Software as a Service

In the past, you bought programs on a physical medium and installed them on your own computer. After that, that version belonged to you, and it ran even without an internet connection. With Software as a Service, things are different. The program runs on the provider’s large computers, and you access it via a browser or an app. Payment isn’t made once, but monthly or yearly per user. The English name literally means “software as a service” – you don’t buy a product, but an ongoing service.

Why renting has displaced buying

For customers, the technical hassle disappears. Nobody has to install updates, maintain servers, or organize backups. A new employee simply gets access, and one who leaves loses it again. Instead of one large purchase, predictable monthly costs arise.

For providers, the model is even more attractive. They don’t collect payment once every five years, but every month. Such recurring revenue can be forecast well, and that’s exactly what investors like. That’s why stock markets often value SaaS companies higher than classic software houses with the same revenue.

But there’s a downside. Anyone who stops paying loses access to the program and sometimes even convenient access to their own data. This dependence on a single provider is called lock-in. Also, small monthly amounts add up to substantial sums over the years.

One program, many customers

Technically, SaaS usually involves a single software installation in a data center. All customers use the same version but only see their own data. This principle is called multi-tenancy. You can picture it like an apartment building: one building, one set of building infrastructure, many separate, self-contained apartments.

Because there is only one version, the provider can roll out improvements to everyone immediately. New features sometimes appear weekly without anyone having to install anything. The price for this is little freedom of choice. You can’t refuse a change, and old features sometimes disappear too.

The necessary computing power is often rented by the provider itself from a cloud giant – that is, a company that operates enormous data centers worldwide. If the service needs more capacity at lunchtime, it’s automatically added. Without an internet connection, however, mostly nothing or very little works.

Where SaaS shows up everywhere

In schools, it’s often already everyday reality. Google Docs, Microsoft 365, and learning platforms like Moodle are SaaS services. Spotify, Dropbox, and small businesses' accounting software also work this way. Companies like Salesforce, Shopify, or Slack have built their entire business on it.

In financial news, you’ll encounter its own vocabulary for this. “ARR” stands for annualized recurring revenue. The “churn rate” indicates what proportion of customers cancel per year. Both figures matter more for SaaS companies than classic profit.

Since the AI boom, the model is shifting once again. Many providers are building chatbots and assistants into their services and charging extra for them. Because every AI response incurs real computing costs, some now bill based on usage instead of a flat rate per head. Whether customers will keep paying for these add-on packages long-term is one of the industry’s big open questions.