Software as a Service (SaaS): Definition and Examples

What Is Software as a Service (SaaS)?

SaaS is a licensing model in which access to software is provided on a subscription basis, where the software is located on external servers rather than on servers located in-house.

Software as a Service is commonly 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 can access the program via the internet.

Key Takeaways

  • Software as a Service (SaaS) is a software licensing model, which allows access to software on 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 than purchasing multiple software licenses for multiple computers.
  • Drawbacks to the adoption of SaaS include data security, speed of delivery, and lack of control.

Understanding Software as a Service (SaaS)

The rise of SaaS coincided with the rise of cloud-based computing. Cloud computing offers technology services through the internet, which often includes access to data storage, networking, and servers.

Before SaaS, 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.

With SaaS, users can log in through the internet or web browser and connect to the service provider’s network to access the particular service. Technology companies, financial services companies, entertainment, and utilities have led the business world in adopting SaaS technology.

SaaS History and Characteristics

SaaS can 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.

As hardware and computing became less costly, organizations made the shift to individual ownership of personal computers using on-premise software but were impeded by ongoing software and hardware maintenance of the individual computers.

In the mid-90s, the growth of the Internet saw the inception of the "online cloud," which allowed organizations to access software from anywhere. By 1999, Salesforce became the forerunner in the SaaS space and both startups and industry giants including Microsoft, Oracle, and SAP were eager to move toward it.

The SaaS provider hosts the customer's software and delivers it to approved end users over the internet, giving customers network-based access to a single copy of an application that the provider created specifically for SaaS distribution. When new features or updates are released, they are then rolled out to all customers.

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.

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 than 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, and Customer relationship management (CRM) systems, a database of client and prospect information. SaaS-based CRMs can be used to hold company contact information, business activity, product purchase history, and sales leads.

The SaaS model works well for enterprise-level services, such as human resources. These types of tasks are often collaborative, requiring employees from various departments to share, edit, and publish material while not 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 must ensure it is safe and cannot be accessed by unauthorized parties.

Slow Internet connections can reduce performance, especially if the cloud servers are accessed from far 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

Launched in 2021, Google Docs is Google's free online word processor where individuals just need to log in through a web browser for instant access. Google Docs allows you to write, edit, and even collaborate with others wherever you happen to be.

• Dropbox

Founded in 2007, Dropbox is a cloud storage service that lets businesses store, share, and collaborate on files and data. For example, users can back up and sync photos, videos, and other files to the cloud and access them from any device, no matter the location.

SaaS expanded and today supports home offices and entertainment daily as users log on to Netflix, Zoom, DocuSign, Adobe, Shopify, and Slack.

SaaS Security

As companies adopt cloud-based models for software products, concerns arise regarding security and privacy. Where management was once responsible for the updates on in-house software, corporations now must rely on third-party management of their encryption, identity and access management (IAM), data privacy, and downtime or incident response. They must also depend on an adequate level of communication with technical assistance.

SaaS Pricing

A SaaS product is commonly more cost-effective for a company than a traditional software license, as setup and installation are not needed. SaaS providers rely on subscription-based pricing models for customers such as tier-level pricing per person or group or a flat rate annual fee. Users may also choose an ad-based model where the SaaS earns revenue through advertising within the cloud space.

SaaS vs. IaaS vs. PaaS

"As a service" products fit into one of three main categories: SaaS, IaaS, and PaaS.

SaaS 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) 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.

Platform-as-a-service (PaaS) provides a software development platform over the web. Specifically, it allows developers to concentrate on software creation without concern for storage and infrastructure.

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.

The Bottom Line

SaaS or Software as a Service uses cloud computing to provide users with access to a program via the Internet. Without having to install software in-house, SaaS allows each user to access programs typically through a subscription service. SaaS has many business applications, including file sharing, customer retention management, and human resources, and is used by applications such as Netflix, Slack, Dropbox, and Google Workspace.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Gartner. "Gartner Forecasts Worldwide Public Cloud End-User Spending to Grow 23% in 2021."

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