Taken from Wikipedia:

Software as a Service (SaaS, typically pronounced 'sass') is a model of software deployment whereby a provider licenses an application to customers for use as a service on demand. SaaS software vendors may host the application on their own web servers or download the application to the consumer device, disabling it after use or after the on-demand contract expires. The on-demand function may be handled internally to share licenses within a firm or by a third-party application service provider (ASP) sharing licenses between firms.

Characteristics of SaaS software include:

• network-based access to, and management of, commercially available software
• activities managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web
• application delivery typically closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering, and management characteristics
• centralized feature updating, which obviates the need for end-users to download patches and upgrades.
• frequent integration into a larger network of communicating software - either as part of a mashup or as a plugin to a platform as a service. (Service oriented architecture is naturally more complex than traditional models of software deployment.)

Providers of SaaS generally price applications on a per-user basis, sometimes with a relatively small minimum number of users and often with additional fees for extra bandwidth and storage. SaaS revenue streams to the vendor are therefore lower initially than traditional software license fees, but are also recurring, and therefore viewed as more predictable, much like maintenance fees for licensed software.

In addition to the characteristics mentioned above, SaaS software turns the tragedy of the commons on its head and frequently has these additional benefits:

• More feature requests from users since there is frequently no marginal cost for requesting new features;
• Faster releases of new features since the entire community of users benefits from new functionality; and
• The embodiment of recognized best practices — since the community of users drives the software publisher to support best practice.