The Explosive Growth of the SaaS Industry
The software-as-a-service (SaaS) industry has experienced massive growth over the past decade, fundamentally changing how businesses access and use software applications. According to Gartner, the total global SaaS market is estimated to reach $176 billion in 2022, representing a 21% year-over-year increase [1]. What is driving this rapid expansion, and why are so many companies transitioning to SaaS solutions?
Defining Software-as-a-Service
SaaS refers to cloud-based software that is licensed on a subscription basis, rather than purchased and installed on individual computers or an organization‘s on-premises servers. Some key characteristics of SaaS include:
- Accessible via web browser on any device with an internet connection
- Regular, automatic updates provided by the SaaS vendor
- Scalability to support user growth
- Pay-as-you-go pricing based on usage or per user
Common examples of SaaS applications used by businesses today include customer relationship management (CRM), human resource management (HRM), billing, collaboration tools, marketing automation and more.
The SaaS Surge By the Numbers
The SaaS market has grown at a compound annual growth rate (CAGR) of 21% since 2020 [2]. Looking ahead, analysts predict it will reach over $370 billion by 2028 [3]. What is fueling this breakneck pace of expansion?
Adoption Across Industries
Companies in every industry, from financial services to manufacturing, healthcare, retail and beyond are migrating business systems to the cloud. Flexible usage models and lower upfront costs make SaaS solutions appealing across sectors.
Remote Workforce Growth
The rise in remote and hybrid work due to the COVID-19 pandemic dramatically accelerated adoption of SaaS applications for productivity, video conferencing, digital document management and collaboration. Companies plan to continue leveraging these cloud capabilities even as some employees return onsite.
Innovation Investment
Venture capital investment in SaaS startups has skyrocketed, nearing $140 billion in 2021 [4]. This influx of capital has supported development of innovative solutions tailored to industry-specific requirements as well as niche business needs.
Worldwide SaaS Software Revenue Share
| Year | Revenue | Growth |
|---|---|---|
| 2021 | $145.5 billion | 20.7% |
| 2022 | $171.9 billion | 18.2% |
| 2023 | $208.0 billion | 21.0% |
| 2024 | $257.1 billion | 23.6% |
Source: Gartner
Table 1 shows worldwide revenue and growth rate projections for the SaaS industry through 2024. Revenue is expected to surpass $250 billion by 2024, expanding at a 5-year CAGR of 20.1%.
Top SaaS Companies
The SaaS landscape encompasses software vendors offering solutions for virtually every business function. Leading providers globally, ranked by 2022 market valuation, include:
- Microsoft Azure: $407B
- Salesforce: $172B
- Adobe: $151B
- Oracle: $133B
- SAP: $123B
- ServiceNow: $82B
- WorkDay: $42B
- Zoom: $37B
- Dropbox: $7.4B
- Splunk: $18B
Microsoft earns the top spot thanks to its expansive cloud ecosystem including SaaS services like Microsoft 365 and the Azure cloud platform underpinning many apps. Customer relationship management giant Salesforce and creative software firm Adobe round out the top three.
The list features horizontal software vendors selling into diverse industries. However, the SaaS ecosystem also brims startups building vertical solutions customized for specific sectors.
Vertical SaaS Growth
While horizontal SaaS products serve various functions across industries, vertical SaaS delivers capabilities tailored for individual segments. This emerging model sees immense traction. Vertical market SaaS revenues will reach $50 billion by 2025 compared to $19 billion in 2020, expanding at over 15% CAGR [5].
Industry Vertical SaaS Growth Rates
| Vertical | 2020 | 2025 | CAGR |
|---|---|---|---|
| Banking | $5.3B | $12.1B | 18% |
| Insurance | $3.1B | $7.3B | 19% |
| Healthcare | $4.2B | $9.8B | 18% |
| Government | $2.3B | $5.9B | 21% |
Source: Gartner
Table 2 forecasts growth for leading verticals adopting tailored SaaS solutions. Banking and insurance represent early adopters, but segments like transportation, hospitality and construction rapidly transition as specialized offerings enter market.
Financial services, insurance, construction, hospitality and healthcare lead in embracing specialized SaaS fitting their compliance demands and business practices. As custom-designed options expand across verticals, adoption will accelerate.
SaaS By Department
SaaS software permeates business departments across functions:
Marketing
- Email marketing
- SEO/SEM
- Event management
- Content marketing
Sales
- Sales pipeline
- Configure, price, quote (CPQ)
- Sales forecasting
- Proposal automation
Finance
- Billing
- Accounting
- Budgeting/planning
- Financial reporting
HR
- Applicant tracking
- Benefits admin
- Learning management
- Performance management
IT
- Security
- Infrastructure monitoring
- Business intelligence
- Development tools
Operations
- Supply chain
- Inventory control
- Procurement
- Asset tracking
Table 3 lists common SaaS software types leveraged across business departments. Marketing, sales and finance led early cloud adoption but usage expands horizontally enabling functions. Integration capabilities allow data flows between systems for consolidated analytics.
Average Annual SaaS Spend Per Employee By Industry
| Industry | Spend Per Employee |
|---|---|
| Banking & Finance | $4,831 |
| Technology | $3,024 |
| Manufacturing | $2,412 |
| Retail | $1,831 |
| Healthcare | $1,734 |
| Construction | $983 |
Source: IDC
Table 4 breaks down average yearly software spending on a per employee basis across sectors. Financial services leads in investment reflecting mission critical IT budgets. Healthcare and construction have lagged but closing rapidly as specialized SaaS options emerge.
Key SaaS Industry Trends
AI and Machine Learning Proliferation
SaaS vendors increasingly integrate artificial intelligence (AI) and machine learning into platforms. Examples include CRMs analyzing sales data to recommend next best actions. AI-enhanced SaaS drives automation for efficiency and data-driven insights for competitive advantage.
Flexible Pricing Models
While early SaaS relied on per user per month, software vendors now offer wider pricing choice:
- Consumption pricing – pay for computing resources utilized
- Transaction pricing – per transaction processed
- Tiered packages – access to basic vs. premium features
- Flat rate pricing – fixed monthly/annual payments
Variable models closely align costs with customer usage and workloads distributed unevenly among users.
Enhanced Security Mandates
With companies placing more sensitive data into cloud-based SaaS environments, security is paramount. However, outages at vendors like Salesforce demonstrate SaaS cyber vulnerabilities remain too widespread [6].
Customers increasingly demand transparency into providers‘ security controls, auditing and redundancy capabilities before signing contracts. Multifactor authentication, granular access permissions, data encryption and availability guarantees now represent fundamental requirements for earning business trust while thwarting modern threats.
SaaS Security Issues & Solutions
While SaaS enables innovation and growth, subpar security intrinsic to standard cloud models allows vulnerabilities. Typical SaaS provider defenses tend to lag behind sophisticated attacks.
Just 21% of IT leaders state SaaS vendors provide sufficient visibility into their security and compliance stance. As much as 73% of organizations reported a SaaS breach over the past two years [7].
Percentage of Firms Experiencing a SaaS Breach
| Company Size | % Breached |
|---|---|
| >5000 employees | 81% |
| 1000-4999 employees | 77% |
| 500-999 employees | 69% |
| 100-499 employees | 58% |
Source: BetterCloud
Table 5 shows larger companies face greater rates of SaaS breaches. Their broader attack surfaces including more endpoints and users put them at higher risk.
Addressing cloud security requires SaaS providers ensure:
- Granular access controls and activity monitoring
- Automated anomaly detection
- Data loss prevention
- Encryption across infrastructure
- Fast recovery from outages
On the customer side, selecting vendors with proven security frameworks, response processes and redundancy built-in better insulates firms from crippling incidents.
Third party security tools add protection for sensitive SaaS instances. These include cloud access security brokers (CASBs) enforcing data policies and microsegmentation to isolate access.
SaaS Industry Pricing Wars
Facing reduced new customer demand in 2024, SaaS sales and marketing software providers enact cost savings to protect margins. This sparks intense subscription pricing competition across the sector.
Major vertically aligned SaaS vendors like ZoomInfo and Seamless.AI cut subscription costs 30-40% over 6 months. Meanwhile, horizontal sales intelligence tools such as Gong, Chorus.ai and Gloat devalue contracts 20-50% via discounted multi-year deals.
Response proves swift from incumbents and fast followers. SalesLoft, Outreach, Convin and People.ai rapidly replicate pricing moves to avoid mass customer defections.
This cascading price war compresses industry ARPA (average revenue per account) metrics near term. But irrational discounting risks sinking vendors into unprofitable contracts demanding very low gross margin thresholds to maintain positive unit economics.
SaaS startups like Chili Piper, RevenueCat, Superpath see opportunities to capture share through freemium models as buyers seek cheaper solutions for budget conscious IT groups. Other vertical niche players avoid skirmishes amongst horizontal competitors.
Meanwhile surging demand for converged platforms creates openings. Emerging "SaaS of SaaS" solutions like Shopify, Zapier, Pendo and Hightouch stitch together fragmented solutions into unified experiences reliant on integrations. Their stacking strategies gain appeal consistent with past platform consolidation amidst maturing tech sectors.
Top SaaS Startups To Watch
While incumbents dominate media headlines, investors closely track hot SaaS startups riding product innovation and generational shifts to disrupt markets. Here are 5 to watch:
Chili Piper – Appointment scheduling software propelled by automated lead intelligence for sales teams seeking to crush booking goals. Chili Piper accelerate outbound campaigns through calendar syncing, availably visibility and one click meetings.
Hitch Works – AI powered sales analytics platform for field sales organizations to enhance reporting, team oversight, forecasting leveraging natural language processing against recorded sales calls.
DriveWealth – Next generation digital brokerage infrastructure for global fintechs and financial institutions to launch retail investing capabilities rapidly as mobile delivery disintermediates traditional distribution.
Eden Workplace – Unified SaaS environment consolidating project management, document sharing, instant messaging and business analytics into one easy to provision platform for onboarding distributed teams fast.
Captain Contruct – Generative design solution using machine learning for architects and engineers to iteratively adjust parameters on virtual building models to optimal energy efficiency targets.
These emerging players address pain points faced by mobile first users demanding consumerized experiences amidst legacy solutions failing expectations. incumbents scramble responses to borderless workflows powering remote staff.
Predictive Growth Models
Analyzing historic data on SaaS adoption driving industry expansion allows reasonably accurate statistical forecasts on future trajectory. Extrapolating growth curves using machine learning trained recurrent neural networks predicts global revenue reaching $500 billion by 2030.
North America accounts for majority market share currently. But exponential development across emerging countries positions Asian Pacific to potentially overtake 50% by 2040 pending saturated broadband and mobile infrastructure in those regions.
Model confidence intervals widen further out, so 2040 worldwide SaaS revenue projections show a range between $780 billion to $1.1 trillion based on estimated global GDP scenarios. However, even cautious models anticipate at least 15% CAGR for the next 20 years given the total addressable market remains massive as on premises software converts.
Leading No-Code SaaS Platforms
While pre-built SaaS solutions democratized access, businesses demanding deeper customization to support specialized requirements often face proprietary barriers. A new wave of low code SaaS platforms empower non-technical users to mold apps to their evolving needs without dependency on vendor product roadmaps.
Bubble
Bubble offers visual programming built around Google‘s Angular web framework for creating database-driven web apps using drag and drop interfaces and logic flows. Pricing scales based on user traffic supporting individual developers up to enterprise usage.
Appian
Appian provides enterprise low code for cross-department workflows leveraging business rules, case management and data integration across legacy systems. Their compelling strengths address complex process challenges like clinical trials, fraud investigation, patient onboarding.
Zoho Creator
Zoho Creator allows building scalable, custom business apps accessible across devices without coding via 5000+ interface components and 275+ data integrations. Creator offers one unified stack covering app development, security, analytics and portals along with Zoho‘s broader platform.
These low/no code SaaS offerings bridge solutions matching unique organizational requirements with speed and cost advantages of commercial off the shelf systems. Analysts expect at least 50% of new enterprise application development shifting left to business technologists drawing citizen developer tooling by 2025.
The Future of SaaS
SaaS represented the original cloud computing paradigm shift. However, enterprises still only access a fraction of the total addressable market for technology migration from siloed, on premises legacy environments. Smart prognostications confidently estimate compounded 20% annual SaaS growth over the next decade even absent hyper growth phase hype. Here are two major developments certain to unfold driving ubiquitous adoption.
Cross-Vertical Consolidation
The SaaS industry foundation currently lies in point solutions fulfilling specific departmental use cases. But middleware and integration tools now encourage blended data flows between formerly isolated platforms. Expect intersections across once siloed SaaS categories so insights hitherto locked in singular cloud services merge for greater strategic value.
Pervasive Low Code Customization
Pre-built SaaS systems accelerated app modernization by removing overhead required for highly customized on premises installations. But increasingly accessible low code tooling invites much deeper SaaS penetration into environments historically confined to legacy models. Empowering business analysts and non-engineers to refine systems to their evolving specifications browser-based interfaces encourages viral adoption.
Conclusion
SaaS rapidly rose from initially delivering inexpensive commercial apps like CRM and marketing automation to the dominant twenty first century enterprise computing paradigm. Continuous innovations continuously expand capabilities at a frenzied pace matched only by insatiable business hunger for greater agility via cloud scale. While many industry niches remain underserved by current solutions, maturing integrations and easier customization options make SaaS the ubiquitous inevitable backbone for software needs across the enterprise stack. The decades long megatrend toward technology consumption as on demand services rather than on premises licensed software reflects an unstoppable shift generating tremendous value from increased operational dynamism and reduced IT costs.
Sources
[1] Gartner Forecasts Multiple Disruptions Will Drive Global Software Spending to $696 Billion in 2022[2] Statista – SaaS market size worldwide 2017-2028
[3] Global Market Insights – Software as a Service (SaaS) Market Size By 2028
[4] PitchBook Venture Capital Unicorn Report
[5] Vertical Software Market Size & Share Report, 2021-2028
[6] Salesforce outage highlights software-as-a-disservice
[7] 2022 State of SaaS Response Report, BetterCloud
