If you have worked in business, chances are you’ve used cloud-based services, commonly referred to as SaaS, short for Software as a Service. You probably have used it in your personal life too - if you’re one of the 2 billion people who have used Google Suite, you’ve used SaaS. Even though it’s a relatively young industry, it’s rapidly growing in importance and adoption, a situation made more acute by the ongoing COVID-19 pandemic that forced remote work to become more of a norm.
Whether you are running your own business, working in a corporation or working with clients, SaaS is likely going to be critical to any digital marketing, operational or strategic initiatives. But what are some of the key current trends to know, and how can you take advantage of them to support what your business does? That’s what we will cover here today.
As a quick disclaimer, I’m going to try to stick to more of a general view rather than delving into what impacts the pandemic has had. While there is no debating the pandemic has had a major impact on the SaaS industry, it’s tough to say whether some of the trends it has borne will have staying power. Given that, this article will deal with more general trends rather than ones specific to the pandemic. To get started, let’s look at a potential change with the SaaS model:
Saas Is Becoming More Vertical
Traditionally, SaaS has been more of a horizontal model - one solution or a series of solutions that can be replicated across different industries. As time has gone on though, customer needs have become more complex. As a result, customers are calling for more customized solutions. This is where vertical SaaS comes into play - specific solutions for specific industries. This also makes having industry specific KPIs possible, something that helps customers better understand how they are performing and where the gaps might be.
What industries are taking advantage of this? According to a report from Business Insider:
The fact that the financial industry leads the way in spending on vertical SaaS isn’t really a surprise. However, some of the other sources of spend, namely retail and healthcare (industries that some would think might rely on their own systems rather than outsource spend) might catch a few by surprise. Here’s one possible explanation: vertical solutions help companies better gather industry specific customer intelligence. These are valuable pieces of information that help companies understand their customers, market products to them, and know potential opportunities within the industry they operate in.
Customer demand also exists for multiple solutions, something made easier when taking a vertical, rather than horizontal, approach to solutions. According to Business Insider, SaaS providers retain 30% of customers over a two year period when they offer a single solution. When they offer two solutions, that retention rate jumps to 48%. Offer four or more solutions? 78% retention rate. Offering those solutions is easier when companies aren’t shackled and can adapt, something vertical SaaS offers.
Pricing Is Shifting Towards Usage Based Pricing
Generally speaking, SaaS has historically been priced either as a flat rate, such as a monthly or yearly rate, or a tiered based approach, where companies have choices between different features or levels of service depending on their price point. Now SaaS is trending more towards a usage based pricing model. This is a consequence of the need for more customization in SaaS that we hit on previously - industries, and the companies that operate within them, are different, and a ‘one size fits all’ pricing model is becoming outdated.
The blog Chargify provides some good examples of companies that are doing this successfully. Some interesting themes that stand out are:
- Billing per hour of active use (as measured by volume of data and the amount of time your virtual machines are active each month)
- Billing based on how frequently a company needs to access data
- A “pay as you take an action” model - the email solutions company Mailgun is a good example of this, charging based on volume of emails sent after passing a threshold determined by the customers’ plan
- Metered billing, depending on how much of each particular feature is used
The key takeaway: find creative ways to price your SaaS services, as the industry is adopting more pricing models than the traditional static, monthly pricing.
Services Will Be Unbundled and Integrated
Let’s take a detour to a different industry for just a moment. We all remember the days where cable companies would bundle services together, making customers buy items they neither wanted nor had a use for. My personal favorite was when I was forced to add on a landline to my cable plan in 2012 - I used said landline a total of zero times. Streaming companies such as Netflix and Hulu exploited this inefficiency and thrived off of it.
It’s a similar story in the SaaS industry. As I talked about earlier, there isn’t a single solution that is universally replicable across different industries. Solutions, and the services that go with them, are going to have to be agile and adaptable.
What are some reasons for this? The blog Koombea identified a few gaps in the SaaS market, including:
- Companies find that in-house solutions don't adequately fit their needs
- Businesses don’t want to build a tool from scratch in-house
- Companies need solutions that can change with the changing business environment
In addition, services need to be ‘integration friendly’ with more and more platforms. Oftentimes companies will use resources in conjunction with each other, and SaaS solutions need to be compatible with what is used. For example, a cloud-based solution may need to be compatible with SalesForce so it can integrate with the existing CRM software. A static solution may not have this ability.
One thing to keep in mind as this trend takes hold: is this scalable? It’s easy for one company to make one solution for one client - but it gets much harder to make multiple solutions for multiple clients. While it is true that learnings can be replicated to different initiatives even when the specific products can’t, actually building and maintaining multiple solutions for different clients can be a challenge. Profitability should also be considered here - while the demand is expected to be there, willingness to pay is unclear. Bigger clients will certainly step up to the plate, but there will be significant competition to service them. Is servicing the smaller clients, who have similar needs but may not be able to pay as much, worth it for developers? Time will tell.
To wrap it up, the SaaS industry, like all industries, is shifting in response to customer needs. As the industry gets more mature, the solutions companies need are evolving with it. This is all driven by customer needs. As those needs become more diverse, so too must the solutions, which are trending towards more customized than standardized. Accordingly, the pricing is also shifting towards more metered based pricing. While the traditional pricing still exists, pricing based on usage will be a trend to watch moving forward.