SaaS
Software that customers use online and often pay for through recurring subscriptions.
Business Characteristics
- Recurring Revenue
- Cloud-Delivered Software
- Subscription Pricing
- Business & Consumer Customers
Not every SaaS company uses subscriptions alone. Some combine subscriptions with usage-based fees, services, or other revenue streams.
What Is It?
Software delivered as an ongoing service rather than simply sold as a one-time product.
Software as a Service (SaaS) lets customers use software hosted and maintained by a provider, usually through a web browser or app. The provider handles the underlying infrastructure, updates, and ongoing operation.
Examples include tools for managing customer relationships, creating digital content, collaborating with teams, and handling business operations.
Customers may pay monthly, annually, per user, or according to how much they use the service. SaaS is a delivery and business model, not a guarantee of profitability or recurring revenue growth.
Business Model in One Minute
A simple example of how a SaaS business serves customers and earns money.
Build the Software
Create a product that solves a specific customer problem.
Host and Maintain It
Operate the service, protect customer data, and deliver updates.
Acquire Customers
Help potential customers discover, try, and adopt the product.
Charge for Access
Collect subscription fees or charge for measured usage.
Retain and Expand
Keep customers satisfied and offer more value as their needs grow.
How It Works
From solving a problem to building an ongoing customer relationship.
Unlike a traditional one-time software sale, many SaaS businesses continue operating the product and serving customers throughout their subscriptions.
- 1Problem
Find the problem
Identify a problem customers need to solve
- 2Product
Build and run it
Develop and operate the software
- 3Customers
Win customers
Attract customers and help them get started
- 4Pricing
Set the pricing
Charge for subscriptions, usage, or additional features
- 5Operations
Keep improving
Maintain the service and improve the product
- 6Revenue
Earn repeat revenue
Earn repeat revenue when customers continue paying
The model works best when customers receive enough ongoing value to justify the cost. A subscription alone does not guarantee that they will renew.
Who Pays?
Customers pay when the software helps them accomplish something valuable.
Businesses
Companies purchase software to manage sales, accounting, marketing, operations, or other workflows.
Individual Professionals
Freelancers, designers, developers, and other professionals pay for tools that help them work more effectively.
Consumers
Individuals may subscribe to software for personal productivity, creative work, or other needs.
Large Organizations
Enterprise customers may negotiate contracts covering many users, security requirements, support, and service commitments.
How They Make Money
SaaS companies can combine several pricing methods. The right mix depends on the product and its customers.
Subscription Revenue
Customers pay a recurring fee for access to the software. Monthly and annual plans are common, although contract terms vary.
Pricing Tiers
Different plans offer different features, usage limits, or levels of support. Customers may pay more when they need additional capabilities.
Usage-Based Pricing
Customers pay according to measured consumption, such as transactions processed, data used, or API requests. Revenue may fluctuate with usage.
Enterprise Contracts
Larger customers may sign negotiated agreements with specific terms, service commitments, or minimum spending requirements.
Add-ons and Services
Some providers earn additional revenue from premium features, implementation, training, or other services alongside their software.
Where the Money Goes
Recurring revenue must cover the cost of building, delivering, and selling the service.
Hosting and Infrastructure
Servers, cloud services, storage, networking, and data processing support the software. Costs may increase as usage grows.
Product Development
Engineers, designers, and product teams build new features, maintain existing software, and fix problems.
Customer Acquisition
Marketing, advertising, sales teams, and sales commissions help attract new customers. Enterprise sales can be particularly resource-intensive.
Customer Support
Support staff, onboarding, training, and account management help customers use the product and resolve issues.
Security and Operations
Companies may spend on data protection, compliance, reliability, administration, and other operating requirements.
What Can Drive Growth?
Where Can Opportunities Appear?
Growth depends on the product, market, competition, customer retention, and operating costs. A large market or a subscription model alone does not guarantee success.
Potential Strengths
Features of the model that can help some SaaS businesses build durable customer relationships.
Repeat Revenue
Ongoing contracts or subscriptions can make future revenue easier to estimate, provided customers continue paying.
Scalable Distribution
Software can often serve additional customers without rebuilding the entire product for each customer, although infrastructure and support costs still matter.
Continuous Improvement
A provider can update its software and deliver improvements to customers over time.
Customer Expansion
A product may earn more from existing customers as their usage, team size, or feature requirements increase.
How Do SaaS Companies Compete?
Common Challenges
What Could Go Wrong?
SaaS businesses face different risks depending on their product, customers, contracts, and cost structure.
Customer Churn
Customers may cancel subscriptions, downgrade plans, or move to competitors. Acquiring replacement customers can be expensive.
High Acquisition Costs
Marketing and sales spending may grow faster than the revenue generated by new customers.
Infrastructure Costs
Heavy usage, data processing, or expensive computing requirements can put pressure on margins.
Security and Reliability
Data breaches, outages, or failures to meet customer requirements can damage trust and create financial or legal consequences.
Product Obsolescence
Technology changes or new competitors can reduce the value of a product unless the company adapts.
Revenue Concentration
A provider that depends heavily on a small number of large customers may be vulnerable if one reduces spending or leaves.
What to Look At
These metrics help explain revenue, customer retention, and operating efficiency. Definitions and calculation methods can vary, so comparisons require consistent measurement.
MRRMonthly Recurring Revenue
The normalized monthly value of active recurring subscriptions. It helps track the recurring revenue base, but it is not the same as cash collected or profit.
ARRAnnual Recurring Revenue
The annualized value of recurring revenue under a company's chosen methodology. It is useful for understanding the scale of recurring business, but is not automatically the same as recognized annual revenue.
Churn Rate
The share of customers or recurring revenue lost during a period. Customer churn and revenue churn measure different things, so the definition should always be clear.
CACCustomer Acquisition Cost
The cost of acquiring a new customer. Companies commonly compare sales and marketing costs with the number of customers acquired over a consistent period.
Gross Margin
Revenue remaining after subtracting the direct costs of delivering the service, expressed as a percentage of revenue. Hosting, support, and other delivery costs can affect it.
LTVCustomer Lifetime Value
An estimate of the value a customer generates over the relationship. A useful economic estimate considers gross profit and retention, not just total revenue, and depends on assumptions.
NRRNet Revenue Retention
Measures recurring revenue retained from an existing customer group, including expansion and subtracting downgrades and cancellations, while excluding new customers. Above 100% means expansion exceeded losses for that group; it does not mean the company is profitable.
No single metric tells the whole story. Read these measures together and consider the company's customer mix, contract structure, growth stage, and accounting definitions.
Companies Using This Model
These companies offer subscription-based software products. Each also has its own product mix and business activities, so none should be treated as a pure SaaS business without further context.
Provides cloud-based customer relationship management (CRM) software and related business applications. Its subscription and support business is central to how it earns revenue.
Offers subscription-based software such as Creative Cloud and Acrobat, along with digital experience products. Adobe also reports other revenue categories, so its entire business should not be described as SaaS alone.
Provides cloud-based business applications, including enterprise resource planning and human resources software. Oracle also operates a broader database and cloud infrastructure business.
Related Business Models
SaaS can overlap with other business models, depending on the product and how it is delivered.
Scope is built for understanding businesses and industries, not for investment advice.