What Is SaaS (Software as a Service)?

In the SaaS model, the software vendor operates and maintains the infrastructure, handles updates and security patches, manages backups, and provides the application as a service — typically billed monthly or annually per user or per usage tier. Customers access the software via a web browser or mobile app without installing anything on their own systems. This stands in contrast to traditional on-premise software that required purchasing a perpetual license, installing the software on company servers, and managing all maintenance in-house.

SaaS has become the dominant software delivery model for business applications because it dramatically reduces deployment friction (no IT procurement required, up and running in minutes), converts large upfront capital expenditure to predictable operational expense, and ensures customers always have the latest version. For vendors, SaaS creates recurring revenue (measured as MRR and ARR) and reduces distribution costs. For buyers, it creates flexibility and lower switching costs — though when many SaaS tools accumulate across a business, total subscription spend often exceeds what on-premise alternatives would have cost.

Key SaaS business metrics include Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Net Revenue Retention (NRR, also called Net Dollar Retention), Churn Rate, Customer Acquisition Cost (CAC), and LTV:CAC ratio. These metrics are the primary language investors and acquirers use to evaluate SaaS businesses — a company with 120% NRR (growing revenue from existing customers faster than it loses customers) commands significantly higher valuation multiples than one with 85% NRR.