SaaS (software as a service)

SaaS, or software as a service, is software that a company rents by subscription and uses over the internet, instead of buying it once and installing it. The company that makes the software also runs it, on its own servers or in the cloud. The customer opens it in a web browser or a phone app, and pays every month or every year for as long as it uses it.

Here is how SaaS works in general. The SaaS company builds one copy of its software and runs it in a data centre, usually on cloud computing. Thousands of customer companies log in to that same copy. Each customer sees only its own data, because the software keeps every customer's records apart. This design is called multi-tenancy. The SaaS company fixes bugs and adds features for everyone at once, so no customer has to install an update. The customer pays a subscription, which is often a fee for each user, called a seat.

Why did software move to this model? The customer does not need its own servers, or a team to run them. It can start in a day, and pay a small amount each month instead of a large amount up front. The SaaS company, in turn, receives money again every month, which is called recurring revenue. But it must keep each customer satisfied, because a customer who cancels stops paying at once. India has built many SaaS companies that sell to the world, such as Zoho, Freshworks and Chargebee.

Take, for example, a design studio with 60 employees. It runs its salaries on an HRIS and payroll service and pays a fee for each employee every month. When the provident fund rules change, the software maker updates the software for every customer.

Consider a company with 3,000 employees. It may pay for more than 200 different SaaS apps, so its IT team uses SaaS management software to find every app, see who uses it and stop paying for the ones nobody opens.

Say a large manufacturer moves its ERP from its own server room to the ERP maker's cloud. It now pays a subscription, and the ERP maker runs the upgrades.

How is SaaS different from on-premises software? On-premises software is installed on the customer's own servers. The customer usually buys a licence once, pays a yearly fee for support and runs the upgrades itself. SaaS is also different from renting raw computing power from a cloud provider. There, the customer rents servers and runs its own software on them. With SaaS, the customer rents the finished application. How SaaS companies set their prices is explained in SaaS pricing models.