Home Tech blog Software development as a service (SaaS): Business model and challenges

Software development as a service (SaaS): Business model and challenges

Bartosz Wojnarowski

28.08.2025

Introduction

In recent years, Software as a Service (SaaS) has emerged as the dominant model for delivering software applications over the internet. Unlike traditional software deployment, where software is installed locally on users’ computers, SaaS allows users to access applications via the internet. This article explores the SaaS business model, its key characteristics, and the challenges associated with SaaS development.

1. Understanding the SaaS Business Model

Definition of SaaS:

SaaS refers to a software distribution model where applications are hosted by a third-party provider and made available to customers over the internet. Users access the software through a web browser, eliminating the need for local installation and maintenance.

Key Characteristics of SaaS:

Subscription-Based Pricing: SaaS applications are typically offered on a subscription basis, where customers pay a recurring fee for access to the software.
Scalability: SaaS solutions are designed to scale easily, allowing providers to accommodate a growing number of users without significant infrastructure changes.
Multi-Tenancy: SaaS applications serve multiple customers (tenants) from a single instance of the software, sharing resources while maintaining data isolation.
Automatic Updates: Providers manage software updates centrally, ensuring that all users have access to the latest features and security patches.
Accessibility: SaaS applications can be accessed from any internet-connected device, providing users with flexibility and convenience.

Benefits of the SaaS Model:

Lower Upfront Costs: SaaS eliminates the need for expensive hardware and software licenses, making it more accessible to businesses of all sizes.
Rapid Deployment: Users can start using SaaS applications almost immediately, as there is no need for complex installation procedures.
Ongoing Support and Maintenance: SaaS providers handle maintenance tasks such as updates, backups, and security, freeing up resources for customers to focus on their core business activities.
Flexible License:
The SaaS subscription model is much more tailored to customer needs and provides adaptability that hosted software cannot provide. SaaS offers flexible monthly and annual subscription terms, and the subscription length is typically determined on the basis of the needs. Additionally, there is no need to purchase a license or install software, unlike what is required for hosted software.
Forecasted Revenue: While we can never predict revenue with precision, when the software you provide becomes an integral part of running your business, you will Build customer loyalty and start seeing consistent monthly revenue from subscriptions. This is much more predictable than a model based purely on one-time sales. Customers who pay for your service over a longer period of time are less likely to cancel their subscription, leading to a more predictable revenue stream.

Disadvantages of the SaaS Model:

Dependency on Provider: Users rely heavily on the SaaS provider for service availability, performance, and security. If the provider experiences downtime or service disruptions, it can directly impact the users’ ability to access their data and applications.
Limited Customization: SaaS applications often offer limited customization options compared to on-premises software. Users may find it challenging to tailor the software to meet their specific needs or integrate it with existing systems.
Subscription Costs: While SaaS typically involves lower upfront costs compared to traditional software licensing models, subscription fees can accumulate over time. Users must continuously pay for access to the software, which may become costly in the long run.
Limited Control: Users have limited control over the underlying infrastructure and software environment in a SaaS model. This lack of control can be problematic for organizations with strict compliance requirements or specific performance needs.

2. Challenges of the Saas Bussines Model

Security Concerns:

As SaaS applications store sensitive data in the cloud, security is a top priority. Developers must implement robust security measures of data breaches, unauthorized access, and other threats.

Data Privacy and Compliance:

SaaS providers must comply with various data privacy regulations, such as GDPR and CCPA, which impose strict requirements for data handling and protection. Ensuring compliance can be challenging, especially for multinational organizations operating in different jurisdictions.

Scalability and Performance:

SaaS applications must be designed to scale efficiently to accommodate increasing user demand. Developers need to optimize performance, minimize latency, and ensure high availability to deliver a seamless user experience.

Customization and Integration:

While SaaS applications offer many benefits out of the box, customers may require customization or integration with other systems to meet their specific needs. Developers must provide flexible customization options and robust APIs to facilitate seamless integration with third-party services.

Revenue Model and Monetization:

SaaS providers face challenges in designing pricing plans that balance affordability with profitability. Finding the right pricing strategy, tiered pricing models, and value-added features can be complex and requires careful analysis of market dynamics and customer preferences.

Continuous Innovation:

In the fast-paced technology landscape, SaaS providers must continuously innovate to stay ahead of competitors and meet evolving customer needs. This requires a culture of experimentation, agility, and a commitment to delivering value through regular updates and feature enhancements.

Market saturation and competition:

The SaaS market is very competitive, with many players offering similar solutions across many different industries. To stand out from competitors, differentiate and capture market share requires continuous innovation, marketing efforts and strategic partnerships.

3. Business Models in the SaaS Industry

Freemium Model:

This model offers a basic version of the software for free, with limited features or functionality. Users can upgrade to a paid subscription to unlock premium features or access additional services.

Examples:

Slack: Slack offers a free version with basic features such as messaging and file sharing. Businesses can upgrade to paid plans for advanced features like unlimited message history and app integrations.

The Subscription-Based Model:

Under this model, customers pay a recurring fee (monthly or annually) to access the software. Pricing may be tiered based on usage levels or features.

An example:

Adobe Creative Cloud: Adobe offers subscription-based access to its suite of creative tools, including Photoshop, Illustrator, and Premiere Pro. Customers can choose from different subscription plans based on their needs.

Usage-Based Model:

In this model, customers are charged based on the basis of the usage of the software, such as the number of transactions processed or the volume of data stored.

Example:

Amazon Web Services (AWS): AWS provides cloud computing services on a pay-as-you-go basis, with pricing based on factors such as compute power, storage, and data transfer.

Enterprise Model:

This model targets large organizations and typically involves custom pricing, advanced security features, and dedicated support.

Example: * Salesforce: Salesforce offers a range of cloud-based CRM solutions tailored to the needs of enterprise customers. Pricing is customized on the basis of factors such as the number of users and the level of customization required.

4. Popular SaaS Businesses and Estimated Profits

Microsoft (Office 365): Microsoft’s Office 365 suite includes productivity tools such as Word, Excel, and PowerPoint, delivered as a subscription service. In 2021, Microsoft reported revenue of over $168 billion, with significant contributions from its cloud and SaaS offerings.
Zoom: Zoom provides video conferencing and collaboration software that saw explosive growth during the COVID-19 pandemic. In 2021, Zoom reported revenue of over $2.6 billion, representing a substantial increase from the previous year.
Salesforce: Salesforce is a leading provider of cloud-based CRM software for sales, marketing, and customer service. In 2021, Salesforce reported revenue of over $21 billion, with strong growth driven by its SaaS offerings.
Adobe: Adobe offers a range of creative software tools, including Photoshop, Illustrator, and Premiere Pro, through its Creative Cloud subscription service. In 2021, Adobe reported revenue of over $15 billion, with Creative Cloud contributing significantly to its overall growth.
ServiceNow: ServiceNow provides cloud-based IT service management software that helps organizations automate and streamline their IT operations. In 2021, ServiceNow reported revenue of over $5 billion, with strong demand for its SaaS solutions driving growth.

Conclusion

Software as a Service (SaaS) has revolutionized the way software is delivered and consumed, offering numerous benefits such as cost-effectiveness, scalability, and accessibility. However, SaaS development comes with its own set of challenges, including security, compliance, scalability, customization, monetization, and innovation. By addressing these challenges effectively, SaaS providers can build successful and sustainable businesses that deliver value to customers and drive growth in the digital economy.

In this article, we’ve explored the SaaS business model, its key characteristics, and the challenges associated with SaaS development. From security and compliance to scalability and innovation, navigating the complexities of SaaS requires careful planning, execution, and a deep understanding of market dynamics and customer needs. By overcoming these challenges, SaaS providers can unlock the full potential of this transformative technology and drive success in the digital age.