Industry Insights

3 Ways the Software Landscape is Changing—and What SaaS Companies Can Do to Respond

By Nick Gilbert / September 11, 2017

Software Landscape Blog Post

Over the past few decades, the software industry has experienced change at a faster rate than during any other time. For companies in the software business, the breakneck pace of change is what makes it so dynamic and exciting—not to mention challenging.

Cloud software vendors know this firsthand—these companies have been at the forefront of many of these changes, defying assumptions about what software can be, empowering more users with better tools, and bringing new products to market that have completely changed how the world does business.

Today, SaaS vendors stand at another turning point. Competitive pressures are more intense, customers are harder to acquire, and now the disruptors run a greater risk of being disrupted themselves. Here’s a look at three key ways the software landscape is changing, and what software vendors can do to respond.

1. The land grab era is over

As cloud software has grown more popular, SaaS vendors have seized the opportunity and launched a tidal wave of innovative solutions. A quick search by category on any major business app store shows just how much competition there is. Searching for marketing apps on the Salesforce AppExchange, for example, returns 284 options, while a search for collaboration apps gives 378 solutions to choose from.

The sheer number of business cloud apps begs an important question: Are SaaS vendors that develop business software becoming the victims of their own success? “The whole SaaS market is not saturated yet, but the major horizontal categories are,” said Clement Vouillon, a Senior Research Analyst at Point Nine Capital, in a recent post on Medium. “In many non-saturated verticals or niches, the trend is going toward more and more competition.”

The days when a SaaS vendor could launch a new product and secure market share because it was new—or there was simply no other option—are long gone. This “land grab” era, when the vendor that was first to market could stake a large portion of it, is over. Now, SaaS companies must differentiate and add value—through technology, services, support, or some combination of these. Many software vendors don't have the resources to provide these value-adds on their own. This means partnerships—such as affiliate, referral, reseller, and alliances—will be crucial to a vendor’s success.

This “land grab” era, when the vendor that was first to market could stake a large portion of it, is over.

2. Acquiring customers is more expensive, putting pressure on profitability

In the crowded market for business applications, SaaS vendors face increasing discovery challenges. A potential customer may have to sort through hundreds of applications available in dozens of different app stores to find a solution to fit their needs. How can software vendors ensure that potential customers can not only find their applications, but also understand what they do and what sets them apart?

Given this reality, it shouldn’t be a surprise that the cost of customer acquisition (CAC) is on the rise. Online advertising can be hit or miss and rarely communicates the full value proposition of business SaaS. On the other hand, full scale thought leadership and content marketing programs are expensive and time consuming to get up and running and manage for the long term.

Beyond these immediate costs, SaaS vendors may find it more difficult to raise capital in a highly competitive market, since the chances of any one solution of becoming a category-defining tool with large IPO potential are lower. To raise funding in this environment, software companies will need to show strong CAC improvement as well as solid ROI to justify additional spend on sales and marketing activities.

To lower the cost of CAC, software vendors can—and should—once again invest in partnerships; partners are often experts in a region, vertical, or other defined segment, and they can do the heavy lifting to educate customers and close the deal. Think of them as an outsourced sales team.

However, even the best partners can’t demonstrate strong ROI if vendors aren’t tracking sales activities accurately. Using technology tools that can provide this level of detail is another way to help ensure the success of partner programs.

To lower the cost of CAC, software vendors can—and should—invest in partnerships.

3. The channel works, but partner programs need to be data-driven

The channel has always been an important go-to-market strategy for technology vendors, and SaaS companies are no exception. Nearly 70 percent of software vendors work with the channel in some way, with almost half—49 percent—offering referral programs, 46 percent distributing through cloud service providers, and 26 percent working with managed service providers (MSPs).

However, there is still much room to improve. “I think channel distribution is one of the most promising and untapped acquisition channels for SaaS, especially for SMB SaaS startups,” said Tomasz Tunguz, Partner at Redpoint Ventures, in a recent blog post. He continues: “[O]nly 23 percent of SaaS revenues are through channel sales. As the SaaS industry continues to mature, we will see a shift toward more channel distribution models.”

What’s holding software vendors back? Part of the problem is that the partner function is, more often than not, a “soft skill” that is not well measured and understood. This means that many software vendors view partner programs as a necessary evil, one that struggles to justify its value and cost.

In this way, the partner function is similar to marketing before the widespread adoption of marketing automation tools. Ten years ago, companies had some idea that they should spend money to market their products, but ROI was nearly impossible to measure accurately. Today, marketing automation delivers end-to-end visibility and metrics that enable marketing staff to be data driven, transforming it from a cost center to a mission-critical business driver.

"As the SaaS industry continues to mature, we will see a shift toward more channel distribution models.” —Tomasz Tunguz, Partner, Redpoint Ventures

The fix for this issue is straightforward: SaaS vendors need to define what success looks like for their partner programs, and find tools that can track and measure their partner activities. This includes functions such as optimizing spend and lead support, customizing revenue shares and prices, and measuring the outcome of leads and the value they drive to the business.

Change is a constant for SaaS companies, but an awareness of where the market is headed, as well as what software vendors can do to anticipate and respond to these changes, can be a secret weapon to stay ahead of the competition.

Nick Gilbert is Product Management Director at AppDirect.