Key Highlights from Softletter’s SaaS Report, Part II of III

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(The following information is excerpted from Softletter’s forthcoming SaaS Report. This report was first released in 2007 and is the industry’s most comprehensive source of information on the SaaS model and its evolution and adaptation to the market. The Report will be released in mid-October. This article will be open till October 21st, and then only be available to Softletter subscribers.)

The Softletter 2016 SaaS Report is primarily based on the Softletter SaaS Survey. Our sixth SaaS survey was launched in late spring of 2016 and was closed at the end of July. The MatrixCX (www.allegiance.com) online was used to generate and manage the survey. The purpose of this survey was to develop a comprehensive snapshot of the current state of the SaaS industry and and has always been targeted at companies and/or software company business units that derived at least 80% of their revenues from sales of SaaS products and services.

This survey had respondents answer up to 163 depending on how respondents answered conditional queries. The surveyed received 220 valid responses. The single largest group, 67% of respondents, reported their title as owner, founder, president, CEO or related title of their companies. This was followed by 23% identifying themselves as vice president, executive vice-president or director. The balance of respondents were senior managers, CFO’s, COO’s or other mid-level management. Twenty-six percent of those taking the survey were international, with representation primarily from Canada, EU countries, and Latin America.

In addition to the summary results, cross tabulation ‘drill downs’ have been incorporated into the report where we felt these could further enlighten companies on important SaaS trends. We invite readers of this report to contact Softletter publisher and managing editor Merrill R. (Rick) Chapman to discuss the results and suggest new areas for survey and investigation. Softletter contact information can be found on the Softletter website.

In addition to adding new questions and content, we also pull results from our past surveys to enable our readers to see important trends and developments in this fast-growing industry segment. To assist you in executing on the information, trends, and best practices information found in this report, we suggest you obtain a copy of Softletter Managing Editor Merrill R. (Rick) Chapman’s latest book, SaaS Entrepreneur: The Definitive Guide to Succeeding in Your Cloud Applications Business, Second Edition.

Throughout this report numbers of particular interest have been bolded. Decimals have been rounded off to one degree of precision for summary results and percentages may not equal 100%. Results cross-tabulated by company revenue size have been rounded off to whole numbers and may not equal 100%.

The results from The Softletter 2016 SaaS Report confirmed trends seen over the last nine years but also highlights new directions in the development of the SaaS industry. Since the first edition of this report, released in 2007, SaaS has moved from a recovering technology movement into the dominant model for the development and release of new software products, particularly in B2B markets. Growth in on-premise and the desktop markets has ceased and existing product lines are transforming into a “legacy” models a la the world of financial management products first created in the 50s, 60s, and the model is now subsuming desktop software, as giants such as Adobe have moved their products into “the Cloud” and Microsoft is also beginning to move away from the desktop as rapidly as it can, though it will take several years for it to manage the transition.

Despite the sluggish growth the economy has experienced since 2008, SaaS growth has continued to expand in the 20% to 30% annual range and we predict this market will continue to grow vigorously. One factor driving expansion is many new markets and niches remain to be filled by SaaS and its “Kissing Cousin,” mobile applications. The other is the development of what we call the “portable workspace,” a virtual computing infrastructure coming into existence that will be a key part of the post-SaaS world. We discuss this trend in greater detail later in the report.

Freemium and Trial Access Programs

Do you allow visitors to your SaaS site to sign up for trial access to your SaaS system without first speaking to a sales or marketing person in your organization?

%
a) Yes 40%
b) No 60%

These numbers reflect a continuous change in how SaaS firms approach the sales cycle. In the last report, 57% or respondents reported they did allow trial access customers to sign up for system usage without first being qualified. As you can see, firms are becoming more rigorous in their processes.

Over the last 12 months, please tell us what % of your trial access prospects converted to a paid version(s) of your SaaS product?

%
a) 1% to 3% 10%
b) 3.1% to 5% 20%
c) 5.1% to 8% 14%
d) 8.1% to 10% 24%
e) 10.1 to 15% 7%
f) 20.1% to 25% 7%
g) 25.1% to 30% 12%
h) 30%+ 3%
i) 50%+ 3%
J) Other 1%

These numbers reflect a definite shift upwards in conversion rates. For example, in the last report, the 1% to 3% cohort was 25%. This trend reflects the fact that SaaS firms are refining their conversion to sales procedures in respects to trial access programs. The main driver behind higher behind trial access conversion rates vis a vis freemium is that customers understand they’re entering a sales cycle and will need to make a buy/no-buy decision at some point. In freemium, the psychology often focuses around defending the free deal, not paying actual money.

SaaS Pricing Models

Do you price your SaaS system on the basis of (please pick your PRIMARY method):

  %
a) Concurrent seats (up to X number of  subscribers can use the system at any one time) 14%
b) Named subscribers (only registered individuals can use the system) 29%
c) Per transaction or based on usage (for example, per insurance claim processed) 33%
d) Per business location (e.g. per branch office or restaurant) 6%
e) Enterprise or site subscription (flat fee for all subscribing) 9%
f) Feature or modules used (e.g. a-la-carte system of adding and removing features/modules that determines monthly pricing schedule) 5%
g) Project(s) (pay per use) 1%
h) Bandwidth used (e.g. G/MGByte of upload/download traffic) 1%
i) Storage used (e.g. G/MByte of storage used) 1%
j) Other, please specify 2%

These numbers are almost completely unchanged from the last report. Per transaction continues it steady climb from 10% beginning with the first report. Other were combinations of named and per transaction with modular and/or storage/bandwidth options.

What is your most popular subscription length option?

%
a) Not applicable; our subscriptions are based only on transactions/usage 6%
b) Monthly 26%
c) Quarterly 6%
d) Bi-yearly 0%
e) Yearly 43%
f) Multi-year 17%
g) Other, please specify 3%

The yearly and multi-year cohorts continue to grow, driven by the desire of larger companies to avoid the overhead of monthly billing models and increased confidence in the SaaS model.

Do you allow your customers the option of installing your SaaS software behind their own firewall (on their servers, the licensed model) rather than on your servers?

%
a) Yes 37%
b) No 60%
c) Quarterly 3%

We have been asking this question since the first edition of this Report because we think it provides an interesting insight into attitudes towards SaaS. Allowing a customer to install a SaaS system on their server means a reversion to the licensed (hybrid) model.We thought in the last report the numbers would shift more towards the No column but they have held steady for this report. However, a look at the crosstabs (not included in this article), reveals that while the number of SaaS companies offering the hybrid option remains steady, the number of companies choosing to implement continues to drop.

Churn Rates

On a per annum basis, what percentage of your SaaS customer base resubscribes?

%
a) 99%+ 17%
b) 98% to 99% 3%
c) 95% to 97% 24%
d) 90% to 94% 28%
e) 80% to 89% 7%
f) 70% to 79% 3%
g) Less than 70% 10%
h) Other, please specify 7%

Churn rates are of particular significance in B2B businesses, where the conventional model is to sell a customer a service that they use on a constant basis to manage, grow, or sustain their business and charge them on a recurring basis. This is in contrast to businesses where the bulk of the firm’s subscribers use a system for free and goal of your company is to convert X% of them to a paying business. In the latter model, refer to our freemium conversion to paid customer numbers for insights into this model.

A word about a new buzz word making its way through SaaS: “negative churn.” We won’t be using it in this report. At its heart, the phrase is a double negative and overly confusing and redundant, something like describing walking forward as “achieving negative backwards progression.” The current means of measuring churn are clear enough and in our expert opinion, don’t need another layer of jargon to overlay them.

Our churn numbers remain stable in contrast to our last report, and we believe this range should now be regarded as an industry standard. The sharp fall off in companies reporting churn rates below  10% is easy to explain; once your churn rate exceeds this number your chances of going out of business rise substantially as your CAC costs begin to overwhelm your revenue generation.

Agile and APIs

Does your company implement “Agile” methodologies in its R&D?

%
a) Yes 76%
b) No 24%
Cross Tab: Development Stage No significant customer revenue Privately owned, privately funded Privately owned, venture funded Public
Yes 68% 23% 92% 72%
No 32 77% 12 28%

The number of firms not implementing Agile technologies in their development has been dropping every year since we started to measure this trend. Note in the crosstab below the overwhelming numbers in the Privately owned, venture funded cohort.

Do you provide third parties with a documented API for your system?

%
a) Yes 64%
b) No 36%

The results for this report are up from 13% from the last report. The use of APIs in SaaS is rapidly increasing as companies are becoming increasingly impatient with SaaS data silos. Another trend driving their acceptance is the growth of device independence and portable, virtualized workspaces.

Are you developing a SaaS product on top of a “full SaaS stack” third-party platform (PaaS) such as Force (Salesforce.com), Servoy, NetSuite’s SuiteFlex or similar system? (Softletter defines a “full stack” SaaS product as one in which the vendor supplies most, if not all, of the underlying infrastructure and middleware required to run a SaaS application. For example, a full stack SaaS development platform typically supplies the underlying hardware, database, and middleware an application needs to run in an online environment, in addition to the programming language/tools required to build a user interface and business logic.)

%
a) Yes 21%
b) No 68%
c) Under consideration 11%

In the previous report, the numbers were Yes, 17%, No, 80%, Under Consideration, 3%. These percentages reflect a significant shift in favor of PaaS adoption, though we question if will ever become the dominant development model.

SaaS Infrastructure

Do you maintain your own hardware/software infrastructure (personnel, servers, storage, security, software, etc) for your SaaS system in-house? Or do you outsource your infrastructure operations? For the purposes of this survey, colocation, where you own servers stored at an offsite location, is regarded as an in-house infrastructure model.

%
a) In-house 39%
b) Outsource 61%
c) Under consideration 11%

When this report was first published, 80% of SaaS companies maintained their own infrastructure. As you can see, the shift towards Outsource is now the dominant model and we predict this trend will continue to shift to Outsource. However, crosstab analysis shows that 60% of firms over $100M maintain their infrastructure in-house. As a company becomes larger, it is able to maintain a large IT infrastructure and can be reluctant to entrust its vital operations to a third party. If you compete with a large infrastructure provider such a Microsoft or Amazon, this becomes an even greater concern.

(In part III of this series we’ll be looking at reseller options and margins, primary reasons to purchase SaaS by potential customers, customer engagement and professional services, and integrated analytics and community.)

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