What Is Software-as-a-Service (SaaS)?

Software-as-a-Service (SaaS) is a software licensing model in which access to the software is provided on a subscription basis, with the software being located on external servers rather than on servers located in-house.

Software-as-a-Service is typically accessed through a web browser, with users logging into the system using a username and password. Instead of each user having to install the software on their computer, the user is able to access the program via the Internet.

Key Takeaways

  • Software-as-a-Service (SaaS) is a software licensing model, which allows access to software a subscription basis using external servers.
  • SaaS allows each user to access programs via the Internet, instead of having to install the software on the user's computer.
  • SaaS has many business applications, including file sharing, email, calendars, customer retention management, and human resources.
  • SaaS is easy to implement, easy to update and debug, and can be less expensive (or at least have lower up-front costs) since users pay for SaaS as they go instead of purchasing multiple software licenses for multiple computers.
  • Drawbacks to the adoption of SaaS center around data security, speed of delivery, and lack of control.

Understanding Software-as-a-Service (SaaS)

The rise of Software-as-a-Service (SaaS) coincides with the rise of cloud-based computing. Cloud computing is the process of offering technology services through the Internet, which often includes data storage, networking, and servers. Before SaaS was available, companies looking to update the software on their computers had to purchase compact disks containing the updates and download them onto their systems.

For large organizations, updating software was a time-consuming endeavor. Over time, software updates became available for download through the Internet, with companies purchasing additional licenses rather than additional disks. However, a copy of the software still needed to be installed on all devices that needed access to it.

With SaaS, users don’t need to install or update any software. Instead, users can log in through the Internet or web browser and connect to the service provider’s network to access the particular service.

SaaS is considered an example of endogenous growth theory, which is an economic theory that subscribes to the belief that economic growth can be achieved through developing new technologies and improvements in production efficiency. Technology companies, financial services companies, and utilities have led the business world in adopting SaaS technology.

History of SaaS

SaaS can loosely trace its origins to a concept called time-sharing, which was developed in the late 1950s and early 1960s to make more cost-effective use of expensive processor time.

Over the next few decades, hardware and computing became less costly. Organizations made the shift to individual ownership of personal computers using on-premise software. But unfortunately, the system still proved to be inefficient on a larger scale as companies were weighed down by ongoing software and hardware maintenance of the individual computers.

In the mid-90s, the Internet reached new heights in terms of e-commerce transactions, The growth of the Internet then fueled the birth of the "online cloud," which allowed organizations to access software from anywhere.

In 1999, Salesforce went all-in on SaaS by launching its own customer relationship management (CRM) platform. Thanks to its head start and "no software" mantra, Salesforce soon became the first superstar in the SaaS space. It remains one of the largest pure SaaS companies in the U.S.

With Salesforce having proved the viability of the SaaS business model, companies of all shapes and sizesfrom young startups to established industry giants including Microsoft, Oracle, and SAPwere eager to move toward it.

Today, SaaS is ubiquitous. With pure-play companies like Adobe, Salesforce, Shopify, and Intuit leading the way, the SaaS market is expected to reach $145 billion in 2022.

With SaaS, users can access software through a web browser from multiple locations, including outside the office. Remote desktop software can help employees securely access work computers from home or allow technicians to resolve computer issues without having to make an onsite visit.

Advantages and Disadvantages of SaaS

Advantages

SaaS offers a variety of advantages over traditional software licensing models. Because the software does not live on the licensing company’s servers, there is less demand for the company to invest in new hardware.

It is easy to implement, easy to update and debug, and can be less expensive (or at least have lower up-front costs) since users pay for SaaS as they go instead of purchasing multiple software licenses for multiple computers.

SaaS has numerous applications, including:

  • Email services
  • Auditing functions
  • Automating sign-up for products and services
  • Managing documents, including file sharing and document collaboration
  • Shared company calendars, which can be used for scheduling events
  • Customer relationship management (CRM) systems, which are essentially a database of client and prospect information. SaaS-based CRMs can be used to hold company contact information, business activity, products purchased as well as track leads.

Types of software that have migrated to a SaaS model are often focused on enterprise-level services, such as human resources. These types of tasks are often collaborative in nature, requiring employees from various departments to share, edit, and publish material while not necessarily in the same office.

Disadvantages

Drawbacks to the adoption of SaaS center around data security and speed of delivery. Because data is stored on external servers, companies have to be sure that it is safe and cannot be accessed by unauthorized parties.

Slow Internet connections can reduce performance, especially if the cloud servers are being accessed from far-off distances. Internal networks tend to be faster than Internet connections. Due to its remote nature, SaaS solutions also suffer from a loss of control and a lack of customization.

SaaS Advantages
  • Accessible from anywhere

  • Cost effective

  • Easy to implement, update, and debug

  • Easy to scale

SaaS Disadvantages
  • Increased security risks

  • Slower speed

  • Loss of control

  • Lack of customization

Examples of SaaS

Google Docs

One of the simplest real-world examples of SaaS is Google Docs, Google's free online word processor.

In order to use Google Docs, all you need to do is log in on a web browser for instant access. Google Docs allows you to write, edit, and even collaborate with others wherever you happen to be.

Google Docs was launched in October 2012.

Dropbox

Dropbox is another simple example of SaaS in real life. Dropbox is a cloud storage service that lets businesses store, share, and collaborate on files and data. For example, users are able to back up and sync photos, videos, and other files to the cloud and access them from any device, no matter where they are.

Dropbox was founded in 2007.

SaaS vs. IaaS vs. PaaS

As-a-service products continue to grow rapidly. But generally speaking, they fall into one of three main categories: SaaS, IaaS, and PaaS.

SaaS typically uses the Internet to deliver subscription software services, which are managed by a third-party vendor. Well-known SaaS examples include Dropbox, Google Workspace, and Salesforce.

Infrastructure-as-a-service (IaaS), meanwhile, offers access to resources such as servers, storage, memory, and other services. It allows organizations to purchase resources as needed. Some common IaaS examples include Amazon Web Services (AWS), Microsoft Azure, and Rackspace.

Finally, platform-as-a-service (PaaS) provides a software development platform over the web. Specifically, it allows developers to concentrate on software creation without worrying about things like storage and infrastructure.

SaaS FAQs

What Is SaaS Marketing?

SaaS marketing utilizes standard marketing practices to promote and acquire leads for cloud-based software applications and information services.

What Is B2B SaaS?

B2B SaaS simply refers to companies that sell software services to other businesses. These products help organizations optimize a wide variety of functions including marketing, sales, and customer service.

How Is MRR Calculated for a SaaS Business?

Monthly recurring revenue (MRR) is an important metric for SaaS businesses that utilize a monthly subscription pricing model.

The calculation of MRR is simple: multiply the average revenue per customer by the total number of accounts for that given month.