The current difficulties in selling into the SaaS market can’t just be laid at the door of a troubled economy. Yes, it’s about buyers reducing costs. But it’s also a cyclical effect after an enterprise software boom where more and more SaaS solutions in more and more SaaS Categories are bought and brought, unchecked, into different parts of the enterprise or institution.
Now, CFOs and COOs are cleaning house and insisting the line of business (LoB) spending of old is reined in. Enterprises and institutions are chasing the efficiencies inherent in reducing SaaS vendor and product sprawl, just as they did with hardware and software sprawls in previous tech booms. This means cutting vendors as well as subscriptions and seats.
In response, the dominant Category vendors are raising prices in attempts to maintain Annualised Contract Value (ACV) levels and keep their shareholders happy. Salesforce, Microsoft, and many other major suppliers have made headlines with price hikes of up to 25% this year.
It looks like a Mexican stand-off is emerging. And we know where that leads. Both vendors and buyers lose and a lot of the industry gets caught in the crossfire.
Might I be being over-dramatic? According to our friends at Vendr, Saas Industry Annualised Contract Value (ACV) was down 17% YoY, in Q3 2023 compared to Q3 2022.
SaaS is now a mature segment of the enterprise software market with a top 25 Categories established in terms of transaction volume from Business Intelligence to Visual Design with clear one, two and threes in each and with the number ones mostly dominating each Category.
Great business you might think. The problem comes when you look at the economics of the SaaS uber-Category.
In ACV terms, the difference, even, between firms such as Microsoft and Salesforce couldn’t be more stark. Sub $30,000 vs around $120,000 with Microsoft doing a quarter of the SaaS transaction volume done by Salesforce.
Salesforce remains the overall SaaS uber-Category leader in terms of ACV and transaction volume and, according to Vendr, recently overall ACV levels were highest in Security and Compliance. Unsurprising as they are now mission-critical to business continuity given rising cybercrime and the corporate and legal consequences of not staying within regulatory boundaries.
IT Infrastructure, Collaboration and Communication, and Marketing and Advertising categories — also land above $100k on average given their ability to impact the bottom line. But transaction volumes even in these ACV segments could be tiny and – even in the top 25 – the majority of SaaS firms are stuck in low ACV and low transaction volume territory.
Because of the proliferation of Categories within SaaS and the resulting SaaS sprawl as even the late adopters SaaSed-up that leaves a long tail of also-ran suppliers faced with an unpalatable double whammy. The ongoing reduction in buyers’ SaaS estates and a simultaneous buying concentration on the big players that can offer more than one solution to a customer’s existing problem.
So, a shake out and standardisation has to be coming. There are simply too many players in each Category and too many instances of each installed. No customer needs five sales tech products, two CRMs and lots of messaging apps.
For those with the financial wherewithal of existing Category leaders that means concentration through M&A but that can often mean rearranging deckchairs on the Titanic towards the end of a cycle.
For those in the low ACV/low transaction volume chasing pack who want to avoid decline or acquisition it’s time to pivot and change the game. Re-think and re-categorise. Leapfrog the current cadre of solutions by using the opportunity of a rapidly changing world to re-frame the customers’ problem and, ultimately, to re-define their relationship with SaaS.
Find more discussion on the future of SaaS and many other contentious Category issues on The Difference Engine podcast at https://link.chtbl.com/