SAAS Industry Growth in 2014-15
Software as a Service
SaaS expansion has been skyrocketing in growth over the past five years due to the advantage it gives to small and medium sized businesses in terms of software investments. The idea behind software as a service rather than as a product as it was in earlier years, is to have a distribution model in which the software applications are now being hosted by vendors or service providers over the internet. This has allowed small and medium sized businesses to skip over the large investments required in running their business, with regards to needing: programmers, staff, application designs, servers and server security. Businesses can then skip the massive upfront costs and huge business investments to focus on the external set-up and customer interactions by paying for their IT needs on a monthly or annual basis.
Over the past five years, or since the beginning of 2008, the public market has seen the SaaS distribution model increase in value by 40%. The reason behind this massive explosion in growth is due to the pressure on performing in a new market. In order to standout from one another, public SaaS companies need to have a growth that supersedes 25% per annual year. The reason for this high growth rate is that SaaS companies are willing to cut profitability over growth, as growth allows for a longer term within the market. By growing each year, these companies can make profits over a longer term, if they have a reasonable growth rate.
The SaaS market is still considered under developed, with only one third of the software market being utilized by the SaaS distribution model. Because of this a public SaaS company must constantly look for higher growth patterns over profitability in order to find a sustainable foundation within the market. In order to stand out, these companies need to be able to demonstrate that they have profitability after their sales, but have a higher growth rate from other companies. But this is not the case for all SaaS companies, as many companies who are reaching that high growth return still invest heavily in their marketing and sales campaigns. So with regards to profitability over growth, growth is still the dominating factor in this market because it provides higher business sustainability.
So what makes this growth so important to the market? Well any low growth SaaS Company will find themselves in an unstable position as many of the higher growth companies will pull away, making lower growth companies less fortunate in the market. An investor that sees a company that has generated $20 million in revenue, is profitable, but is only growing at 10% instead of 25% per annual year, will more than likely shy away from the business if they can invest in another that has a higher growth potential. The growth for SaaS companies over the last five years has increased two fold because a successful outcome is dictated by the generation of high growth and this drives the market upward. In order for there to be high growth, the company needs to invest large capital sums into sales and marketing and therefore must cut back on their profitability.
Where the Industry is Headed
With SaaS becoming a more mainstream distribution model, there is no question that the future for it looks bright. According to Gartner, within the next year the global spending has been estimated to reach about 17.9% reaching $15 billion and increasing to around $23 billion throughout 2015. At these rates it looks as if the SaaS market will outshine traditional software services, with a growth rate of 5X that of traditional means. Although not every software product will be able to switch over to SaaS cloud based distribution, the majority of the market will flourish and find advantages in this model.
The SaaS cloud model benefits businesses by allowing them to have lower initial investment costs, have businesses up and running quickly, and find accessibility within shorter contracts and monthly/annual payments. A business that does not have to handle their own IT needs, will not have to deal with the complex and specialized issues that prove to be costly when problems arise. Companies can then simplify their operations and become more efficient.
I am a young, aspiring writer, avid reader, have a mind of a skeptic, the heart of a dreamer and the imagination of a gamer. I love writing, reading, gaming, and sports.