Software as a service

History 

Centralized hosting of business applications dates back to the 1960s. Starting in that decade, IBM and other mainframe providers conducted a service bureau business, often referred to as time-sharing or utility computing. Such services included offering computing power and database storage to banks and other large organizations from their worldwide data centers.

The expansion of the Internet during the 1990s brought about a new class of centralized computing, called Application Service Providers (ASP). ASPs provided businesses with the service of hosting and managing specialized business applications, with the goal of reducing costs through central administration and through the solution provider's specialization in a particular business application. Two of the world's pioneers and largest ASPs were USI, which was headquartered in the Washington, DC area, and Futurelink Corporation, headquartered in Irvine, California.

Software as a service essentially extends the idea of the ASP model. The term Software as a Service (SaaS), however, is commonly used in more specific settings:

Whereas most initial ASPs focused on managing and hosting third-party independent software vendors' software, as of 2012 SaaS vendors typically develop and manage their own software.
Whereas many initial ASPs offered more traditional client-server applications, which require installation of software on users' personal computers, SaaS solutions of today rely predominantly on the Web and only require a web browser to use.
Whereas the software architecture used by most initial ASPs mandated maintaining a separate instance of the application for each business, as of 2012 SaaS solutions normally utilize a multitenant architecture, in which the application serves multiple businesses and users, and partitions its data accordingly.
The acronym allegedly first appeared in an article called "Strategic Backgrounder: Software As A Service," internally published in February 2001 by the Software & Information Industry Association's (SIIA) eBusiness Division.

DbaaS (Database as a Service) has emerged as a sub-variety of SaaS.

Pricing 

Unlike traditional software which is conventionally sold as a perpetual license with an up-front cost (and an optional ongoing support fee), SaaS providers generally price applications using a subscription fee, most commonly a monthly fee or an annual fee.[13] Consequently, the initial setup cost for SaaS is typically lower than the equivalent enterprise software. SaaS vendors typically price their applications based on some usage parameters, such as the number of users using the application. However, because in a SaaS environment customers' data reside with the SaaS vendor, opportunities also exist to charge per transaction, event, or other unit of value, such as the number of processors required.

The relatively low cost for user provisioning (i.e., setting up a new customer) in a multitenant environment enables some SaaS vendors to offer applications using the freemium model.  In this model, a free service is made available with limited functionality or scope, and fees are charged for enhanced functionality or larger scope. Some other SaaS applications are completely free to users, with revenue being derived from alternate sources such as advertising.

A key driver of SaaS growth is SaaS vendors' ability to provide a price that is competitive with on-premises software. This is consistent with the traditional rationale for outsourcing IT systems, which involves applying economies of scale to application operation, i.e., an outside service provider may be able to offer better, cheaper, more reliable applications