What is the SaaS business model? Basics for subscription software startups

SaaS (software as a service) is a model in which software is delivered online by subscription instead of being sold as an installed licence. Customers pay monthly or yearly; updates, hosting and maintenance are the provider's job. Its predictable revenue makes it one of the models investors like most.

Why SaaS is attractive

• Recurring revenue: income every month without selling again
• High gross margin: serving one more customer costs little
• Scalability: the same product sells to many customers anywhere
• Expansion revenue: customers pay more as they grow

Cost structure

• Product and engineering
• Hosting: cloud infrastructure
• Sales and marketing: usually one of the biggest items
• Customer success and support: critical for preventing churn

Key metrics

• MRR / ARR
• Churn: customer and revenue loss
• NRR: how revenue from existing customers changes
• CAC, LTV and payback

See our startup metrics guide for how to calculate them.

Growth channels

• Product-led: users discover the product themselves through trials or freemium
• Sales-led: direct sales to enterprises; see our B2B sales guide
• Content and SEO: low-cost acquisition over time
• Marketplaces and integrations: being present where customers already work

What investors look at

• Growth rate and consistency
• Churn and NRR: do customers stay and grow?
• Gross margin
• Efficient growth: new revenue per unit of spend

Common mistakes

• Ignoring churn and focusing only on new customers
• Pricing too low; see our pricing guide
• Not investing in customer success

Conclusion

Built well, SaaS is a sustainable, scalable model. Success depends as much on keeping and growing customers as on winning new ones.