The concept of centralized hosting of business apps dates back to IBM and other mainframe providers in the 1960s, who offered their data centers as sources of storage and processing power to large businesses. Centralized computing reached new heights in the 1990s with the advent of Application Service Providers (ASP) who offered businesses specialized apps and hosting services, reducing costs through specialization and centralization. SaaS is effectively a modern extension of the ASP model, where providers develop their own software that can be utilized and accessed by multiple users and businesses via a thin client, often a web browser (Wikipedia).
This contemporary distribution model is gaining steam quickly in this age of Free and Open-Source Software (FOSS). The ever-increasing reliability and availability of the Internet has forced change among organizations and VARs who practiced traditional methods of software distribution in order to remain relevant. Freely available and reliable systems and softwares have been a driving force in the reduction of cost of traditional software, as household names such as Microsoft or Google are forced to offer a comparable service or bid adieu to a healthy chunk of the market.
Traditional software is typically offered as a perpetual license with a high up-front cost and may include a fee for support, while SaaS applications are generally priced using a subscription fee based upon the number of users, and as such tend to have a lower setup cost than an equivalent enterprise software does. The caveat is that user data in a SaaS model exists within the providers servers, leaving opportunities for business to be charged on a per event/transaction basis, and the security of said data outside of company hands. The key to SaaS' s growth in today's market, however, still lies within the providers ability to provide a price that is competitive when measured against in-house or traditional softwares.