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Software-as-a-Service is now standard, from mobile phones and laptops to business solutions for the largest of entities. It seems that there’s an app for everything, and it’s all personalized to each user’s credentials. 

Is your gym closed during Covid-19? Subscribe to Truecoach to build an online training platform for customers. Need to set up an online store, especially with COVID-19 closures? Build one on Shopify. Too busy to make a baby book? Text Queepsake your baby milestones and they’ll make one for you. (Not kidding.)

The solutions are big, small, and endless. 

But, it wasn’t always that way. 

Cloud computing has transformed how users interact with software. Before the software-as-a-service model, users had to purchase their software, either on physical media or via direct download, and had to pay for updates or replacements as technology improved. These days, that’s not how it works. 

Rather than purchase software annually or biannually, users pay for access to the software that they need on a subscription basis. They have credentials and they pay a small fee to accomplish their needs.

This model has transformed how we operate as a society, and it offers a frontier of investment opportunities as software companies strive to create solutions for the next big thing.  

What Is SaaS?

Salesforce, which pioneered the software-as-a-service model in 1998 defines software-as-a-service as “a way of delivering centrally hosted applications over the internet as a service. SaaS applications are sometimes known by other names: Web-based software, On-demand software, and Hosted software”

How is this different from previous models?

Consider that hardware is the physical computer or user device. Now consider that software is the programs and apps that help users do things on the computer. 

Before software-as-a-service, customers would buy software housed on a physical source, such as a compact disc. After purchasing, they would take it home, download it to their computer, and then use it. While this utilization of software was helpful, it was also exceptionally hard for companies to update.  

It also wasn’t the most user friendly. For example, if someone was using a tax software before SaaS, they would purchase the software, download it, and input their information. However, every year, they would need to repeat the process in full. Knowing the autofills and recalls of today’s applications, starting from scratch seems tedious and time consuming.

Not to mention that because traditional software is so difficult to update with information, such as the annually revised tax code, for example, users would need to repurchase the software every year. 

Software-as-a-service is different in that it doesn’t require customers to purchase software. Instead, users purchase access to software that’s available on the cloud. 

What exactly is the cloud? It’s a “a vast network of remote servers around the globe which are hooked together and meant to operate as a single ecosystem,” according to Microsoft. 

This type of infrastructure has changed the way software companies administer software, users access and use software, and multiplied the uses and ease of use of software products. For one, SaaS companies can focus on improving their product rather than dedicate energy to producing and marketing new versions. It limits distribution costs like packaging. It also does away with the hassle of administering licenses because the software can only be accessed by paying customers. 

It has also changed payments from one-time to subscription-based. While subscription fees are much smaller from month-to-month than the one-time purchase fees previously were, the fees often add up to more than the cost of the software over the course of the year. 

For companies, pivoting to SaaS has more perks. Because the functions of SaaS have become so familiar and house a user’s data, switching services is often a hassle despite the minimum software cost. This user data can also be leveraged by companies to test new features. 

Why Invest in SaaS?

There have been many success stories in SaaS, from Salesforce to Shopify. 

In 2015 at its IPO, Shopify was valued at $1.27 billion. As of spring 2020, it’s valued at $127 billion. Founded by Tobias Lütke and Scott Lake, Shopify started as an online store in 2004 to sell snowboards when they couldn’t find a platform that worked well for them. Now, its e-commerce platform is used by individual sellers and big companies like Google. 

And, the industry is poised to keep growing, especially in the wake of COVID-19

Consider the workforce shift to remote and the Zoom solution, connecting coworkers, families, and even loved ones in nursing homes. Another SaaS platform on the rise is Dynatrace, which provides software intelligence that streamlines user experience and improves business outcomes. 

SaaS companies are solving problems from providing e-commerce solutions for businesses, business solutions that are making remote work scenarios work, to giving users access to platforms that help them do everything from monitoring their finances to staying fit to doing their taxes. 

As the world adopts new post COVID-19 norms, these new solutions are likely to stay in one form or another. 

How to Invest in SaaS

Naturally, in an industry as large and diverse as software, picking winners and losers can be challenging. However, for those investors interested in accessing the segment more broadly, there are a number of ETFs and mutual funds available to help streamline the process. A search on Magnifi suggests that there are many SaaS funds available to choose from.

Unlock a World of Investing with a Magnifi Account


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The information and data are as of the June 17, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

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