SaaS Market Overview and What the Pandemic Has Done to It

Masha Panchenko

In 2020, after working as a full-service app development agency for five years, we at Eleken decided to focus exclusively on SaaS and became the design studio that we are now.

Why SaaS? It’s one of the fastest-growing markets and the design is crucial to it.

We can tell a lot about how cloud is the future but don't trust bare words. In this article, we have collected all the most important numbers of the SaaS industry, visualized and explained.

SaaS market size

There are so many reports on the SaaS industry, each one giving different projections. What they all have in common is the fact that the SaaS market will indeed continue to grow in the following years.

Report from the beginning of 2021 from The Business Research Company is the most promising. It states that the SaaS market will reach  $272.49 billion in 2021 (CAGR 20.8%), and grow up to $436.9 billion in 2025 (CAGR 12.5%). CAGR, Compound Annual Growth Rate, is the metric that is most commonly used by investors to indicate the potential of a business or industry.

The industry has been growing significantly during the last years. All the researches forecast SaaS CAGR to be no less than 10% for the next five years

SaaS industry revenue forecast (millions of USD). 2019 - over 100,000, 2022 - 120,000

According to Gartner forecast, the revenue of the SaaS industry will grow up to $120 billion in 2021 (given a short slowdown in 2020 due to the effects of the pandemic).

Market segmentation

By region

The USA is leading in the global SaaS market, leaving the rest of the world far behind. The fastest-growing region is APAC (Asia-Pacific). Although it is not likely to become the leader in the next five or so years, investors are attracted by the vast amount of opportunities in the emerging market. Given the slow adoption of SaaS in the APAC region, most of the products have to rely on the international market to gain good traction.

Latin America SaaS market is also growing fast, especially within the ecommerce sector. Europe has a strong market, second after the USA. European companies tend to go global and focus on monetization at early stages.

Here is a heatmap of the SaaS world, ranging by the size of revenue.

map of SaaS world, the biggest market: US, other big markets: Canada, UK, Germany, India, Japan, Australia, New Zealand, Spain, France

Please note that Singapore is also present on the map, with revenue numbers close to Colombia and Ireland. Countries with relatively low revenues in SaaS business are not colored. Data is taken from Latka.

By type

SaaS products provide a wide range of services. There are barely any limits, especially now when pricing models have become more diverse and flexible to accommodate all sorts of products. Here are the most popular segments, starting from the ones that have the largest share in SaaS market:

·  Marketing

·  Business operations

·  Management

·  CRM (Customer Relationship Management)

·  Data

·  Loyalty (apps for collecting loyalty points to get bonuses)

·  Ecommerce

This list does not mean that these are the only types of SaaS that have demand on the market. Of course, there are lots of companies that do not fit in any of these categories, and are still successful. For example, all the individual-use apps like the ones that help you meditate, adopt good habits, take care of the plants, or arrange your dating schedule.

By type of market expansion. Vertical vs Horizontal SaaS

Horizontal SaaS are the companies that serve a wide market, providing solutions for all types of clients.

Examples: Slack, Salesforce.

Vertical SaaS companies focus on a particular industry, tailoring their solution to the needs of a specific type of client.

Examples: Veeva (life science industry), HotSchedules (restaurant management).

When you look at the list of top SaaS companies, you may think that horizontal products are ruling the market and therefore are the best option. Don’t let those big stars blind you. If you are not a giant like Microsoft, when you start a SaaS business, going vertical will take a lot of pain away.

It makes customer acquisition much easier, and the competition is likely to be lower. Vertical-specific software has been on a list of industry trends for years, and it continues to grow and attract investors. The biggest segments of vertical SaaS market are banking, insurance, communications, media, government, and medicine.

Image credit: nasdaq.com View full-size

If you want to understand vertical SaaS better, take a look at the case study of TendrX, the app that we worked on as a design agency. TendrX provides a solution for international freight shipping, connecting shippers and carriers.

Biggest SaaS companies

The market is dominated by large enterprises: Adobe Inc., Microsoft Corp., Oracle Corp., Salesforce.com Inc., and SAP SE. Together they account for over 50% of the market. To compare, in 2015, 11 biggest companies were having less than 50% of the SaaS market share (all together), and none of them had more than 11% share.

This tendency is not likely to change, as the growth rate of these giants is significantly higher than the industry average.

Image credit: FinancesOnline

Some people argue that Microsoft and some other large companies should not be counted as they are not making exclusively SaaS products. If you want to look closely at how “pure” SaaS works, read our list of the best SaaS companies.

The number of SaaS companies is increasing rapidly. As of June of 2020, there were 15,529 of them in the world. One of the phenomena that define the industry is the so-called micro SaaS (a small product run by one person or a small team that is designed to solve one particular problem).

Micro SaaS have lower expenditures and a higher margin. A simple organizational structure allows these solutions to be flexible, stay in direct contact with the customers, and respond fast to the changes in demand. Also, these businesses can run without large investments and therefore keep their independence.

How does SaaS work?

The majority of SaaS businesses rely on the subscription payment model. However, in the last years, this model has become more nuanced, including usage-based, feature-based, tiered models. If you want to learn more on how companies deal with pricing, read our article explaining different SaaS pricing models.

One of the most common characteristics of SaaS is offering part of the product (or the whole) for free. This phenomenon is directly related to the increasing adoption of the product-led marketing strategy

Free demo or trial is quite common: 44% of SaaS companies use this model. However, giving off products for free is not a must. 38% of businesses avoid this to keep revenue and attract the right kind of customers.

Lots of companies nowadays use the freemium model, offering free product with limited functionality and premium version with all the features. This model does magic for many businesses but can kill the revenue for others. To find out why it happens, read our article about freemium pricing and its dangers.

SaaS market is characterized by dynamic pricing models. In 2020, 40% of companies considered changing their pricing models when they recover from the crisis.

Market drivers. Why do users switch to SaaS?

According to the statistics, 80% of businesses use one or more SaaS products, and 73% expect almost all of their software to be SaaS by 2021. Transferring to cloud software saves money and lets companies be more flexible.

Image credit: BetterCloud

Nowadays as we are so used to using SaaS products, the migration of all kinds of processes to cloud seems natural. However, there are certain factors that accelerate the adoption of SaaS and some risks that make customers doubt.

Increased use of mobile devices

Mobile devices have become an essential part of our lives a long time ago, but only in the last few years, they started playing a more and more important part in business activities. Smartphones have taken over not only the functions of the phone, but also many others.

SaaS products make a perfect match with mobiles: they help save precious space, access information from different gadgets, update it instantly, and make team collaboration fast and efficient. The same applies to the tablets and laptops that are used more and more for work purposes.

Small business is the main driver of mobile SaaS growth. Its revenue is forecasted to grow up to $30.5 billion in 2021. The revenue of corporate mobile SaaS is growing steadily, up to $7.4 billion in 2021. To compare, in 2016, the numbers were respectively $16.5 billion and $4.4 billion.

Artificial Intelligence

The advance in AI technologies opens lots of opportunities for SaaS. Lots of the recently launched startups use AI-based technologies. One of our clients, Gamaya, applies an AI modeling system to agriculture, for example.

Cutting-edge technologies bring disruptive innovations to the fields that seemed to have once-established leaders and solutions. By applying artificial intelligence in a new way, small enterprises get a competitive advantage that allows them to challenge SaaS industry giants.

Market constraints

So, if SaaS is so great, how come all the world still hasn’t transferred to cloud completely? There are some reasons that slow down the adoption of cloud software.

Data security

Security issues are a cornerstone for SaaS businesses. Sometimes, security breaches can bring annoying inconveniences such as zoombombing (interruption of online events by trolls), sometimes they end up exploding in huge and costly scandals. All these risks require SaaS products to provide extra security measures to convince their clients.

How can you be sure that your corporate information is safe? All the data leakage-related accidents of recent years happened to people who were 100% sure. Cyber security is a never-ending battle. For each new safety technology, there will be new hacks.

On the other hand, issues that cause SaaS companies to invest more in security end up bringing positive consequences, too. This investment makes their systems of information protection more advanced than those of an average enterprise. So, the clients who prefer to take the pain of security measures off their heads know that by moving to a reliable cloud they would keep their data in safety.

Concerns regarding fast web access

Poor quality and interruptions of internet connection are the reason why many companies hesitate to adopt SaaS.

For those living in big cities of the US, it is hard to imagine that there are people who have to wait until the download finishes. However, almost half of the country population (157.3 million people) have internet speed below the minimum broadband speed.

The USA ranks high on the list of countries ranged by internet speed. Most other countries have slower internet speeds and in some, the interruptions are very habitual. This is what impedes companies around the world from shifting to SaaS in their core business processes. Nobody wants to risk stopping work just because of unpredictable issues with the internet or decrease productivity because of a slow internet connection.

COVID impact on SaaS industry

The consequences of the pandemic have hit all businesses, even in the digital world. However, the impact on the IT market was not as huge as in other industries. According to the report by CompTIA, 28% of companies experienced no impact or grew during 2020, and 37% expect to grow revenue in 2021 compared to the previous years. 25% even admitted the positive effect of the pandemic on their business.

Image credit: CompTia

Even with optimistic views for the future, the numbers are not as positive. IT industry has a significant drop in growth rates. Out of all the segments, cloud computing is the one that has the major increase in spending, and SaaS accounts for a large part of it.

Image credit: bmc blogs

Naturally, a large shift to remote work forced many companies to adopt SaaS solutions. The impact on the market was significant. Here is the graph of the SEG SaaS Index, comprised of 93 publicly traded companies. You can see that the index has jumped in the third quarter of 2020 and reached an all-time record by the end of the year.

Image credit: Software Equity Group. View full-size

Takeouts

If you were concerned whether the software-as-a-service industry is a good place for new business, there is nothing to worry about. The SaaS market remained healthy even when the pandemic hit. Its growth has been positive during the last few years and all the forecasts say it will be so in the next few years.

The popularity of micro SaaS is what makes the entrance to the market accessible for niche independent products. Remote work, the spread of 5G, artificial intelligence — all of it favors new cloud solutions and opens numerous opportunities for startups. To find out what else is shaping the market right now, read our article about the latest SaaS trends.


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