Full Definition
SaaS (Software as a Service) is a software distribution model where applications are hosted in the cloud and made available to customers on a subscription basis, rather than being installed locally. SaaS is one of the most popular business models for venture-backed startups due to its recurring revenue and scalability.
Why Investors Love SaaS
- Recurring Revenue: Predictable, repeating income streams
- High Gross Margins: Typically 70-90% gross margins
- Scalability: Marginal cost of serving additional customers is very low
- Switching Costs: Customers become embedded in the product over time
- Data Insights: Usage data enables product improvement and expansion revenue
Key SaaS Metrics
- MRR/ARR, churn rate, NRR, CAC, LTV, CAC payback period
- Rule of 40: Growth rate + profit margin should exceed 40%
- Magic Number: Net new ARR ÷ Sales & Marketing spend
Real-World Example
Slack is a SaaS company that charges teams $7.25-$12.50 per user per month for its communication platform, generating predictable monthly recurring revenue.
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Related Terms
Predictable, recurring revenue from subscriptions, measured monthly (MRR) or annually (ARR).
The percentage of customers or revenue lost over a specific period, a key SaaS health metric.
The strategy a company uses to generate income from its product or service.
The direct revenues and costs associated with a single unit of a business model (typically per customer).
A metric measuring revenue retained from existing customers including expansion, contraction, and churn.
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