What is SaaS (Software as a Service)?

SaaS (software as a service) is software that a vendor hosts and runs for you and that you use over the internet, usually through a browser, paying a recurring subscription instead of buying a license and installing it yourself.

At a glance

• NIST’s 2011 definition: the customer uses the provider’s applications running on cloud infrastructure and doesn’t manage the servers, storage, operating systems or the application itself, beyond its own settings.
• It’s one of three cloud service models, next to platform as a service (PaaS) and infrastructure as a service (IaaS).
• Common pricing: per seat, by usage, by tier, or a mix.
• Revenue is recurring, so the business is measured in ARR, retention and churn rather than one-off sales.
• A SaaS deal is worth what the customer renews, not what they sign.

How SaaS works

A customer signs up, picks a plan, and gets access through a browser, a mobile app or an API. The vendor runs the infrastructure, ships updates and handles security. The customer pays monthly or annually for as long as they keep using it.

Because nothing is installed, switching costs are lower than with on-premise software. That’s good for buyers and it’s why SaaS companies care so much about onboarding and time to value: a customer who doesn’t get value quickly can simply stop paying at renewal.

The SaaS metrics that matter

Benchmarkit’s 2025 report on private B2B SaaS companies gives a sense of the typical shape of the business in 2024:

• Median growth of 26% a year.
• Median net revenue retention of 101%.
• Median subscription gross margin of 81%, against 77% on total revenue once services are included.
• Expansion from existing customers making up 40% of new ARR at the median.

A SaaS unit economics example

Example (illustrative): a customer costs $18,000 to win and pays $1,500 a month at 80% gross margin, so they return $1,200 a month. It takes 15 months for that customer to pay back their acquisition cost. If they cancel at the first annual renewal, the company lost money on them. This is why CAC payback and churn rate get as much attention as new bookings.

Common SaaS mistakes

• Treating the signature as the finish line. In SaaS, the first renewal decides whether the deal was profitable.
• Mixing services into recurring revenue. Implementation and training fees aren’t ARR and carry lower margins.
• One motion for every price point. A $5,000 product and a $150,000 product can’t carry the same sales cost. Size the motion to the ACV.
• Measuring only new logos. Without retention and expansion figures, growth can hide a leaking customer base.

How SaaS shows up in a revenue system

For a SaaS company, pipeline, renewals and expansion all feed the same recurring number, so the sales team and the post-sale team are working on one target. TruckX went from $2M to $16M ARR in 14 months while we built and ran its sales function, and the playbooks then went to TruckX’s own team. Read the TruckX story.

Terms that sit next to SaaS

SaaS revenue is tracked as MRR and ARR, and many SaaS companies grow through product-led growth or a land and expand strategy. Most SaaS sold to companies is B2B.