SaaS Architecture

According to recent industry research, organisations already allocate most of their software spending to Software-as-a-Service (SaaS) applications, and this share continues to grow as customers prioritise SaaS for its scalability, simpler integration, and operational efficiency. To capture this market share, traditional software companies are increasingly shifting to the SaaS model, as it replaces one-off sales with steady, recurring revenue streams. Beyond predictable income, SaaS provides easier scaling, faster product updates, and broader customer reach, which stimulates business growth.

Here, I’m going to explore the key architectural changes that traditional software must undergo to transform into a SaaS product. But before diving into the details, let’s take a quick refresher on what SaaS really is.

SaaS is a model where software is offered as a subscription or pay-as-you-go service rather than a one-time purchase. Instead of handling installations or maintenance themselves, users simply access the software online while the provider hosts and manages everything in the background.

To succeed as a SaaS business, traditional companies must move away from a project-delivery mindset and embrace service-delivery instead. This shift means focusing on three key pillars: how you land new customers, how you monetise them, and how you keep them coming back.

From a technical perspective, building a SaaS application goes beyond traditional software development practices. Engineers need to take into account SaaS-specific architectural dimensions like tenant identity, onboarding, and isolation. If these dimensions aren’t carefully designed, the outcome can be poor scalability, limited pricing models, and high operational overhead. Let’s explore how SaaS architecture influences business outcomes.

One of the main reasons software companies shift to a SaaS model is the opportunity for faster growth. SaaS simplifies scaling by streamlining customer acquisition and reducing operational costs. However, to sustain this growth, the application’s architecture must align closely with the business model across several key dimensions.

Tenant identity management defines how users are authenticated in a multi-tenant SaaS application. Poor implementation can limit your ability to serve specific market segments. For example, if your customers are organisations, your identity management system should be able to federate with their corporate identity providers. Beyond that, your identity management must also comply with local regulatory requirements.

Tenant onboarding is a core SaaS capability that directly influences customer acquisition. The design of this process often depends on the expected onboarding volume. For example, a company that onboards a single new customer every few years may need a very different approach compared to a business that onboards thousands of customers annually.

Tenancy model defines how tenant resources are deployed. In traditional software, applications are often installed separately for each customer. Many software providers shifting to a SaaS model move customers’ applications into their own environment but often leave the applications unchanged. This approach increases operational overhead and limits growth. To scale and reach new market segments, the tenancy model needs to be carefully aligned with the overall market expansion strategy.

Tenant operations are crucial for effectively managing a growing customer base. If poorly designed, operational processes can quickly become a bottleneck for scaling. To keep pace with growth, operations teams need robust tools to manage tenant resources and access tenant-specific telemetry. Without these tools, manual or ad hoc approaches can easily collapse under the weight of customer growth.

The cost of goods sold (COGS) plays a major role in determining profit margins. In a SaaS model, it includes the expenses associated with operating and maintaining the application. By optimising application architecture, SaaS providers can reduce operational costs and, in turn, increase profit margins. Let’s look at the architectural dimensions that influence COGS.

Tenancy model defines how resources are allocated among tenants in a SaaS application. Unlike traditional software, which usually serves a single tenant, SaaS must support multiple tenants within the same environment. If traditional software is simply lifted into a SaaS provider's environment without rethinking its tenancy design, it can lead to inefficiencies that reduce profit margins.

Tenant cost allocation maps SaaS application expenses to individual tenants, providing SaaS providers with a clearer view of profitability. By tracking and assigning infrastructure and operational expenses to each tenant, you can identify which customers are profitable and which are not. These insights guide cost optimisations, improving overall profitability.

Tenant decommissioning should be a core part of your data retention strategy. In a subscription-based model, customers can leave at any time, often leaving behind large volumes of data from their usage. Once they churn, that data is no longer tied to subscription revenue and quickly turns into a cost burden for the SaaS provider, that scales with every customer who exits.

One of the first challenges software companies face when moving to a SaaS model is securely hosting tenant applications on their own infrastructure. This shift transfers the responsibility of operating and maintaining the software to the SaaS provider. To meet these obligations, several architectural dimensions should be carefully considered when designing for compliance.

Tenant identity management is a bedrock of compliance in SaaS model. It governs how users are authenticated and authorised, ensuring that only the right users can access tenant resources. Strong identity management fuels tenant isolation and makes user actions auditable and secure.

Tenant isolation works closely with tenant identity management to ensure that every tenant can only access their own data and resources. This separation is essential for maintaining trust, as it prevents cross-tenant data leaks and safeguards sensitive information. It’s also a key factor in meeting regulatory requirements, which is especially important consideration for SaaS providers serving customers across different industries.

Tenancy model defines where each tenant’s data and resources are hosted. By setting the geographic location for storage and compute, it helps organisations address challenges such as data sovereignty and cross-border transfer limits. This is crucial for industries handling sensitive information, as it provides the necessary controls to meet legal and contractual obligations.

Tenant decommissioning ensures that customer data is handled responsibly at the end of a contract. This process involves securely deleting or archiving all tenant-related information, reducing potential security risks while proving compliance with legal and industry requirements.

The SaaS model shifts software pricing from one-time purchases to recurring subscriptions, creating predictable and steady revenue streams. To fully support this shift, the application’s architecture must adapt to the subscription- and consumption-based model. The following architectural dimensions highlight the key areas to consider when designing your new monetisation strategy.

Tenancy model defines how tenants' resources are allocated. SaaS providers can adjust deployment strategies to balance performance, cost, and security needs. For example, premium tenants can run on dedicated resources to ensure maximum isolation, whereas standard tenants can share resources to keep operational costs lower.

Tenant cost allocation ensures that resource usage costs are fairly allocated across the tenant base, supporting more effective pricing strategies. While assigning costs of dedicated resources is usually straightforward, shared resources require more effort to track and allocate accurately. The required level of detail and accuracy largely depends on the chosen pricing model.

Tenant consumption analytics give SaaS providers visibility into how each tenant uses application features. These insights help refine pricing models, for example, identifying which features drive the most value or where usage-based billing makes sense. Consumption analytics enable data-driven monetisation by aligning cost, value, and customer behaviour.

Metering and billing form the backbone of pricing model in SaaS. By tracking subscriptions and consumption data, SaaS providers can design flexible pricing models that align closely with customer value. This drives smarter monetisation and creates a significant competitive advantage.

Shifting to a SaaS model speeds up both time to market and innovation. Shorter development cycles and faster releases make it easier to respond quickly to customer and market needs. However, to fully realise these advantages, the application’s architecture must be tightly aligned with the SaaS business model. Let's consider a couple of architectural dimensions that directly influence business agility.

Tenancy model determines how tenants' resources are deployed within a SaaS application. Standardisation simplifies resource management, while shared resources enable rapid scaling and allow new tenants to be onboarded quickly without the overhead of provisioning dedicated infrastructure.

Development cycle with frequent releases allow SaaS providers to respond to market opportunities at high speed. Top players can ship features to production several times a day, enabling rapid reaction to customer feedback or competitive moves. In contrast, long release cycles introduce costly delays between spotting an opportunity and delivering a solution, leaving SaaS providers vulnerable to faster-moving competitors.

SaaS businesses typically grow in two ways: by acquiring new customers and by expanding existing services. Service expansion focuses on generating more revenue from existing customers, either by encouraging greater usage or by introducing complementary services. Below are a couple of architectural dimensions you need to take into account when designing your revenue expansion strategy.

Tenant consumption analytics enables SaaS providers to track how different customers interact with their product, helping them understand which features deliver the most value and which are underutilised. These insights support smarter business decisions by prioritising the most impactful changes and minimising wasted effort on low-impact areas.

Development cycle determines how quickly a SaaS provider delivers new features and services. A shorter cycle enables faster delivery, which helps the business stay ahead of competitors while continuously improving user experience.

Metering and billing provide the foundation for flexible pricing models, such as usage-based, feature-based, or tiered models. This ensures that SaaS providers can monetise new features and services more efficiently.

SaaS generates predictable revenue by shifting from one-time license fees to recurring subscriptions. To ensure this model is sustainable, SaaS providers must focus on customer retention and lifetime value, both of which are closely tied to customer satisfaction. The following architectural dimensions play a key role in maintaining a high level of customer satisfaction.

Tenant onboarding is the moment when customers first interact with your product, and it often determines how quickly they get value. A smooth and well-structured onboarding experience builds confidence and reduces friction. When done right, it accelerates adoption and builds foundation for long-term relationships.

Tenant operations give support and operations teams the tools to identify and resolve issues effectively, sometimes even before they affect customers. Early detection enables teams to act quickly and prevent problems from escalating. This proactive approach plays a significant role in driving customer satisfaction.

Development cycle defines how quickly a SaaS provider can deliver new features and services. In SaaS, customer feedback drives product development, so short cycles are essential to staying competitive. Rapid iterations not only address customer needs more effectively, but also strengthen loyalty and build long-term relationships.

Tenant health management provides ongoing visibility into customer satisfaction, ensuring potential issues are detected early. By tracking multidimensional customer health indicators (CHIs), organisations can uncover valuable insights into the drivers of satisfaction. This foundation enables proactive engagement and improves customer retention.

Even native SaaS applications can suffer from architectural gaps that limit their potential, while legacy systems often face even greater challenges. Aligning the architecture with your business model is essential for overcoming these challenges and achieving better performance. A strong SaaS architecture acts as a growth engine, driving efficiency and enabling sustainable, long-term success.

Valentine Nikonovich