SaaS Growth Shows Interest Now More Than Financial

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SaaS Makes Business Intelligence Work for SMBs

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It's been nearly a year since I wrote about how the down economy appeared to be boosting usage of software-as-a-service. We now seem to be in the midst of a tentative economic recovery. So how is SaaS faring these days? Pretty darned well, according to longtime software industry observers Ray Wang, CEO of Constellation Research, and Evangelos Simoudis, managing director for Trident Capital.


Writing on Trident Capital's blog, Simoudis says his company's portfolio of 10 SaaS companies had "a decent quarter" in Q3, which is traditionally a tough quarter of IT vendors. He also shares some interesting observations about those companies and public SaaS companies. While the economy has been especially tough on SMBs, the traditional target buyers of SaaS companies, enterprises have been making up for the loss of SaaS business among SMBs.


Simoudis says at least half of the total number of deals signed by Trident Capital's SaaS companies during the quarter came from large enterprises, across a broad swathe of industries including manufacturing, publishing and retail. This is the proverbial good thing/bad thing for SaaS vendors.


As Simoudis points out, larger customers tend to want to lock in prices over longer terms and also to get plenty of post-sales support, both of which can drive up costs for SaaS companies. Larger companies also tend to require longer and costlier sales cycles than their smaller counterparts. In deals where customers pushed to lock in prices, a CIO or other IT executive "was always involved in the decision process," Simoudis says.


Other trends of note from Simoudis:

  • Less customer churn.
  • Growing use of "land and expand" strategies, which emphasize not only acquiring new customers but expanding business with existing ones.
  • Increased interest in SaaS among European and Asian companies.
  • Growing demand for analytics and business intelligence capabilities. Customers want out-of-the-box reporting functionality in all of their SaaS applications.


Writing on his Software Insider's Point of View blog, Wang says both SaaS and on-premise software companies had much better third quarters in 2010 than in 2009. But the SaaS companies "showed massive gains in subscription revenue at on-premises vendor expense." Among the public SaaS companies with revenue growth in excess of 25 percent: Salesforce.com, SuccessFactors, Kenexa and RightNow Technologies. License growth, rather than new customer acquisition, was a trend for both on-premise and SaaS vendors in Q3, Wang says. SaaS vendors, in particular, "continue to crush all expectations in subscriber growth."


In Wang's opinion, "SaaS will be the predominant entry point for new innovation" moving forward and an increasing number of organizations will seek "two-tier approaches," moving away from standardizing on a single platform, to consolidate their legacy applications.


It's interesting to see the reduction in churn. As I've written in the past, churn can be a more significant problem for SaaS vendors than for on-premise software companies. The decrease in churn, coupled with the expansion of business in existing accounts, would seem to imply SaaS customers are largely happy with their solutions. Gartner concluded much the same thing back in June, though it warned SaaS satisfaction levels might drop if customers simply transferred their bad purchasing habits from on-premise software to SaaS.


I also think Wang's conclusions are on target and show that cost may no longer be the primary factor in selecting SaaS over on-premise software.