2020 SaaS Market Overview


The article below is taken from SaaS Mag Issue 4. To order your free copy, click here


Before the COVID-19 pandemic swept the globe, 2020 was shaping up to be a year of both strong growth and innovation. Although the effects of the virus have created uncertainty for global markets, it remains true that SaaS has created real value for customers over the years. The variety in SaaS product has allowed companies to address a vast number of issues that previously required a great deal of manpower and technological know-how. By reducing the time it takes to set up a person or business with a software solution, SaaS has paved the way for consumers to more easily sample solutions and more effectively choose products.

This has seen a proliferation in SaaS startups and increased competition among service offerings. As companies compete to stake out current and future niches in the software market, the increased competition has driven innovation in all sectors of the cloud market. The end of 2018 saw numerous prominent tech and business pundits predict that SaaS adoption was unlikely to slow down in 2019, and Gartner predicted in its midyear briefing that SaaS adoption rates would continue steadily into 2020. In this report, we look at the key developments in SaaS during the past year as well as at predictions of how SaaS might change in 2020.

Tech stocks performance

A global recession, which appeared to be a minimal risk before the advent of the novel coronavirus, is now a reality, although its severity and duration remain unknown. The pandemic has already slowed business internationally, with governments forced to make difficult decisions regarding the health of both their citizens and their economies. Additional factors are uncertainty around the U.S. election, continued threats of trade wars, and drawn-out Brexit negotiations–all of which combine to make markets unsteady. But the tech sector continues to offer an alternative investment safe haven.

Media net advertising revenue had been set to grow by more than 6% in 2020, but the effect of market uncertainty remains to be seen. The isolation caused by coronavirus is likely to benefit Netflix, as, according to Nielsen, streaming services are seeing a 60% spike.

Companies like Netflix, while facing some strong competition, are looking at a market set to expand rapidly over the next few years as more and more households switch to an over-the-top (OTT) model of media consumption. AI investments also have a positive long-term outlook despite short term stagnation as transition costs and capital expenditure eat into gains. All these cases point to the very real opportunities to be found in the tech arena in 2020.

5G technology is also seen as a driver of new growth for tech companies in 2020, but the major effect of this technology will be felt by businesses that aim to solve issues related to 5G performance. The technology struggles indoors more than 4G did and requires more physical antennas.

By keeping abreast of the dynamic tech landscape, investors will be able to take advantage of the strong growth rates on offer while avoiding the various drawbacks associated with rapidly growing, adventurous technologies.

SaaS stocks have strong prospects amid global concerns

 Space to grow

Since cloud services are integral to many global businesses, the growth of the cloud-services market is likely to grow 20% in 2020 alone. However, the market is still in the low $100 billions and seems small compared to the trillion-dollar software market. This will allow for high growth rates to be sustained for many years. Many business leaders’ initial concerns regarding data security and reliability seem poised to decrease as fewer businesses are likely to prioritize home-grown software in favor of turnkey cloud solutions. All of which will help counteract negative market forces.

5G’s impact on SaaS will be global

The adoption of 5G, particularly in emerging economies, could have a big impact on the adoption of SaaS technology. While access to the internet still creates issues for many countries (particularly in a business context), the creation of wireless 5G networks could allow for businesses and individuals (who already lack the facilities for in-house service solutions) to onboard to popular SaaS products at a rapid rate. The quick development of user- friendly mobile interfaces for some of the world’s most prominent SaaS products will help. While many offerings already have intuitive mobile experiences, some – particularly in the analytics space—are sorely lacking. It is expected that 5G will cover 65% of the world’s population by 2025.

SaaS companies weathering supply chain issues

Many tech companies could suffer from the fallout from the trade war between the U.S. and China, but it will mostly affect those involved in manufacturing or those requiring entrenched hardware. Many tech companies have manufacturing arms in China which could be affected by any ongoing disruption. SaaS companies are unlikely to feel the pressure, and in some cases could even capitalize on the resulting hardware concerns.

Quinn Bolton, a semiconductor expert from Needham & Company, told CNBC: “Semiconductor suppliers have relatively high ‘ship-to’ revenue exposure to China. This high exposure to China puts the semiconductor sector at greater risk to the escalation in the U.S.- China trade war than many other segments of technology.”

D.A. Davidson’s Rishi Jaluria feels extremely confident about SaaS companies’ ability to weather the storm of an economic downturn.

“I think a lot of investors are starting to look at, at least SaaS companies, as being a little bit more resilient to an economic downturn or an economic recession,” Jaluria told Yahoo Finance last July. “We did this analysis a few months back. If you look at the 08/09 recession companies like Salesforce and NetSuite and Red Hat, all subscription software companies, all held up really well through what was a really deep recession. And I think investors can look at the data now and say: ‘Even if there’s a slowdown coming up, we think these subscription software companies will hold up just fine.”

Industry heavyweights will continue to dominate

Companies like Microsoft will help to bring about the rapid onboarding of SaaS customers. Due to upstarts like Zendesk, Atlassian, and Splunk, traditional software vendors are rushing to push their own SaaS products and suites onto their legacy customers. The effect of this will do the bulk of the heavy lifting for the SaaS industry. A fifth of SaaS revenue worldwide still comes from Microsoft. That company’s ability to leverage its brand name to make global business comfortable with cloud-based services, while pulling back from the full-stack service model used in the past, will create a healthy SaaS environment.

Industry transformation

One of the key drivers of SaaS stock growth in 2020 and beyond will be the drive from retail, hospitality, financial, technology, and communications and healthcare industries to transform their legacy IT structures. SaaS products offer these industries a way to update their services without overhead costs. The resulting software can often have a greater chance of being adaptable to the industries’ needs in future, especially if single solutions are widely adopted within an industry (which is the norm). This scenario will allow SaaS companies to better focus on updating their products for industry-specific needs, while offering these updates in real time. All of this will build towards healthier IT ecosystems and industries that are dependent on their SaaS solutions long-term.

$116 billion expected in SaaS revenue in 2020

The rapid rate of adoption, along with the sheer size of the enterprise software market still left to convert to the cloud, continues to buoy SaaS market revenue predictions. Gartner has predicted $116 billion of revenue in 2020, noting that by 2022 up to 60% of global organizations will use an external service provider’s cloud-managed service offering. Of the various subsets of the SaaS industry, business intelligence, supply chain management, project and portfolio management, and enterprise resource planning (ERP) will likely see the fastest growth. Five key vendors still dominate the SaaS Market—Microsoft, Salesforce, Adobe, SAP, and Oracle. Together they make up more than 50% of total SaaS revenues. Although this market dominance is unlikely to see any major change in 2020, it is the “born in the cloud” enterprises that will grow fastest and draw investor attention.

SaaS Companies Under the Microscope

To get a better sense of the state of the market pre-coronavirus, here is a look at some of the most successful companies and how they were faring in early 2020.

Dropbox

Strong revenue figures in 2019 are likely to see Dropbox through any post-IPO blues. Unlike some other high-profile tech companies, Dropbox has healthy earnings on top of its growth. The file-sharing space remains competitive, however, so 2020 won’t be worry-free.

Palantir

This data-mining startup and brainchild of Peter Thiel has made headlines by becoming the go-to company for U.S. government agencies like the National Security Agency (NSA) and the Department of Homeland Security. After its IPO stalled last May, it began searching for private funding, with an IPO talked about for 2023. It has been accumulating government contracts as well as negative attention for its work for ICE (the U.S. Immigration and Customs Enforcement agency).

Anaplan

Anaplan provides cloud-based collective planning platforms designed to help connect organizations and people to facilitate faster decision-making. Good financial results in 2019 and the release of its “intelligent forecasting” feature have helped mark it as a SaaS business to watch. Its mission to help sales executives drive growth in the face of economic slowdown could be a formula for success in an uncertain market.

Slack

After IPO-ing in June 2019, Slack saw its share prices slide as buzz around the so-called fastest-growing SaaS ever faded, and competition arrived in the form of Microsoft Teams and a yet-to-be-released Google product. Slack’s future seems hazardous, but many observers remain optimistic—their software has already become synonymous with business communication. The ongoing debate about workspace messaging apps and their utility will dominate Slack’s future growth prospects.

Autodesk

Autodesk, the computer aided design (CAD) company, is continuing to see stock growth, with a large boost toward the end of 2019 and into January. AutoCad was the standard tool for designers for decades, and Autodesk is still seen to have a large competitive advantage due to its reputation as an industry-standard product. Partnering with companies like Virgin Hyperloop One is also helping raise Autodesk’s profile.

Avalara

This company helps small to midsize businesses calculate and file their sales taxes in the cloud. Less flashy than some other SaaS businesses, it saw a successful IPO in 2018. It has had strong Q2 earnings in 2019 and its stock prices were trading at all-time highs in early 2020. The property and legal industries have always been paper-intensive. Avalara first arrived in 2006 and has since worked to provide easier filing and access to crucial documents in these industries. The digitization of documents still has major room for growth in these industries, despite Avalara already seeing heavy growth. The stock price was up 76% over the year to August 2019.

Appian

Appian facilitates the ability of customers like Aviva, Melbourne Airport, and Anglian Water to build powerful enterprise applications quickly. The company’s stock price has soared nearly 50% since last August, but pulled back in February and early March. Appian still faces heavy competition from Salesforce and ServiceNow.

Spotify

With growth in subscribers and monthly active users, Spotify has a lot to be happy about. Initiatives such as its Storyline feature and the custom radio station app Stations had a positive impact in 2019. Spotify has spent heavily on podcast content, diversifying its profit streams and making many commentators think that the company could successfully defend itself against the advance of Amazon Music.

DocuSign

DocuSign’s customer base grew 24% year-on-year in 2019, and revenue was up 40% at the end of Q3. The company appears to believe its market penetration is currently at 5%, and the digital signature space has high growth potential. Companies growing at this rate often experience profitability issues, but analysts are predicting DocuSign will grow earnings 75% in fiscal 2021. Strategic acquisitions have done much to bolster its prospects.

SaaS and the Growth of AI

It is hard to avoid conversations around AI in the technology space, but there is continuing confusion as to what exactly AI constitutes. While the number of companies building AI technology and utilizing the technology increases, the definition of AI remains loose. Many businesses are happy to label their technology as being powered by AI when in reality the impact is minimal and their applications are heavily supported by humans. SaaS and AI are often painted as being on a collision course, with AI companies capable of creating technologies that will perform the duties of SaaS applications and platforms. Many believe that in the future, applications will be replaced by question-and-answer-based voice applications, which would depend on complex AI to formulate responses. The reality for SaaS companies is probably less bleak than some imagine.

Established SaaS companies that have built solid customer bases can often act as loading bays for AI technology, as seen with some of the businesses discussed here. AI acquisitions like those by Anaplan and Salesforce show that AI and SaaS are able to complement one another. We are already seeing AI tools, such as automated meeting schedulers, customer service bots, and data cleaning services, taking the tedium out of many office roles, freeing up people to work on more pressing tasks.

What other advantages will AI bring to SaaS in 2020 and beyond?

Sales boost

Sales teams tend to spend far more time qualifying leads and doing simple administrative tasks than they do closing leads. The amount of time that could potentially be saved by having AI check leads against long and complex lists of criteria could give sales teams a much-needed boost. If there is any doubt on this, Salesforce has claimed that successful sales teams are 4.9 times more likely to be using AI than unsuccessful ones.

Marketing automation and campaign evaluation

A major area in which AI could innovate and save working hours is in the less creative marketing activities. Choosing when to respond to emails, creating tailored responses, and conducting customer surveys are just a few things AI could help with. With so much to choose from, and AI already being used to save marketers time, we can expect marketing departments to be positively affected by the rise of AI. Not having to spend so much time reporting on the success (or lack thereof) of a campaign would probably justify a SaaS spend in one fell swoop.

Personalization

AI can keep tabs on a person, see what content they have interacted with, and match it against any other profile data. These activities can allow the right AI-endowed SaaS tools to create personalized experiences for customers, only showing them what will keep them engaged and converting. Personalization of the online experience has long been touted as the next step in website evolution, and it could be AI that allows for an unprecedented depth and complexity in the personalization process.

Predictive analytics

This is perhaps one of the most discussed use cases of AI. The idea that AI will be able to remove the job of analytics specialists and produce its own prescriptive reports is a holy grail for entrepreneurs. To be able to predict, even in broad strokes, what will happen to a business based on the data it currently collects is the sort of competitive advantage that can’t be ignored. When people talk of a fourth Industrial Revolution, it is technology like this that they are referring to. SaaS analytics and data visualization tools using AI to this effect will have an extreme competitive advantage.

The competitive edge

One question that arises from the growth in AI technology is how fast the top five cloud companies are able to react to new innovations. While smaller SaaS companies may strive to build a product that makes use of AI, a company like Microsoft or Amazon is able to build so-called freemium versions of the same tools. This need for the Big Five to cover their bases and watch out for all emerging opportunities is suffocating some smaller SaaS businesses. The ability of these businesses to invest heavily in AI and develop a competitive advantage over otherwise innovative SaaS competitors can be a cause of concern for SaaS entrepreneurs, although growth in larger tech companies can breed confidence in the SaaS market as a whole. To avoid a larger company turning your niche product into a free add-on (see how Google Data Studio is threatening the data visualization market), you need to ensure that you have a genuine competitive edge and unique IP.

Market Overview in Brief

Gartner is continuing to make strong predictions for growth in the SaaS industry, with revenue of $354.6 billion predicted by 2022. The agility of the SaaS model and the ease of access and onboarding for many SaaS products is leading to both young and established companies exploring cloud-based software options. There is still much room for growth in the industry as the reliance on more traditional software options continues to dominate many industries. If 2019 was a breakout year for SaaS, then 2020 will be the year that SaaS refines itself. With such a large market in which to operate, many SaaS companies are seeing the benefits of narrowing their scopes and targeting more industry-specific pain points. See below for some of the ways SaaS businesses are starting to get smarter.

Personalized SaaS

Being able to provide white-label SaaS products to customers is one thing, but the ability to tailor entire tools and interfaces to client needs will only help to reduce customer churn. However, many SaaS companies will run afoul of over-customization. This can put a heavy strain on developers and suck resources from other departments. Customization options can often over-complicate products, so the SaaS businesses that will benefit best from a flexible product offering will understand where to cap these feature options. In 2020, you can expect the best SaaS companies to deploy more strategic surveying, bringing their customers into the conversation about feature development. In this way, the amount of personalization required to retain customers can be reduced. This kind of emphasis on the customer feedback loop is growing worldwide, not just in SaaS. From local community groups to architecture firms, the benefits of democratized development are being felt.

Transaction-based pricing

One of the most talked-about changes in SaaS is the notion of transaction-based pricing models. SaaS has brought the monthly and annual subscription models to the forefront of the software world, and businesses have been happy to enjoy the advantages that this model has to offer. But “shelfware” is still a problem for many businesses. Unused software licenses are a heavy burden on the business world, and this problem can potentially be compounded by the cloud-based subscription model. If more SaaS companies billed their customers on a usage-only basis, they could find themselves increasingly popular with businesses or industries prone to overzealous software spending. Many SaaS companies, most notably Stripe, are already taking advantage of this model, and continued proliferation is likely.

Improved emphasis on data security and client data control

The issues around data security, a hot topic in 2019, will continue into 2020, with SaaS companies looking for ways to quell stakeholder fears about data access. By its very nature, SaaS is at odds with data security, and major hacks and data leaks have made enterprise SaaS users warier about where their data is ending up and who has access to it. To combat these concerns, Slack introduced Enterprise Key Management to their platform, giving their users the choice to encrypt their data with their own special keys. This type of development could help to increase the rates of SaaS adoption as more businesses feel comfortable about handing sensitive data over to the cloud.

Artificial intelligence

AI has been popping up in SaaS products in varying forms for a while now. While some instances seem less like AI and more like complicated customer service workflows, this year should see the appearance of more AI features with significant consumer benefits. There are four main areas in which AI is likely to benefit. In data security, AI is likely to be able to identify threats to data more quickly than ever before. AI’s ability to notice patterns of behavior and activities that humans cannot means that issues around SaaS and cloud-based security could reduce overtime, not increase it.

Regarding speed: AI can help to speed up processes that might have required manual data sifting. The answering of questions in a customer support capacity, and doing it in a timely manner, is an area where companies are already seeing improvements. And in the area of personalization: By utilizing natural language processing from voice-controlled applications, some SaaS businesses will be able to better tailor the customer journey and experience to individual customers. With automation, the ability to automate processes such as customer onboarding and customer service chat will free up more SaaS companies to focus on product development tasks. In 2020, we will likely see more SaaS businesses with automated chatbots, some of which may appear convincingly human.

The rise of micro SaaS

Increased competition between SaaS companies and the resulting fragmentation of SaaS services has caused many smaller SaaS companies to exploit gaps in service offerings. Micro SaaS refers to SaaS add-ons that are created to complement existing SaaS solutions or to resolve minor software needs. As more developers see the benefits of working alone or in a small team, the idea of developing quick solutions with very little overhead becomes appealing. As more major SaaS products appear, and they are able to interface via APIs, more opportunities to fill in gaps in service will appear. Currently, apps such as Grammarly, Sprout Social, and Boomerang offer good examples of this growing niche.

Vertical SaaS

As the SaaS industry expands, more SaaS businesses are realizing that they can make both strong profits and important contributions by focusing on specific industries. Many SaaS companies have tried to create tools that can be used in a wide variety of business contexts—for example, Slack’s messaging service can be utilized by an almost limitless array of industries. Emerging entrepreneurs, however, are noticing the large profits and lower competition in areas such as healthcare, education, insurance, and hospitality. There are also advantages to being seen as a software leader in a niche industry; whole industries often rally around the same standard software.

OpenTable is an example of SaaS making a strong impression in the restaurant booking niche. The restaurant industry was relatively slow to leverage the power of the internet, and this SaaS company has leveraged quick, reliable booking services to expand quickly. Textura is another example. This company focused on construction management and was bought by Oracle in 2016 for $163 million.

Some of the other great advantages of operating in a better-defined niche are the ability to use more industry-specific customer data and intelligence, the ability to upsell more easily due to better industry-specific knowledge, the better performance of products that are industry-specific, and better data governance and industry-specific compliance.

Conclusion

SaaS, particularly in the small to mid-market, has continued its winning streak and the trends mentioned here should continue to invigorate the space—not just in 2020 but for years to come. Both vertical and micro SaaS businesses are set to proliferate this year, and we will see developments in how SaaS companies look to competitively price their services. The storms expected to buffet the wider economy may just pass over the SaaS space as investors seek alternative investment strategies.

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