SaaS (Software as a Service)
Software as a Service (SaaS) is a software distribution model where applications are hosted in the cloud and provided to customers over the internet on a subscription basis, rather than installed locally.
In depth
SaaS is the dominant business model for modern software companies. Instead of selling a perpetual license, you charge monthly or annually for ongoing access.
SaaS advantages: - Predictable recurring revenue (MRR/ARR) - Lower barrier to entry for customers - Ability to push updates instantly without customer action - Usage-based expansion revenue - Higher LTV than one-time software sales
SaaS tiers by market: - B2C SaaS: consumer-facing apps (Spotify, Duolingo) - B2B SMB: sold to small/medium businesses ($10–$200/month) - B2B Mid-Market: larger companies, self-serve or light sales ($200–$2,000/month) - Enterprise SaaS: complex sales, custom pricing, legal/security requirements ($2,000+/month)
Key SaaS metrics: MRR, ARR, CAC, LTV, Churn Rate, NRR, CAC Payback Period.
Real example
Slack charges $7.25/user/month for Business plan. With 10,000 business users, that's $72,500 MRR ($870,000 ARR). At a 10× ARR multiple, Slack's subscription business alone would be valued at $8.7B.
Tools & calculators
Related terms
MRR (Monthly Recurring Revenue)
Monthly Recurring Revenue (MRR) is the predictable, normalized monthly revenue generated from all active subscriptions. It's the north star metric for SaaS companies.
ARR (Annual Recurring Revenue)
Annual Recurring Revenue (ARR) is the yearly equivalent of your recurring subscription revenue. It's MRR × 12 and is the primary metric investors use to value SaaS companies.
CAC (Customer Acquisition Cost)
Customer Acquisition Cost (CAC) is the total cost of acquiring one new paying customer, including all marketing and sales spend.
LTV (Lifetime Value)
Customer Lifetime Value (LTV or CLV) is the total predicted revenue you'll earn from a customer over the entire duration of your relationship.
Churn Rate
Churn rate is the percentage of customers (or revenue) that cancels or doesn't renew in a given time period. It's the single most important retention metric for subscription businesses.
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