The Rise of SaaS

Abstract

When Marc Benioff founded Salesforce in 1999 with the battle cry “No Software”, it registered as a provocation. Twenty years later, the subscription model was the dominant way enterprise software was sold. SaaS changed how software is delivered, and it changed how companies think about IT as an expense.

Before SaaS: The On-Premise World

In the 1990s, enterprise software was a physical product. SAP R/3 arrived on dozens of CDs. Oracle licenses were priced by CPU count and cost millions. Upgrades meant projects: months of planning, external consultants, downtime.

The vendors’ business model was lucrative: a one-time license fee (large), an annual maintenance fee (17–22% of the license price), and implementation partners who often earned more than the software maker itself. Siebel Systems dominated CRM with exactly this model: complex, expensive, but without alternative for large enterprises.

The problem from the customer’s perspective: the money flowed before the benefit was visible. Implementation projects frequently failed or blew their budgets. And software running on local servers aged until the next costly upgrade round.

Marc Benioff and the “No Software” Manifesto

Marc Benioff had worked at Oracle, knew the business model from the inside, and hated it from the customer’s perspective. In 1999, in the middle of the dot-com boom, he founded Salesforce.com on a simple thesis: CRM software does not need to be installed. It runs in the browser.

The early slogan was aggressive: “No Software”, with a crossed-out CD-ROM symbol as the logo. That was not a technical description but a political statement. Benioff understood marketing.

The model was radically different:

No installation, no local IT infrastructure
A monthly or annual subscription fee per user
Automatic updates, without customer projects
Scalable: five users today, five hundred tomorrow

The early years were tough. Large enterprises distrusted the browser as a work environment. Security concerns. Data protection questions. “How can we entrust our CRM data to an external provider?” Salesforce initially grew through smaller companies that could not or would not build Siebel infrastructure.

The breakthrough came with the dot-com bust, paradoxically. As IT budgets shrank, the SaaS argument became decisive: no capital expenditure, predictable operating costs, fast implementation.

The Economics of the Subscription

Info

Why subscription models are better for software vendors than one-time sales:

A company selling software for €100,000 books €100,000 in revenue once. A SaaS vendor selling the same functionality for €2,000 per month has generated only €24,000 after year 1, but €120,000 by year 5, with growing predictability.

The decisive difference: Annual Recurring Revenue (ARR) is predictable and bankable. From the mid-2010s, investors valued SaaS companies at 10–15 times ARR, far above the multiples of traditional software companies. That financed aggressive growth. Net Revenue Retention (how much of last year’s revenue remains, plus expansion) became the central health metric: >120% means the existing customer base grows on its own.

The SaaS vocabulary became its own dialect: MRR (Monthly Recurring Revenue), ARR, churn, CAC (Customer Acquisition Cost), LTV (Lifetime Value), NRR (Net Revenue Retention). Each of these concepts existed before in related form; SaaS made them the standard language of investors, CFOs, and founders.

The calculus changed for customers too: instead of CAPEX (capital expenditure, a balance sheet item), software became OPEX (operating expense, on the profit-and-loss statement). For many finance departments a real relief: no depreciation process, no capitalization debate.

The SaaS Stack Grows

In 2005, Salesforce opened the platform to third parties with AppExchange, the first enterprise app store concept. The ecosystem exploded. Thousands of extensions, all on subscription.

In parallel, specialized SaaS vendors emerged for every business function:

Workday (2005): HR and finance software for large enterprises
ServiceNow (2004): IT service management
HubSpot (2006): marketing and CRM for mid-sized companies
Zendesk (2007): customer support
Dropbox (2007): file storage as a service

GitHub (2008), Stripe (2010), and Twilio (2008) brought SaaS to the developer domain. The entire software stack of a modern company gradually shifted from purchased licenses to booked subscriptions.

Slack, Zoom, Notion: COVID as Accelerator

In March 2020, the world sent its office workers home. What followed was the largest natural experiment in the history of SaaS.

Slack (launched 2013, public 2019) had already been growing, but COVID catapulted the number of simultaneously connected users from 10 million on March 10, 2020, to 12.5 million on March 25. Salesforce recognized the value: an acquisition for 27.7 billion dollars, announced in December 2020.

Zoom (Eric Yuan, 2013) became a verb. “Let’s zoom” replaced “let’s have a call”. Quarterly revenues quadrupled. Its market capitalization temporarily exceeded that of all US airlines combined.

Notion (founded 2013, breakout from 2018) became the showcase for “bottoms-up SaaS”: individuals and teams adopted the tool without an IT department. The invoice followed the usage, not the other way around. This pattern, product-led growth (PLG), became the preferred go-to-market for new SaaS products.

The SaaS Winter of 2022/23

After a decade of almost uninterrupted growth and rising valuations came the correction. The US Federal Reserve raised interest rates aggressively. Capital that had been cheap for years became expensive.

The effects on SaaS companies were brutally direct:

Highly valued growth companies dependent on cheap capital saw their valuations halved or cut to a third
The “Rule of 40” yardstick (growth rate + profit margin ≥ 40%) replaced pure growth as the investor criterion
Waves of layoffs across the industry: Salesforce 10%, Workday 3%, Zendesk sold to private equity

What remained: the SaaS model itself was not broken. The overvaluation phase was corrected. Companies with real unit economics survived well. Market cleansing was followed by consolidation: large vendors absorbed smaller ones.

Dead End: On-Premise Enterprise Software

Warning

SAP, Oracle, and the forced transformation

SAP and Oracle are not dead; their revenues are larger than ever. But their core business has fundamentally shifted. SAP S/4HANA is a cloud migration initiative. Oracle followed with Oracle Cloud (Larry Ellison, a SaaS skeptic for years). Both now sell primarily subscriptions.

The actual dead end was the perpetual license model: a one-time license fee for software that runs forever. Attractive for customers (pay once, use forever). Economically worse for vendors than subscriptions, and hard for capital markets to value. Microsoft Office was a perpetual license product for decades. Since 2013, Microsoft 365 has been the dominant model: subscription, cloud-connected, billed monthly.

What really disappeared: the class of mid-sized on-premise specialty vendors that lacked the resources to migrate their entire stack to the cloud while maintaining customer support for legacy installations. Acquisition or irrelevance were the alternatives.

Legacy

SaaS changed more than software distribution. It changed how software is built. When customers can cancel at any time, software has to be consistently good, not just good at the moment of sale. That created pressure for customer success as a standalone function, for onboarding investment, for feature velocity as a competitive advantage.

It also changed power structures: end users could subscribe to SaaS tools without IT approval. That weakened the gatekeeping function of IT departments. “Shadow IT” grew, until companies started subscribing to SaaS management platforms to help them keep track of all their subscribed SaaS services.

Marc Benioff was right: software as a product was a phase. Software as a service is the normal form. The question that remains: who controls the data?