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Issue 16. February 2, 2020

6 SaaS trends to float your boat

This week’s issue of Driven focuses on a one important topic:

  • 6 SaaS trends and 11 ideas to float your boat

Reading time

Your estimated reading time this week is about 8 minutes.

REVENUE | PRODUCT | STRATEGY

6 SaaS trends and 11 ideas to float your boat

SaaS industry analysts project robust growth through the decade.

But unlike the rising tide said to lift all boats, overall growth of the SaaS industry will not benefit all providers equally.

The 6 trends you read about here will offer big advantages to SaaS vendors that navigate them well.

This article is mainly for B2B SaaS companies that sell higher-ticket applications to medium-sized and enterprise accounts.

I don’t talk here about obvious trends such as Artificial Intelligence (AI), machine learning (ML), blockchain, mobile-first applications, and more.

I focus instead on topics you may have heard less about.

After reading about the trends, you’ll also see 11 recommendations.

Let’s dive in with the trends:

1. Companies are struggling to manage the chaos of the SaaS applications they’ve licensed.

The average U.S. company spent $343,000 on SaaS in 2018. That was up 78% from the prior year.

As companies of all sizes use more SaaS applications, several challenges are emerging for IT shops. Here are 4:

a. Data governance

This is a matter of data security, privacy, protection, location, and integrity.

Companies know they must comply with with laws and regulations such as GDPR, CCPA, and Sarbanes-Oxley.

In some industries, they must also meet data-security standards such as SOC 1, SOC 2, HIPPA, and more.

When companies use SaaS products, they allow their data to be placed on multi-tenant servers. Their data on those servers may commingle with that of other companies.

This creates a “honeypot” problem. Sensitive data is at greater risk when it’s aggregated in one place.

These insights are from Jonathan Rosenberg, vice president and chief technology officer in Cisco’s collaboration division. Sujan Patel quotes from Rosenberg’s 2018 speech at Cisco Live.

In SaaS applications, Rosenberg says,

“data flows like water—all over the place.”

“All it takes is one compromised bit of code, copied and embedded in your company’s own app, and malicious actors are off to the races.”

b. Integration

I’m talking here about more than technical integration of data across applications.

It’s also a matter of maintaining data integrity across applications. And of integrating workflows.

Users don’t want switch from one SaaS system to another in the middle of what they see as a single workflow or process.

c. Ballooning costs for SaaS

Companies are seeing huge growth in their total cost for SaaS subscriptions per employee.

Blogger and industry analyst Nathan Latka says one CEO recently told him his company pays $10,000 to $15,000 per employee per year.

These payments come out of operating expense (OpEx) budgets rather than capital expense (CapEx). CapEx is more subject to budget cuts when companies tighten their belts.

d. Uncontrolled subscription growth

Companies find they’re paying big money for duplicate and unused subscriptions. It’s often unclear who’s paying for them and how much the company is paying in total.

Rise of SaaS management applications

Blissfully is one of a few dozen SaaS providers that help companies track and manage their use of other SaaS companywide.

Applications for SaaS spend and usage management help expose where companies are likely to be wasting money.

The upshot? Companies are increasingly likely to discover little-used SaaS applications. They are also more likely to cancel licenses before renewing them.

The following graphic, from a Blissfully report, maps relationships between people and SaaS apps in an organization. Each line shows a connection between a person and an app.

The illustration shows the complexity of managing SaaS even in a small company.

2. Your customers and prospects will focus even more on the quality and usability of your product.

You’ve read in prior Driven emails that Product-Led Growth (PLG) is a mega trend in SaaS.

PLG, you may remember, is a business model where the SaaS product sells itself. It’s designed to do so without help help from a sales team.

Providers of PLG applications obsess over product quality and ease of use. They also find ways to deliver immediate value within a short trial period.

PLG applications are working their way into more enterprise accounts. As this continues, vendors of enterprise software will face stiffening competition.

Increasingly, prospects will evaluate new SaaS applications against the look and feel of consumer software.

3. Low-code and no-code software will intensify competition.

Low-code and no-code software technologies enable companies to develop software faster and at much lower cost. That’s because these technologies don’t require involvement of highly trained developers.

A growing list of SaaS providers offer low-code and no-code development platforms.

As these applications gain acceptance, your SaaS applications are likely to compete more directly with homegrown low-code or no-code applications.

4. PaaS (Platform as a Service) offers growth potential for SaaS vendors and solid benefits for customers.

PaaS enables customers to create or buy add-ons to the product they licensed.

Through PaaS, you can offer customers more individualized software. You can also provide more functional capabilities than through your own software alone.

PaaS enables you to create an ecosystem of related SaaS offerings. Your company can earn a fee or a share of revenue for every partner app sold through your platform.

A successful PaaS offering can encourage growth in customer usage rates. It can also improve customer retention.

5. SaaS providers can often grow revenue and customer satisfaction by offering more services.

Nathan Latka says many SaaS investors discourage their portfolio companies from providing professional services.

That’s because professional services generate low gross margins compared to SaaS licenses.

But SaaS companies that provide professional services can accelerate delivery of benefits and improve customer retention rates.

These benefits, in turn, can increase the value of SaaS companies that provide services.

6. Investors will pay a premium for SaaS providers that show they can grow profitably.

For potential investors in your company, revenue growth remains a key performance metric.

And these days, investors are likely to put more emphasis on profitable, sustainable growth.

They’ll offer higher valuations for companies that have shown they can achieve it.

That means when you go for a round of funding, you’ll likely raise more cash with less dilution.

Key takeaways and recommendations

1. Build enterprise-grade products with a consumer-grade look and feel.

You must make your enterprise applications very easy to use with minimal training.

You must design them for easy use mobile devices.

2. Provide more, better, and easier integration to other market-leading software.

SaaS providers are offering more and more API connections.

If you don’t provide enough APIs, you risk losing business to competitors who offer more.

For more and better integrations, you can do one or more of the following:

  • Create direct integrations to the other applications your target customers use most.
  • Create SaaS APIs that enable your customers to make better use of your product
  • Create an integration to Zapier. This makes more than 1,500 integrations available to your customers.

3. Improve security.

Remember Jonathan Rosenberg from Trend 1, above? He’s a VP and chief technology office for a Cisco division.

Rosenberg suggests 2 ways SaaS for companies to minimize security risks for customers:

  • Use end-to-end encryption.
  • Use PIN security and secure access features that can operate without a virtual private network (VPN).

4. Explore the emerging architecture of distributed data models for enterprise applications.

Tomasz Tunguz of Redpoint Ventures describes an emerging distributed data model in a recent blog post. Briefly, it’s an architecture that separates application processing from databases.

The architecture segments enterprise SaaS applications so that most of the processing runs on the SaaS provider’s servers. The data resides locally, under the customer’s full control.

The model seems likely to appeal to enterprise accounts that must maintain tight control over their data.

5. Consider adjusting your pricing model and product bundling.

Think about unbundling your applications. This means you break them up into smaller, modularized components that solve a specific pain.

But be careful. This strategy, suggested on the OpenView blog, isn’t suitable for all SaaS providers.

Serial SaaS entrepreneur Sujan Patel presents the dilemma this way:

“Should companies niche down or unbundle products to serve customers who aren’t ready (or who don’t need) a full suite? “Or should they double down on becoming all-in-one platforms incorporating multiple tools and supporting several different business needs?”

Consider moving from subscription-based to transaction-based pricing.

Maybe it’s better for your business in the long term to charge your customers for their actual use of your application.

If you risk losing business over your current fee structure or rates, transaction volume might be a better pricing model than subscriptions.

It’s also likely to be more in line with the value your customer gets from your system.

Do your homework. For budgeting and cost control, some customers may prefer the predictability of user-based subscriptions.

6. Consider having your Customer Success team proactively approach customers who are barely using your applications.

Have them do so long before license-renewal time. If a customer isn’t using your software, chances are good that a SaaS management application will help them see it.

By being proactive, you can help wobbly customers get more value before they think to cancel.

7. Implement and track product-specific KPIs.

What are those? Look here for an explanation.

8. Consider whether your offering has the potential to be a PaaS rather than a stand-alone application.

PaaS isn’t appropriate for all SaaS companies, and it may or may not work for yours.

Make sure you’ve established a strong product-market fit before you consider a PaaS strategy.

9. Make your systems faster, easier, and less costly to implement.

Make your products…

  • More configurable
  • Easier and faster to configure and reconfigure
  • Easier to integrate.
  • Less risky to implement

To compete successfully against home-built low-code and no-code applications, rethink your value proposition. It’s not like you’re selling against on-premises solutions.

With low-code and no-code, you sell against other SaaS applications. They may offer lower implementation risk and implementation cost than your solutions. They may also be more flexible in the long run.

With industries changing so fast, flexibility is of paramount importance.

Consider creating industry-specific templates for your key target industry segments. The goal is to reduce…

  • Configuration and implementation time and cost
  • Implementation risk for you and your customers
  • Time to benefit for your customers

10. Consider offering more professional services.

Are your investors unenthusiastic about SaaS companies offering professional services?

If so, Nathan Latka suggests you sort your customers into two categories:

  1. Those for whom you’ve provided professional services
  2. Those for whom you haven’t provided professional services

Compare rates of activation, usage, and renewal for customers in each of the two. Also compare customer lifetime value.

With this data, you’ll probably see that the first group outperforms the second in most respects.

If professional services help drive activation, Latka says, offer them. Charge a competitive rate for them.

Present a strong case to your board, using the data you’ve gathered.

Over the long term, professional services are likely to drive higher value for your company..

11. Focus more on profit and key operating KPIs.

If you plan to seek funding, pay close attention to the performance metrics investors care most about. These include…

  • Growth in Annual Recurring Revenue (ARR)
  • Customer Acquisition Cost (CAC)
  • Customer Lifetime Value (CLTV)
  • CAC-to-CLTV ratios
  • Gross margin
  • Free cash flow
  • Churn rate

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Have a great week!

Best,

Dave Vranicar

ABOUT DRIVEN

Driven is a free weekly email for time-strapped revenue leaders in business-to-business SaaS companies.

Its goal is to keep you informed about a broad range of topics related to revenue growth.

We scan the horizon for insights and ideas from sources you may otherwise miss.

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When I provide links to articles from vendors, it does not imply an endorsement of their products or services. I link to them because they offer good content.

I’ll make it clear when I’m recommending a product or service. 

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