The SaaS model works, infact it works really well. This is a great time to be selling SaaS because the TCO (total cost of ownership) tends to be much less than that of standard licensed software. (http://www.readwriteweb.com/archives/is_saas_cheaper_than_li...)

The question you need to answer is "how big the opportunity is for your application?" The number of paying customers at other SaaS companies is irrelevant unless you're playing in the same market and you expect to steal their customers. Which by the way should be a valid strategy if you believe that your application is going to be better.

Figure out what you're replacing, guess the % of that market that you can own and decide if it's big enough for you to survive and thrive in.