Software Growth

SaaS (Software as a service)

SaaS is software you rent instead of buy. Customers use it through a browser and pay a recurring fee while the vendor runs, hosts and updates it.

SaaS stands for software as a service. Instead of buying a license and installing the software on their own machines, customers log in to a product you host and pay a monthly or annual fee to keep using it. You run the servers, ship the updates, handle security and fix the bugs. They get a product that improves over time without doing anything.

How the SaaS model works

Three things define the model. The vendor hosts the software, usually on shared infrastructure (see multi-tenancy). Customers access it over the internet. And they pay on a recurring basis, which makes SaaS a subscription business.

Stripe's guide to SaaS subscriptions describes it the same way: users pay regular fees for cloud-delivered access, and the provider handles data storage, uptime and backend infrastructure. Stripe also lists the common ways to charge: flat rate, tiered, per user, usage-based and freemium, plus hybrids of these.

Why founders like it

  • Predictable revenue. Customers who stay keep paying, so you can forecast next month from this month. That revenue is what you track as MRR.
  • Compounding. Each retained customer adds to the base, so growth stacks instead of resetting to zero every month.
  • Fast feedback. You see how people use the product and can change it in days, not release cycles.
  • Low marginal cost. Serving one more customer usually costs a small amount of hosting and support.

What it costs you

You are on the hook every month. If the product goes down, you pay for it in refunds and cancellations. Customers can leave at any time, so you earn each renewal. Cash comes in slowly (a $29 per month customer takes months to pay back what it cost to acquire), which is why SaaS rewards founders who watch churn and acquisition costs from day one.

Example

Say you build a tool that turns support emails into a searchable help center. You charge $29 per month. At 100 customers that is $2,900 in monthly recurring revenue. If 3 of them cancel each month and you add 8, you net 5 more customers and the base keeps growing. That small, steady loop is the whole business.

SaaS flavors

SaaS is a delivery model, not a market. It shows up as B2B SaaS sold to companies, as tools for a single industry (vertical SaaS) or as tools many industries use (horizontal SaaS), and as tiny products run by one person (micro-SaaS).

Related terms

Sources

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