The Business Model :
Most software continues to be sold in the same way it has been sold for decades. The customer buys a license to use the software and installs it on hardware that belongs to the customer or that is otherwise under the customer's control, with the vendor providing support as directed by the terms of the license or a support agreement. In an honest, above-board software transaction, the notion of a "license" can seem like something of a technicality: legally, the customer is only purchasing the right to use a copy of the software, but for practical purposes, it's as though the customer "owns" the software and may use it as often and for as long as it wishes. SaaS brings a new concept which is defined, i.e. instead of "owning" important software outright, customers are told, they can pay for a subscription to software running on someone else's servers, software that goes away if they stop subscribing.
Let's look at it from a different angle. Basically speaking, there are three types of components of an IT infrastructure in a company.
Out of these, from an organizational perspective, the software is the most important aspect of it, as the software is the main component that helps them complete the objective of the organization. Whereas hardware and professional service enable the software to function and produce the result needed for the organization. In another word, an organization would be happy to add new software or functionalities to an existing software without any addition to the hardware, if existing hardware would enable the new software/functionality to run effectively, but no organization would add new hardware if there is no anticipated need of new software.
But with the current situation, the majority of the budget is spent on the hardware and the software professional to run the software. This leaves a minority of the budget for software that will most directly involve in information management, which is the ultimate goal of any IT organization.
In opposed to that, if the organization can consume this software's from a remote location, which is being managed by a third-part SaaS vendor and they would only need to pay the subscription of that software, then a huge chunk of their budget can be saved from hardware and professional services since the hardware and the professional services will be managed by the third-party SaaS vendor. This would enable them to spend the majority of the budget on software services, which would have a direct impact on meeting the objective of their organization. Moreover, applications delivered over the Web or through smart clients place significantly less demand on a desktop computer than traditional locally-installed applications, which enables the customer to extend the desktop technology lifecycle significantly.
From a SaaS provider perspective, for SaaS applications that are built to scale well, the operating cost for each customer will continue to drop as more customers are added. As this is happening, the provider will develop multi-tenancy as a core competency, leading to higher-quality offerings at a lower cost. Therefore, even accounting for the hardware and professional services costs incurred by SaaS vendors, customers can still obtain significantly greater pure software functionality for the same IT budget
A small question, is this, not a fairy tale, as the subscription for the software service would also include the management of the server and the professional service? The answer is NO, and the magic behind is "Economy of Scale". A SaaS vendor with x number of customers subscribing to a single, centrally-hosted software service enables the vendor to serve all of its customers in a consolidated environment. For example, a line-of-business SaaS application installed in a load-balanced farm of five servers may be able to support 50 medium-sized customers, meaning that each customer would only be responsible for a tenth of the cost of a server. A similar application installed locally might require each customer to dedicate an entire server to the application-perhaps more than one, if load balancing and high availability are concerns.
There are clearly quite a lot of benefits for both consumers (end users) as well as providers. We can consolidate some of the core points as mentioned below:
Realizing the benefits of SaaS requires shifts in thinking on the part of both the provider and the customer, and it's up to the provider to help the customer make this shift.