What Is SaaS? A Simple Definition, Examples and Business Model

A SaaS is software hosted on the internet by the company that sells it. The customer logs in with an account, uses the service, and pays every month or every year for as long as they need it.

• No installation: everything runs in the browser or in a lightweight app.
• Automatic updates: customers always have the latest version.
• Recurring payment: the subscription renews until the customer cancels.
• Data in the cloud: your work is available from any device you log in from.

Many everyday tools are SaaS: online office suites, video-calling tools, online invoicing software, browser-based design tools, project management boards and the CRMs sales teams live in.

But SaaS isn't only for big tech companies. Thousands of small, profitable SaaS products serve one precise niche: a booking tool for hair salons, a quote generator for contractors, a food-safety log for restaurants. These are often run by one person or a very small team.

SaaS revenue is recurring: each new customer adds to the ones you already have, as long as they keep subscribing. That's why SaaS founders talk about MRR (monthly recurring revenue) rather than one-off sales.

A simple example: with a $29/month subscription, 100 paying customers represent $2,900 in revenue every month, without having to sell the product again. The flip side is churn, the share of customers who cancel each month. A healthy SaaS keeps adding customers faster than it loses them.

Common SaaS pricing models

• Flat monthly price: one plan, one price. The simplest option to start.
• Tiered plans: for example Basic, Pro and Business, with more features or usage at each level.
• Per seat: the price grows with the number of users on a team.
• Usage-based: customers pay for what they consume, common when each action has a real cost (like AI requests).
• Yearly discount: a lower effective monthly price in exchange for paying a year up front.

• Predictable revenue, month after month.
• Low marginal cost: serving one more customer usually costs very little.
• Leverage: the same product can serve 10 or 1,000 customers without you working 100 times more.
• A business that can run without you being present every hour of the day.

TipRecurring revenue is powerful, but it has to be earned every month. Customers keep paying only if the product keeps solving their problem, so talking to users matters as much as writing features.

• Traditional software: bought once, installed on a computer, updated manually or through paid upgrades.
• Mobile app: can be a SaaS if it runs on a subscription with an online account.
• SaaS: online, subscription-based, updated continuously by the company that makes it.

You'll also hear about PaaS (Platform as a Service) and IaaS (Infrastructure as a Service). Those are building blocks for developers, like hosting or databases. SaaS is the finished product that end users actually use.

• MRR (monthly recurring revenue): the total of all active subscriptions, per month.
• ARR (annual recurring revenue): the same thing over a year, roughly MRR × 12.
• Churn: the share of customers (or revenue) you lose each month to cancellations.
• CAC (customer acquisition cost): what it costs you, in money and time, to win one customer.
• LTV (lifetime value): how much a customer pays you in total before canceling.
• Free trial: a limited period to try the product before the first payment.
• Freemium: a free plan with limits, and paid plans that unlock more.

The one relationship worth remembering: a SaaS works when the value of a customer over time (LTV) is clearly higher than what it costs to win them (CAC). That's why keeping customers happy is just as important as finding new ones. You don't need to track all of these on day one: start with MRR and churn.

Yes, and it's more accessible than ever. AI assistants can now write the code, hosting platforms have free tiers, and payment platforms handle subscriptions for you. Everything is explained step by step in our guide on how to create a SaaS, and if you don't have an idea yet, start with how to find profitable SaaS ideas.

If you want a guided path, the 2-minute EasySaaS quiz matches you with 3 niche SaaS ideas and gives you the prompts to build them with Claude.