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What Is SaaS? Software as a Service Explained for Beginners

SaaS (software as a service) is software you use in a browser and pay for by subscription — Gmail, Slack, Notion, Shopify. What makes something SaaS, how SaaS businesses make money, the metrics that matter (MRR, churn, CAC), and what you need to build one.

SaaS stands for software as a service: software you use over the internet — usually in a browser — and pay for with a subscription, instead of buying and installing it.

Gmail, Slack, Notion, Canva, Shopify, Zoom, Figma — all SaaS.

What makes something SaaS

  • Hosted by the company, not installed and maintained by you.
  • Accessed through a browser or app, from anywhere.
  • Subscription pricing — monthly or yearly, often per user or by usage.
  • One version for everyone, updated continuously — no "version 2023" to buy.
  • Multi-tenant — many customers share the same system, with their data kept separate. (Multi-tenant SaaS on Postgres)

SaaS vs the alternatives

SaaS Traditional software Custom-built
Where it runs Vendor's servers Your computer Your servers
How you pay Subscription One-off licence Build cost + hosting
Updates Automatic Buy/install new versions You do them
Example Notion Old Microsoft Office boxes An internal tool

Related terms: PaaS (platform as a service — a place to run your own apps, like Heroku) and IaaS (infrastructure — raw servers, like AWS EC2). (What is the cloud?, VPS vs PaaS)

How SaaS businesses make money

Recurring revenue is the whole point: a customer who pays $20 a month for three years is worth $720, not $20. Common pricing models:

  • Flat rate — one price, everything included.
  • Tiered — Free / Pro / Business with more features or limits.
  • Per seat — price per user.
  • Usage-based — pay for what you use (API calls, storage, AI tokens).
  • Freemium or free trial to get people started. (Freemium vs free trial)

(How to price your SaaS)

The numbers SaaS founders watch

Metric Meaning
MRR / ARR Monthly / annual recurring revenue
Churn % of customers (or revenue) lost each month
CAC Customer acquisition cost — what it costs to win a customer
LTV Lifetime value — revenue from a customer over their lifetime
Activation % of sign-ups who reach the "aha" moment

The basic health check: LTV well above CAC, and churn low enough that growth isn't a leaky bucket. A 5% monthly churn means losing about half your customers each year.

What you need to build a SaaS

The product itself, plus the plumbing every SaaS needs:

AI tools have made the product part much faster to build. The plumbing — and getting customers — is still where most of the work is. (Get your first users)

Micro-SaaS

A micro-SaaS is a small SaaS run by one person or a tiny team, solving a narrow problem for a specific audience — a Shopify plugin, a tool for wedding photographers. Lower revenue ceiling, much lower costs, and very achievable with today's tools. (What is an MVP?, How to validate your app idea)

EasySpawn gives your SaaS a home: a server running your app, Postgres and background jobs at a flat monthly price, with daily backups and Claude Code to help you build. See pricing or join the waitlist.

Related: How to Price Your SaaS · What Is an MVP? · Freemium vs Free Trial · Stripe Subscriptions Explained

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