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SaaS (Software as a Service)

Definition

SaaS is software delivered over the internet on a subscription basis. Instead of buying and installing software, users access it through a browser. No servers to manage, no updates to install.

What is SaaS (Software as a Service)? | early.tools

SaaS changed how software is sold. Before SaaS: buy a $10,000 license, install on your server, pay for upgrades. After SaaS: pay $50/month, access anywhere, automatic updates. Lower barrier to entry, predictable recurring revenue. Why SaaS won: (1) Lower upfront cost—$50/month beats $10k license, (2) Faster time-to-value—sign up and start using in minutes, (3) Always up-to-date—vendor pushes updates, you don't manage them, (4) Accessible anywhere—browser-based, works on any device. SaaS economics: The model depends on retention. Acquiring a customer costs money (CAC). You recover that cost over time through subscription payments (LTV). If customers churn before you break even on CAC, the business fails. Retention is everything. SaaS vs. on-premise: On-premise software lives on your servers (you manage it). SaaS lives on the vendor's servers (they manage it). Trade-off: SaaS is easier but less customizable. On-premise is complex but fully controlled. Most startups choose SaaS for faster adoption. SaaS vs. PaaS vs. IaaS: SaaS = full application (Salesforce, Notion). PaaS = platform for building apps (Heroku, Vercel). IaaS = infrastructure you build on (AWS, Google Cloud). Different layers of abstraction. SaaS pricing models: (1) Per-user (Slack, Notion), (2) Usage-based (Stripe, Twilio), (3) Tiered (free, pro, enterprise), (4) Freemium (free tier, paid upgrades). Choice depends on value delivery and customer segmentation. SaaS challenges: (1) Churn kills growth—can't rely on one-time sales, (2) Customer support is ongoing—users expect instant help, (3) Competition is global—anyone can launch a SaaS competitor, (4) Pricing pressure—customers compare features and prices easily.

Examples

Gmail is SaaS (email in your browser). Salesforce is SaaS (CRM without servers). Shopify is SaaS (e-commerce platform hosted for you). Netflix is SaaS-adjacent (streaming instead of DVDs).

Related Terms

ARR (Annual Recurring Revenue)

ARR is the yearly value of recurring subscription revenue. It's MRR × 12, normalized to show annual run rate. SaaS investors care about ARR more than MRR at scale.

Churn Rate

Churn rate is the percentage of customers who cancel their subscription in a given period. It's the silent killer of SaaS businesses—you can't grow faster than you're losing customers.

Freemium

Freemium is a pricing model where the core product is free forever, but advanced features, higher limits, or premium support require payment. The free tier drives adoption, paid tiers drive revenue.

MRR (Monthly Recurring Revenue)

MRR is the predictable revenue your business generates every month from subscriptions. It's the north star metric for SaaS businesses because it shows growth trajectory independent of one-time sales.

PLG (Product-Led Growth)

PLG is a go-to-market strategy where the product itself is the primary driver of customer acquisition, conversion, and expansion—not sales or marketing teams.