Software as a Service explained for founders and investors
SaaS (Software as a Service) is a software delivery model where applications are hosted in the cloud and accessed by users over the internet, typically on a monthly or annual subscription basis. Instead of buying and installing software, users pay a recurring fee to access it. Examples include Slack, Notion, Figma, and Stripe.
The subscription model creates predictable, recurring revenue that investors love. For customers, it lowers the barrier to entry (no large upfront cost), ensures they always have the latest version, and allows them to cancel if the product stops being valuable. For companies, it creates a direct relationship with users, enables continuous improvement based on usage data, and generates compounding revenue. A customer paying 50 pounds per month is worth 600 per year, and if they stay for five years, that is 3,000 from a single acquisition. This compounding effect is why SaaS companies command high valuations.
B2B SaaS sells to businesses. Think CRM tools, project management, accounting software, or developer tools. B2C SaaS sells to consumers. Think streaming services, personal productivity apps, or creative tools. B2B typically has higher contract values, longer sales cycles, lower churn, and requires sales teams. B2C has lower prices, higher volume, higher churn, and relies on self-serve sign-up and marketing. Most venture-backed SaaS startups are B2B because the unit economics are more predictable and the market is less fickle. But some of the biggest SaaS companies (Spotify, Netflix, Canva) are B2C.
The metrics that define a healthy SaaS business: MRR/ARR (monthly/annual recurring revenue), Churn rate (percentage of customers leaving), CAC (cost to acquire a customer), LTV (total revenue from a customer), LTV:CAC ratio (should be 3:1 or better), Net Revenue Retention (revenue from existing customers including expansion, should be above 100%), and Payback period (months to recover CAC). Master these seven metrics and you understand the financial health of any SaaS business.
The advantage of building SaaS in 2026 is that the infrastructure costs are near zero. Cloud hosting, payment processing, authentication, and email are all available as services themselves. A solo founder can launch a production-grade SaaS product with a few hundred pounds in monthly costs. The hard part is not building the software. It is finding product-market fit, acquiring customers at a sustainable cost, and retaining them long enough to be profitable. Most SaaS startups fail not because of technical problems but because they cannot find enough people willing to pay for what they built.