SaaS-based applications are beginning to dominate their respective markets, but a confluence of factors could position these vendors to expand the boundaries of their markets even wider.
In the next few years, a handful of Software-as-a-Service companies, also known as “SaaS,” have an opportunity to grow faster and at a stronger rate than historical comparisons would suggest.
Positive feedback loops are ramping up around SaaS companies, enabling the larger players to amass greater share of scale.
Although these SaaS-focused companies are swiftly growing to dominance within their respective markets, these companies could also be in prime position to expand further by consolidating the areas they operate in and redefining the boundaries of their markets.
This opportunity is driven by three key factors: expanding markets beyond their current use cases, building a virtuous circle of data and scale, and a tilting the scales from best-of-breed specialization towards integrated suites of products and services.
SaaS as a business model creates a much bigger market than traditional on-premises software. Traditional software doesn’t involve running data centers or selling the databases where information is stored. It also doesn’t sell the server, storage or networking equipment. In contrast, the SaaS players sell an entire bundle of functionality to end customers beyond just the core application logic.
Additionally, the extensibility of many SaaS applications enables companies to reach customers outside their initial core client. As an example, customer service software for a private sector company could be adapted for use by government agencies, creating new avenues for revenue.
Historically, the software market has seen a balance between best of breed vendors bringing to market the newest functionality to target specific problems, and suite vendors who have taken functionality and integrated it into one platform, with a common underlying set of data.
Ultimately, all customers want their data and workflows to be integrated. However, businesses also don’t want to miss out on new functionality, because that is where potential efficiencies lie.
With SaaS models, the scales tip towards the suites. Because the SaaS delivery model involves one set of code run out of a cloud-based environment, it removes a lot of the frictions towards integration that older systems suffered and enables a much faster pace of innovation, closing the gap on best of breed solutions.
Positive feedback loops are also ramping up around SaaS companies, enabling the larger players to amass greater share of scale.
Software solutions with the most functionality tend to draw more customers. Because of the larger customer base, systems integrators and technology partners favor these solutions, which then creates an ecosystem. This results in a positive feedback loop where customers draw vendors, increased vendors bring more functionality to the platform, which in turn draws more customers. Now, the positive feedback loop in these systems is coalescing around the biggest vendors in this SaaS space.
Bottom line: Each of these three factors taken together create additional runway for SaaS vendors. Even better, these companies have a much smaller share of the market than many people believe, alongside a market opportunity much larger than many have imagined.