On-premises software is software that is purchased under a traditional license agreement and physically installed directly on one or more computers at the purchaser’s facility. Licenses for on-premises software are typically priced based on the number of users; in some cases, duration of the license and the level of functionality or included support is a factor as well. A good example of on-premises software that many PC users are familiar with is Microsoft Outlook, for which you pay for a license, download the executable file to your computer, install it, and run it locally.
The Software as a Service (SaaS) model of licensing and delivering software has grown significantly in the last 10 years for virtually all types of software, and shipping and selling platforms are no exception. SaaS software is hosted by the provider and typically accessed by the user over the internet using a web browser. As with on-premises software, licensing is typically based on the number of users, duration, and level of functionality and/or support. SaaS licenses, however, are very often structured as monthly or annual subscription fees. A good example of a basic SaaS product is Gmail, which, in contrast to Microsoft Outlook, runs on a server in the cloud and is accessed via a web browser.
Generally speaking, on-premises software offers more customizability at the expense of higher maintenance and infrastructure requirements for the buyer. While SaaS software may offer less customizability, maintenance and infrastructure requirements are virtually non-existent for the buyer.
The following illustration shows key differences in the lifecycle of on-premises vs SaaS software: