The future of the SaaS market is bright—so bright, in fact, that it’s estimated to reach a whopping $113.1B in 2021, up nearly two times what it was in 2017 ($58.8B). With that kind of growth comes an increasingly saturated marketplace, and SaaS vendors must be on the leading edge of trends to keep pace.
To that end, we’ve compiled five perspectives from investors and growth experts on what SaaS vendors can expect in 2020.
Prediction #1: Enterprises and investors will shift away from B2B SaaS vendors that don’t offer a service component.
“A pure SaaS business used to be the holy grail to pursue as a startup—high margins and low cost for growth. That time is behind us,” says Dan Piltch, Managing Partner of Broad Sound Partners, a management and investment firm that provides technology-driven operating solutions and capital. “Buyers have realized that the complexity lies in integration with existing systems and ongoing operation, so B2B SaaS subscriptions are increasingly being sold with integration, implementation, and ongoing support.”
According to Piltch, “Users appreciate these changes, especially for analytics platforms. Having ongoing support from vendor-provided data scientists ensures that users receive more meaningful insights from the new platform.”
From an investment standpoint, this complicates things. Piltch says, “Valuation is no longer based solely on a multiple of SaaS revenue. The services component—while it earns a lower margin—is now an important piece of the puzzle.” It also positively affects retention and lifetime value, two critically important KPIs for SaaS businesses.
Prediction #2: Outside sales will not be ousted by inside sales next year—and possibly not ever.
“SaaS companies understand a thing or two about efficiency, especially as it relates to the sales process. Many have managed to sell solely over-the-phone with an inside sales model,” says Harvey Morrison, Founder/Executive Director at Marion Square Partners, a sales and business growth consulting firm. “No matter what kind of company you are—SaaS or not—if you’re targeting enterprise clients, outside sales is still the best way to close business.”
According to Morrison, “In SaaS, having inside sales handle smaller opportunities is a good model, but if you’re trying to land the whales, you still need outside sales with boots on the ground, forming relationships.” Even though technology is king, SaaS companies must not lose sight of the people using it.
Prediction #3: The demand for royalty financing will continue to grow, but supply won’t keep up.
“Interest in royalty financing where investors lend money for a percentage of revenue rather than an equity stake is accelerating,” says Paul Silva, General Partner at Launch413, a venture fund that helps take startups to their first $10 million in revenue. “More and more companies are a fit for it, but there just aren’t many sources of that flavor of capital out there. My hope is that supply and demand begin to even out in the coming years, and 2020 will be the year we see some acceleration in this type of financing model.”
Prediction #4: SaaS companies will pay the same amount of attention to existing customers as they do to new ones.
“Unfortunately for SaaS vendors, it’s just as easy to cancel a subscription as it is to buy it,” says Natalie Nathanson, Founder and President of full service B2B marketing agency, Magnetude Consulting.
According to Nathanson, “SaaS marketing is changing. ABM (account-based marketing) strategies—where sales and marketing work hand-in-hand to target specific accounts—are being utilized not just for prospects, but for existing customers. Applying an ABM approach to customer retention, upgrades, and land and expand strategies ensures that customers feel valued, are getting the full value of the platform, and are facilitating new relationships. We’ve seen ABM campaigns focused on existing customers produce results like increased retention, higher share of wallet, and greater ARPC (average revenue per customer).”
A recent survey indicated that SaaS vendors that started five years ago had 2.6 competitors, while those that were founded a year ago were up against 9.7. With competition surging like it is, it’s no surprise that SaaS companies are getting more strategic about protecting their customer base.
Prediction #5: Companies that understand critical sales metrics before they scale will prosper.
“One mistake too many SaaS leaders made in 2019 was making funding or growth decisions without understanding the math from a sales perspective,” says Mike Stankus, CEO/Founder at STM360, a company that specializes in coaching and training for sales leaders. “If you are not familiar with your organizations’ pipeline coverage, sales capacity, productivity, and efficiency, you are probably not ready to scale.”
Without this information, it’s difficult to make revenue projections and know how many salespeople you need to hire to achieve your goals. While many leadders don’t get into the weeds when it comes to sales, you’ll want to wade into these details to ensure you understand things like close rates and sales cycle lengths before scaling.
Wrapping it up: Focus on service and revenue growth
These predictions point towards an increased emphasis on what customers truly need to utilize SaaS products in the most effective way. That can mean providing an outside salesperson to shepherd enterprise buyers through the purchase process, including a strong service component as part of a product offering, or continuing to show value to customers even after the deal is done. All signs point to investors’ continued focus on the SaaS market, so vendors are encouraged to look at more creative options for funding and understand the velocity of their pipeline before they make the decision to scale.