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.
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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