Defining SaaS: Key Characteristics for Sustainable Growth Software-as-a-Service (SaaS) refers to businesses that deploy cloud-hosted software applications delivered on a subscription basis, providing businesses with scalable solutions, accessibility, and predictable recurring revenue. Over the past few years, the definition of SaaS has evolved as businesses across industries adopt subscription models and cloud delivery, leading to the “SaaS -ification ” trend. However, not all businesses claiming to be SaaS meet the true criteria. Investors differentiate true SaaS companies through the following characteristics: • Recurring Revenue: High proportion of revenue derived from subscriptions • Scalability: Ability to serve a growing customer base with minimal incremental cost • Customer Retention: High retention rates (e.g., low churn) and growing customer lifetime value (LTV) • Unit Economics: Strong gross margins (>70%) and efficient customer acquisition costs (CAC) High-quality SaaS businesses share specific hallmarks, including: • Consistent annual recurring revenue (ARR) growth • Net revenue retention (NRR) exceeding 100% • Operational efficiency often measured by the “Rule of 40 ” (ARR growth % + EBITDA margin ≥ 40%) These businesses demonstrate strong customer value, predictable cash flows, and scalability while maintaining a competitive moat and differentiated offerings. Investors scrutinize these metrics to identify SaaS companies that deliver sustainable, high-margin growth versus those leveraging temporary trends.
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