One of the most popular business models of the past two decades has been Software-as-a-Service (SaaS). The first company touted as being a SaaS model; Salesforce. Today, its market cap is $192.5 Billion. The SaaS market size today is estimated to be valued around $251 Billion and reach USD$307 Billion by 2026. It is estimated there are around 30,000 SaaS companies today. While it is an excellent business model for software companies, there are strong headwinds that could impact growth and sustainability in the coming one to three years.
Challenges for SaaS Companies
One of the more popular business models we’ve made use of in our innovation projects is SaaS models. They’ve proven to be very effective and have helped even traditional industrial type businesses like manufacturing to develop new recurring revenue streams. So what headwinds does this model face?
Inflationary Pressures: For consumer focused or D2C (Direct to Consumer) SaaS companies, especially streaming services like Netflix, HBO and Crave, it is the issue of inflation. Consumers will choose food over entertainment. A full belly is more valued than a binge session. This will impact other SaaS products and apps for consumers. From meditation guides to productivity tools. B2B SaaS companies are likely at higher risk. Value propositions and proving ROI contributions for B2B SaaS companies will be vital to survival.
Tightening IT Budgets: Many companies are dealing with technology debt, while at the same time evaluating cybersecurity risks around data and privacy as new laws come into effect. One recent study suggests companies in the U.S. alone spend around $2,623 per employee on SaaS products. B2B SaaS companies like Monday, Notion, AirTable, HubSpot and others can expect to see a higher churn rate into 2023 and 2024 as companies conduct audits and evaluations of their SaaS budgets.
Tech Giants Wade In: Google Workspace, Salesforce and Microsoft365 are rolling out products that are challenging many SaaS companies. Since so much of an organisations data is already in whatever ecosystem a company has chosen, it makes it harder for SaaS competitors to justify themselves. It’s easier to cut a subscription than people.
Cloud Costs: Energy prices are going up. Chip shortages are happening. Cloud services are a high energy cost centre and servers need processing power. With chip shortages and the cost of energy, Cloud costs are going to go up. That means SaaS businesses are going to have to increase their subscription prices. Or lock-in Cloud service agreements to maintain cost controls.
Privacy and Data Regulations: Governments are taking greater interest in privacy laws. Especially in the EU, Nordic countries and Canada. America has no federal privacy law beyond HIPPA and has shown little interest in enacting one, but some States, like California, are enacting stricter data, privacy and Artificial Intelligence laws. For SaaS companies to compete at a global scale, they will have to adapt. The lawyers are salivating.
Geopolitics: While TikTok isn’t a SaaS based model, it does send a signal about how governments are starting to view technology companies and SaaS businesses are not immune. If a SaaS company is on the wrong side of the values based battles that are heating up, governments could restrict usage and access.
These are the primary headwinds we see facing the SaaS market sector into 2024 and possibly through 2025. They are not predictions, simple issues at hand. Nascent and early stage startups are most at risk. They will face challenges from investors and no, simply putting an “Artificial Intelligence” bullet point in your pitch deck will not solve your problems. For mid to late stage startups, your risk is budget belts being tightened and companies going on subscription diets. Guard your churn rate and get out in front of it.
There’s more that needs to be done. We’re certainly not putting SaaS models into the dust bin yet, there is still significant opportunity and profit to be made. It just means being smarter with the business model.
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