# Understanding SaaS: Definition, Benefits, and Examples

![Software as a Service (SaaS)](https://www.investopedia.com/thmb/FmHi2FYg-2nDq1JneTHLWNT6Z1w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Software-as-a-service-saas_final-5caef210a00b48f5ac5de4964f72a016.png)

*— Michela Buttignol / Investopedia*

> **Definition**
>
> Software as a Service (SaaS) is a software licensing model that provides access to applications via the Internet on a subscription basis, eliminating the need for local installation and maintenance.

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

Software as a Service (SaaS) is a form of cloud computing that lets people access software online without needing to install it on their computers. It usually works on a subscription basis, making it easy and cost-effective for businesses to use important tools. Common examples include Salesforce, Google Workspace, and Dropbox. Although convenient, SaaS can have drawbacks like data security risks and limited control compared to traditional software.

### Key Takeaways

*   SaaS provides software access through the Internet via a subscription model, eliminating the need for in-house installations.  
    
*   It offers business applications such as email, file sharing, and customer relationship management.  
    
*   SaaS is cost-effective and easy to implement but can pose data security issues and limited customization.  
    
*   Popular examples of SaaS include Google Workspace, Dropbox, and Salesforce.  
    
*   SaaS relies on cloud computing, making it accessible from anywhere with an Internet connection.

## How SaaS Works: A Closer Look

The rise of SaaS coincided with the rise of [cloud-based computing](https://www.investopedia.com/terms/c/cloud-computing.asp). Cloud computing offers technology services through the Internet. This often includes access to data storage, networking, and servers.

Companies looking to update the software on their computers had to purchase compact discs before SaaS. The discs contained the updates and they then had to download them onto their systems. Updating software was a time-consuming endeavor for large organizations.

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

## The Evolution and Features of SaaS

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

Organizations made the shift to individual ownership of personal computers using on-premise software as hardware and computing became less costly. They were impeded by ongoing software and hardware maintenance of the individual computers, however.

The growth of the Internet saw the inception of the “online cloud” in the mid-1990s. The online cloud allows organizations to access software from anywhere. Salesforce became the forerunner in the SaaS space by 1999 and both startups and industry giants were eager to move toward it, including Microsoft, Oracle, and SAP.

The SaaS provider hosts the customer’s software and delivers it to approved end-users over the Internet. It gives customers network-based access to a single copy of an application that the provider created specifically for SaaS distribution. New features or updates are rolled out to all customers when they're released.

> **Important**
>
> SaaS has become ubiquitous with pure play companies like Adobe, Salesforce, Shopify, and Intuit leading the way. The SaaS market is expected to exceed $675 billion in 2024.

## Pros and Cons of SaaS Solutions

SaaS offers a variety of advantages over traditional software licensing models but it has some drawbacks as well.

### Advantages

Companies don't need to invest as much in hardware because the software isn't stored on their servers. SaaS is easy to implement, update, and debug, and it often costs less than buying several software licenses for different computers.

SaaS is used in many applications, such as email services, auditing, automating sign-ups, managing documents, and [customer relationship management (CRM)](https://www.investopedia.com/terms/c/customer_relation_management.asp) systems, which store 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 suits enterprise-level services like human resources, where tasks are often collaborative. Employees from different departments can share, edit, and publish materials even when they're not in the same office.

### Disadvantages

Drawbacks to the adoption of SaaS center around data security and speed of delivery. Data is stored on external servers so companies must ensure that it's safe and can't be accessed by unauthorized parties. Security is especially important to SaaS business users in the [aerospace and defense sector](https://www.investopedia.com/articles/markets/080415/how-honeywell-hon-makes-its-money.asp).

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. SaaS solutions also suffer from a loss of control and a lack of customization due to their remote nature.

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
    

## Real-World Examples of SaaS

Google Docs is Google’s free online word processor launched in 2006. Individuals can simply log in through a web browser for instant access. Google Docs allows you to write, edit, and even collaborate with others from any location.

Founded in 2007, Dropbox is a cloud storage service for storing, sharing, and collaborating on files. Users can back up photos, videos, and other files to access them from any device and location.

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

## Navigating SaaS Security Challenges

Security and privacy concerns emerge as companies adopt cloud-based software. Previously, management updated in-house software, but now they rely on third parties for encryption, identity and access management (IAM), and data privacy. Companies also need reliable communication and technical support.

## Understanding SaaS Pricing Models

SaaS products are commonly more cost-effective for a company than traditional software licenses because setup and installation aren't necessary. 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 can also choose an ad-based model where the SaaS earns revenue through advertising within the cloud space.  

## Comparing SaaS, IaaS, and 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 that are managed by third-party vendors. Well-known SaaS examples include Dropbox, Google Workspace, and Salesforce.

Infrastructure as a service (IaaS) provides access to resources like servers, storage, and memory. Organizations can purchase these resources as needed. Examples of IaaS include Amazon Web Services (AWS), Microsoft Azure, and Rackspace.

Platform as a service (PaaS) provides a software development platform over the web. It allows developers to concentrate on software creation without concerning themselves with storage and infrastructure.

## What Is SaaS Marketing?

SaaS marketing uses standard [marketing](https://www.investopedia.com/terms/m/marketing.asp) practices to promote and acquire leads for cloud-based software applications and information services.

## What Is B2B SaaS?

[B2B](https://www.investopedia.com/terms/b/btob.asp) 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 SaaS Businesses?

Monthly [recurring revenue](https://www.investopedia.com/terms/r/recurringrevenue.asp) (MRR) is an important metric for SaaS businesses. It uses a monthly subscription pricing model. The calculation of MRR is simple: Multiply the average monthly revenue per customer by the number of customers for that month.

## The Bottom Line

SaaS uses cloud computing to deliver software online, usually through a subscription. It is convenient and cost-effective because it’s easy to set up, update, and scale without heavy hardware costs. It is used in many areas like customer management, human resources, file sharing, and collaboration, with popular examples like Google Workspace, Slack, and Dropbox. Some of the common drawbacks include data security concerns and less customization. SaaS is growing rapidly and is expected to have a major impact.  

> **Article Sources**
>
> 1.  Salesforce. "[The History of Salesforce](https://www.salesforce.com/news/stories/the-history-of-salesforce/)."
>     
> 2.  Gartner. "[Gartner Forecasts Worldwide Public Cloud End-User Spending to Surpass $675 Billion in 2024](https://www.gartner.com/en/newsroom/press-releases/2024-05-20-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-surpass-675-billion-in-2024)."
>     
> 3.  Google. “[15 Milestones, Moments and More for Google Docs’ 15th Birthday](https://blog.google/products/docs/happy-15-years-google-docs/).”
>     
> 4.  Dropbox. "[Our Mission Is to Design a More Enlightened Way of Working](https://www.dropbox.com/about)."