In a recent educational video titled "What is SaaS? Explained Simply with Real-Life Examples," pricing strategy expert Akil breaks down the fundamental concept of Software as a Service (SaaS) and its pricing implications. The video offers clear explanations using everyday analogies to help viewers understand how SaaS has transformed the software industry from a product-based model to a service-oriented approach.
From Owning to Subscribing: The Core Shift in Software
Remember when you purchased software on CDs or DVDs? You'd pay a large upfront fee, install the program on your computer, and it was yours to keep. As Akil explains, "You'd buy a box with a CD, install the program on your computer, and that was it. You paid a big one-time price and owned that version of the software. If a new version came out next year, you had to buy it again if you wanted the updates."
This traditional software distribution model closely resembles purchasing a physical product like a car – a significant initial investment followed by ownership and self-maintenance. However, the industry has undergone a dramatic transformation.
The Apartment vs. Home Ownership Analogy
To illustrate the difference between traditional software and SaaS, Akil uses a particularly effective real estate analogy:
"A great analogy is renting an apartment versus owning a home. When you own a home, you pay a lot upfront and you're responsible for the maintenance, moving the lawn, fixing the water heater, keeping everything secure. When you rent an apartment, you pay monthly and the landlord takes care of the upkeep. SaaS is like the landlord model."
This comparison perfectly captures the essence of the SaaS model – ongoing payments in exchange for continuous service, maintenance, and updates handled by the provider rather than the user.
Traditional Software vs. SaaS: Key Differences
The Old Model: On-Premise Software
With traditional software (often called on-premise), companies would:
- Make a large upfront investment
- Purchase licenses for a specific number of users
- Install software on their own computers and servers
- Manage all maintenance, security, and updates internally
- Pay additional fees for new versions and major upgrades
The SaaS Approach
In contrast, the SaaS model operates quite differently:
- Software is hosted by the provider and delivered via the internet
- Users pay subscription fees (monthly or annually) rather than large upfront costs
- All updates, security, and maintenance are handled by the provider
- Users always have access to the latest version without additional charges
- Scaling up or down is typically much more flexible
As Akil puts it, "With SaaS, the software is hosted by the provider and delivered over the internet. You typically pay a subscription, often monthly or yearly, instead of a large upfront cost. For example, instead of paying $1,000 for a software CD, you might pay $20 per month to use it online."
The Revenue Revolution: Recurring Subscriptions
One of the most significant impacts of SaaS is how it has transformed business models and revenue streams for software companies. The shift from one-off sales to recurring revenue has fundamentally changed how these businesses operate and are valued.
"Instead of selling software as a one-off product, companies now sell it as an ongoing service," Akil explains. "The goal pioneered by early SaaS companies was to remove those big upfront payments and replace them with monthly or annual payments for access."
This recurring revenue model creates a more predictable business with steady income streams rather than the peaks and valleys associated with major product releases. Software companies now track metrics like Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) to measure business health and growth.
Real-World Examples: SaaS Pioneers
Salesforce: The SaaS Trailblazer
Salesforce stands as perhaps the quintessential SaaS success story. Akil highlights how revolutionary their approach was when they launched in the late 1990s:
"Salesforce is a customer relationship management or CRM software which launched in the late 1990s and it did something revolutionary for the time. Instead of selling a CRM in a box, Salesforce offered it over the internet with a monthly pay-per-user subscription. Mark Benioff, the founder of Salesforce, basically said, 'We're not going to charge huge licenses. We're going to let companies subscribe to our software like a utility.' People thought he was crazy at first, but it worked."
This bold move to subscription-based pricing proved tremendously successful and helped establish the SaaS model as viable for enterprise software.
Slack: Per-User Subscription Model
Slack exemplifies another common SaaS pricing approach – the per-user subscription model that scales with team size.
"Slack is a workplace communication tool, kind of like a chat room for your team," explains Akil. "How do they charge? Per user per month. So, if a company has 10 employees on Slack standard plan and let's say it's around $8 per user per month, that company pays about $80 each month for Slack. If they add more employees, the monthly bill goes up accordingly. If someone leaves, you can drop the seat and the bill goes down."
This flexible pricing model aligns costs directly with value received and usage, making it attractive to organizations of varying sizes.
The Pros and Cons for Customers
Like any business model, SaaS offers both advantages and disadvantages for customers.
The Advantages
- Lower barrier to entry: "No huge upfront cost. Obviously, it's often easier on your budget to pay, say, $20 a month, then $5,000 at once for a software."
- Automatic updates: "You're always getting the latest features without extra charges. No need to buy software 2.0 next year because you will get it automatically as it is part of the service."
- Reduced maintenance burden: IT teams don't need to manually update software or maintain servers
- Flexibility to scale up or down as needed
The Disadvantages
- Potentially higher long-term costs: "Over a long period, subscriptions can add up. If you subscribe for many years, you might end up paying more in total than the one-time purchase would have been."
- Loss of access if payments stop: "If you stop paying, you lose access. Whereas in a purchase license, you could theoretically keep using the old software as long as it runs."
Strategic Implications: From Transactions to Relationships
Perhaps the most profound change SaaS has brought is transforming how software companies relate to their customers. The model shifts the focus from making a single sale to building and maintaining long-term relationships.
"When you move to a SaaS model, pricing isn't just about making the initial sale. It's about building a long-term relationship with the customer," Akil notes. "Companies track things like churn rate, which is how many subscribers cancel each month. Because keeping customers subscribed is crucial."
This emphasis on retention has led to:
- Greater focus on customer success and satisfaction
- Ongoing engagement rather than transactional interactions
- Regular product improvements based on user feedback
- New metrics to measure business health (churn, MRR, customer lifetime value)
As Akil explains, "Turning one-time software buyers into long-term subscribers often turns transactions into ongoing relationships. The company isn't just selling and saying goodbye, enjoy your software. Instead, they're constantly engaging with you, offering support, updates, maybe community forums, and looking for feedback to improve."
SaaS Pricing Strategies
SaaS businesses employ various pricing strategies to attract and retain customers:
- Tiered plans: Basic, Pro, Enterprise options that allow customers to upgrade as their needs evolve
- Freemium models: Free basic version with paid premium features
- Usage-based pricing: Pay based on actual consumption
- Per-user pricing: Costs scale with team size
- Annual commitment discounts: Lower rates for longer commitments to reduce churn
"SaaS pricing is less about the price tag on the box and more about the ongoing value that is delivered," summarizes Akil. "It's a win-win if done right. Users get continuous improvements and support and companies get a steady income and a chance to build loyalty."
The Future is Service-Oriented
The transition to SaaS represents more than just a change in how software is delivered or priced. It reflects a fundamental shift from product-centric to service-centric thinking across the technology industry.
Traditional software was created, packaged, sold, and the relationship largely ended there. SaaS, by contrast, is about ongoing service delivery, continuous improvement, and long-term customer relationships. This shift mirrors broader economic trends toward subscription and service-based models seen across industries.
For executives in the SaaS space, understanding these dynamics is crucial for building successful pricing strategies that balance customer value with sustainable business models. As Akil concludes in his video, "Whether you are just curious about the tech business or