What is SaaS in business? Software you rent, explained

SaaS stands for software as a service. It means you rent software instead of buying and installing it. You sign up, pay a subscription (usually per user, per month or year), and use the software through a web browser or an app. The vendor runs everything behind the scenes: the servers, the updates, the backups and the security of its own systems.

If your company uses web-based email, a CRM (customer relationship management system), an online accounting tool or a project management app, you’re already a SaaS customer. Most new business software is sold this way.

The official definition, in plain words#

The US National Institute of Standards and Technology (NIST) wrote the definition most people still borrow, in Special Publication 800-145. Paraphrased: with SaaS, the customer uses the provider’s applications running on cloud infrastructure, reached through a browser or a program, and doesn’t manage the underlying network, servers, operating systems or storage. The customer might adjust some settings for their own account, and that’s about it.

The analogy: a furnished apartment#

Buying traditional software is like buying a house. You own it, but you also fix the roof, pay for repairs and decide when to renovate.

SaaS is like renting a furnished apartment in a managed building. You move in quickly, the landlord handles the plumbing and the lifts, and repairs happen without you lifting a finger. In return you pay rent every month, you live with the building’s rules, and if you stop paying, you have to move out. What you must take with you when you leave is your own stuff, which in SaaS terms means your data.

Who looks after what#

1
                    Installed software     SaaS
2
                    (you own it)           (you rent it)
3
                    -----------------      -----------------
4
  Your data         YOU                    YOU
5
  Settings, users   YOU                    YOU
6
  The application   YOU (install, update)  VENDOR
7
  Servers, storage  YOU (or your IT firm)  VENDOR
8
  Building, power   YOU (or a data center) VENDOR

Notice the top two lines. Even with SaaS, your data and who has access to it remain your responsibility.

How SaaS changes the business decision#

	Traditional license	SaaS
Upfront cost	Large purchase, plus hardware	Small or none; pay as you go
Ongoing cost	Maintenance fees, IT time	Subscription that grows with users
Updates	When you choose to install them	When the vendor releases them
Time to start	Weeks of setup	Often same day for simple tools
Accounting treatment	Often an asset	Usually an operating expense
Leaving	Keep using the old version	Access ends when payments stop

The accounting line is worth checking with your accountant, since treatment depends on contract terms. The operational point stands either way: SaaS swaps a big purchase for a recurring bill.

What to check before you sign#

Data export. Can you download all of your data in a usable format, at any time, without paying extra?
Integrations. Does it have a public API (application programming interface) so it can share data with your other systems? Our guide to API integration explains why that matters.
Pricing triggers. What makes the bill go up: users, records, storage, API calls, add-on modules?
Contract terms. Monthly or annual? Auto-renewal? Notice period to cancel?
Sign-in. Does it support single sign-on (SSO), where staff use one company login for many apps? That makes adding and removing people simpler.
Where data is stored. Some industries and customers require data to stay in certain countries.

SaaS is one of three main cloud service models. The other two, PaaS and IaaS, rent you lower layers of the stack; PaaS (platform as a service) rents you a ready-made environment for building and running your own apps, and IaaS (infrastructure as a service) rents you raw computing power and storage. We also compare the big IaaS providers in AWS vs Azure vs Google Cloud. For a full business system sold as SaaS, see our list of ERP options for small business.

What this means for a 20-person company

You can run nearly every core function on SaaS without a server room or an in-house IT team.

Subscriptions creep. Review every SaaS bill twice a year and remove unused seats.

Make one person responsible for adding and removing users across all apps when people join and leave.

Before you sign, confirm you can export your data. It’s your moving van when you leave the apartment.