 find a place in a data room and do all this work,

00:06:33.740 then the time that I decide,

00:06:35.120 hey, we really need this solution to do better accounting

00:06:37.540 or better project management or whatever it is,

00:06:39.620 the speed to actually getting something

00:06:41.320 my company can use might be months, right?

00:06:44.000 Now I can just literally go online, start a trial,

00:06:46.980 check it out, add all the people on my team

00:06:49.160 and we could be get going in the same hour.

00:06:51.320 Isn't that crazy?

00:06:52.600 That's why I love it so much.

00:06:54.340 And then success of using the software now,

00:06:57.720 instead of it, you buy the server

00:06:59.380 and you install the software.

00:07:00.880 And now you as a business owner have to figure out

00:07:02.820 how to be successful with the software.

00:07:04.880 The success of it is now pushed back

00:07:06.960 onto the software creator

00:07:08.100 because if it's not easy to use,

00:07:10.200 it's not easy to get deployed.

00:07:11.940 If it's not fast to get value,

00:07:13.920 then you're just gonna go find somebody else

00:07:15.680 that solves a similar problem

00:07:16.580 because there's no effort.

00:07:17.840 I didn't make a big investment up front.

00:07:19.180 I'm in a trial.

00:07:20.000 A lot of these software as a service,

00:07:21.160 they have a trial 14 days, seven days, 30 days

00:07:24.080 for me to play with it to see if I like it.

00:07:26.320 So now all of a sudden,

00:07:27.820 me being successful with this new tool

00:07:30.100 is put the responsibility onto the software creator

00:07:33.160 so the interface is better.

00:07:34.360 It's faster, it's clear, it integrates

00:07:37.920 with all my other tools for me to be more successful.

00:07:40.240 And that is a beautiful thing.

00:07:41.560 Number four, why is it growing?

00:07:43.340 Well, there's this famous investor

00:07:45.040 and entrepreneur named Marc Andreessen,

00:07:46.400 and he has this great quote that kind of summarizes

00:07:48.380 why it's been growing 40% compounded year over year.

00:07:51.520 And that is that software is eating the world,

00:07:54.040 meaning that everywhere you look, no matter what your job,

00:07:57.200 your role, your business, your function is,

00:08:00.200 there's probably a software that's super niche,

00:08:03.040 that's in your vertical that's coming in

00:08:05.140 that over time will get rid of jobs,

00:08:07.300 will get rid of manual process,

00:08:09.900 will get rid of the requirement to be creative.

00:08:11.840 I mean, you just look at something like Canva.

00:08:13.520 Canva is this simple tool that allows anybody

00:08:16.600 that wants to create social media assets,

00:08:19.000 different imagery, promotional materials, et cetera,

00:08:21.620 to not have to be a designer,

00:08:23.480 not have to buy Photoshop or even know how to do those tools

00:08:28.160 or even know what good design looks like.

00:08:29.780 They take care of all of it.

00:08:30.800 And for them, by the transaction, by the month,

00:08:34.200 you can pay them to have access to this power

00:08:36.420 that they've spent hundreds of millions of dollars in

00:08:38.740 that you pay 10 or $15 in a month so you can get it.

00:08:42.040 And it's become an incredibly powerful business.

00:08:44.620 But that's just such a simple example.

00:08:46.440 But the big idea is mobile growth,

00:08:48.220 that's made it so powerful.

00:08:49.780 And then the subscription business model,

00:08:51.640 there's something powerful when you say every month,

00:08:54.560 especially if you charge on a monthly basis

00:08:56.200 and people can cancel at any time,

00:08:57.880 that I need to make sure I create so much value

00:09:00.000 that every one of my customers decides to renew

00:09:02.140 for the next month.

00:09:02.980 And I create so much more value that they not only renew,

00:09:05.420 they tell their friends about it and it continues to grow.

00:09:07.620 And every month I have more profit hitting the bottom line

00:09:11.000 because the average software as a service business

00:09:13.280 makes 87% gross margin because a new customer

00:09:16.700 or 10 new customers or a hundred new customers

00:09:18.800 for the most part has a fractional amount of cost

00:09:21.960 to the business so they can grow very rapidly.

00:09:24.320 All of that gross margin hits the bottom line, that profit,

00:09:27.120 and it allows them to reinvest in marketing

00:09:29.460 in sales and customer success,

00:09:30.700 in software development and R&D,

00:09:32.480 so they can make an even better product.

00:09:34.280 And it's just a beautiful, beautiful business model.

00:09:36.520 Subscription business model is one of my favorites.

00:09:39.580 It's the only one I've ever done my whole life.

00:09:41.400 That's all my companies I've ever invested

00:09:43.060 have been software as a service companies,

00:09:44.660 all the ones I've ever built, because I love it.

00:09:47.080 So those are the big ideas.

00:09:49.340 So quick recap, four things that make SaaS so awesome.

00:09:53.140 Real quick, what is SaaS?

00:09:54.780 The method for delivering software.

00:09:56.720 Number two, why is it new?

00:09:58.320 It's not, it's been around since the nineties,

00:09:59.960 but it's now got a new name because of the internet.

00:10:02.260 Number three, why is it preferred?

00:10:04.120 Because of time, value of money,

00:10:06.160 and then speed of deployment and success.

00:10:08.260 And number four, why is it growing?

00:10:10.300 Because the world is being eaten by software

00:10:13.360 and the subscription business model is so powerful.

00:10:15.600 As I mentioned at the beginning of this episode,

00:10:17.220 I wanna share with you an exclusive resource

00:10:18.880 called the idea to exit mini course.

00:10:20.960 It's literally me across three videos,

00:10:23.820 teaching you exactly how to identify

00:10:26.120 a great business opportunity to build a SaaS,

00:10:27.940 how to pre-sell it to your ideal customer,

00:10:30.480 use that pre-sales to hire a team,

00:10:33.380 get it built by using clickable prototypes

00:10:35.780 so you don't get somebody to build something

00:10:38.000 that the customer didn't want,

00:10:39.080 and then use that if you want

00:10:40.560 to have other people help you fund that growth.

00:10:43.160 You can click the link below

00:10:44.000 to get access to your idea to exit mini course for free.

00:10:47.500 There's no cost.

00:10:48.340 And if you liked this video,

00:10:49.360 be sure to subscribe to my channel,

00:10:50.920 share it with somebody you think it could serve,

00:10:52.300 and be sure to leave a comment

00:10:53.420 and let me know if you have any questions with that.

00:10:55.980 As per usual,

00:10:56.740 I wanna challenge you to live a bigger life

00:10:58.420 and a bigger business, and I'll see you next Monday.

00:11:02.240 Oh, oh, I've got the idea to exit mini course.

00:11:05.400 I totally forgot.

Dan Martell - February 15, 2021

What Is SaaS？ Software As A Service Explained (In 9 Minutes)

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