These trends will define the SaaS market in 2021

As SaaS matures, the customer and investor expectations will only rise.

The recent crazily successful Snowflake IPO seems to have brought a second wave of SaaS fever to the market. Why? Shares more than doubled, and this California-based cloud data-warehousing company raised $3B in the biggest software IPO ever, adding some Death Valley heat to the competition.

However, even without it, SaaS has already become the gold standard for businesses, from the archaic law industry to cutting-edge IoT startups. Since the SaaS market has catapulted from just 2% of the software market in 2009 to 23% in 2020 and reached $100B in revenue, this trend will surely continue in 2021 and beyond.

As SaaS matures, the customer and investor expectations will only rise. A subscription-based model and a product hosted in the cloud are only a bare minimum. To succeed in the SaaS space, companies should offer a streamlined as-a-service delivery experience, fresh functionality, and at least some hint of growth, which is especially important during this period of uncertainty.

Therefore, we've gathered the hottest SaaS industry trends of the VC financing and engineering ecosystem to help you build a relevant SaaS solution, out-innovate competitors, reap all SaaS benefits, as well as come prepared for any possible market turbulence.

SaaS trends: State of the SaaS investing market

Powering almost every department at work and a fair share of household activities, the Software as a Service industry is currently an insanely active market boasting the highest innovations and valuations. Proof? In Q3 of 2020, we counted 25 SaaS unicorns compared to 10 in Q3 of 2019. Never mind the fact that Shopify now trades at 51 times forward revenue, Zoom — 37 times, and Twilio — 20 times.

SaaS market outperformance since the coronavirus-induced lows of mid-March.

State of the SaaS investing market

Snowflake's unexpected success suggests that public cloud market investors are watching high-priced shares and have a great desire to pay for growth. Clearly, this can be applied to the private investment market as well. The interest in growth-focused SaaS means that investors believe in the steady long-term growth of software and are always looking for opportunities, with the money ready.

Still, not all founders are given the upper hand in the race for those funds.

If you look at Forbes' Cloud 100 list, it's obvious that some sectors are objectively COVID-depressed (retail, travel, etc.) but some managed to catch the tailwind. Capital is flowing into the shares of databases, automation, developer tools, fintech, and vertical SaaS (see more on that further in the article).

Besides, cybersecurity is increasingly drawing investors' attention as it moves to the cloud. Such privacy regulations as GDPR, CCPA, etc. created new security and compliance needs to focus new, potentially profitable businesses on. HR and customer support solutions will also attract more investments because more legacy apps are transitioning to the cloud and SaaS.

According to Blissfully, companies use 3x more free than paid apps, so companies with the try-before-you-buy approach have made the leap in 2020. After all, Zoom and Slack have a free tier in their apps, and do you remember what blockbuster IPOs they had? So, if you're seeking to use upsells for expanding, go ahead.

On the other hand, sales solutions, being SaaS market trailblazers and including Salesforce and all sorts of CRMs, show the slowest or almost no growth.

Finally, if you're choosing the sector to start a business in, then great news: every sector is ripe, and the future of SaaS is brighter than ever. Even though there are millions of apps on the market, there are still millions if not billions of dollars in opportunities, especially considering the continuing digital transformation and a dearth of technology in healthtech, insurance, security, e-commerce, and more.

SaaS software development trends

Whether you're about to make important SaaS investment decisions or choose how to diversify your SaaS offering, it's important to understand in what direction SaaS is heading. Here are the top SaaS development trends to watch in 2021.

AI-centered SaaS

In such a fast-moving industry, Software as a Service representatives with ambitious plans must spare a seat for artificial intelligence and machine learning in their tech stack. You wouldn't mind some super efficiency in high-volume manual processes and a hyper-focus on customers' needs, would you?

There are several areas where AI/ML can be deployed specifically for SaaS organizations. These include analyzing historical data to predict customers' next steps, customer support automation, pricing optimization, and talent sourcing, to name a few.

Furthermore, the IT security industry is large and still growing, so AI can make cybersecurity more effective, affordable, and widely accessible. With the implementation of AI technology, it's possible to accelerate threat detection, identify common threat patterns, as well as de-risk cyberattacks long before they reach software systems.

White-label SaaS

White-label SaaS refers to a fully integrated, tested, and vetted product produced by one company and then bought by another one to sell under its brand. White labeling is a way out for many small businesses (those who would like to kick-off their own marketing automation, task management, e-commerce, etc. platform should listen closely), and especially startups, that try to compete with the likes of Shopify, Slack, and Dropbox. When done right, an entire brand can be built around a SaaS white-label product, particularly given the constantly emerging tech advances.

More opportunities in vertical SaaS

Building a SaaS product focused on a specific vertical is a surefire way to become a successful SaaS company. This works because when SaaS business targets the customer group sharing the same activities or interests, it can go deeper into core workflows and spend fewer resources on marketing and sales.

Additionally, some verticals that are still struggling with legacy software (such as logistics, construction, transportation, and local government) will become more open to modern SaaS as technology evolves and enters the economy.

According to Andreessen Horowitz, fintech is perfectly positioned to scale vertical SaaS, as most revenue now comes from financial services. When SaaS firms add financial services alongside the core product, they get 2-5x increased revenue per customer, and this is just the start. So, fintech will likely drive the next era of vertical SaaS, open new vertical markets, and improve different business models.

The rise of low-code, no-code SaaS platforms

Low-code or no-code means creating new applications with minimal coding requirements, often using development toolkits, drag-and-drop interfaces, reusable components, and more.

According to Forrester, half of the surveyed developers have already adopted or plan to adopt the low-code tooling. Moreover, Q1 2020 VC funding for no-code/low-code startups was around $80M, while in Q2 we can see at least $140M. Apparently, no-code/low-code companies are expected to raise approximately $500M by the end of 2020, and the growth will be no less spectacular in 2021.

In the context of talent shortage and increased demand for innovations, no-code and low-code platforms will help businesses deliver mission-critical apps faster and at scale, clear up backlogs, improve team productivity, and respond to changing user needs effectively, to name a few. Moreover, this rather inclusive trend will allow regular folks to create full-fledged apps, without incurring heavy costs.

Unbundled SaaS applications

The "bigger is better" approach isn't about SaaS. Customers are demanding more customized experiences, which is where unbundling comes into play. This approach presupposes selling software in the form of an API instead of a fully packaged product.

This could be highly beneficial to both SaaS companies (particularly, startups) and their clients. Unbundling empowers vendors with a competitive edge and niche offering while allowing users to determine their own experience beyond rigid UI. Another "small" bonus is that users pay only for the functionality they'd like to use.

Transition to PaaS

This SaaS industry trend has largely the same roots as the previous one: the need for customization.

Whether it's IaaS, SaaS or PaaS, there's no universal solution for all companies. Still, PaaS, the least mature type of cloud computing yet no less promising one, allows customers to build add-ons to the core product that they initially acquired. This makes PaaS a highly scalable and flexible alternative to SaaS that brings a more personalized experience while sparking better growth and customer retention rates.

SaaS connections and integrations

SaaS connectivity limitations are the top reason why companies adopt and then expand API integration projects. If SaaS isn't integrated properly, it's just silo as a service.

Since any SaaS solution must operate faultlessly in today's increasingly complex IT mix of on-premises and SaaS applications, blockchain and other technologies, the trend of seamless integrations and connections has gained traction in the past few years. More vendors include automated API integrated features in their offerings to enable customers to perform integrations more effectively and with better time to market.

So, how do you become the best of the SaaS Class in 2021?

As per Deloitte, 93% of CIOs in the SaaS industry reported plans to adopt cloud SaaS. So, the market transformation towards SaaS and cloud is inevitable, and the subscription economy is overtaking the traditional way of doing business.

The SaaS revolution will bring the huge growth potential, more new businesses, greater interest from investors, and more cost-effective technologies — software will no longer be an enormous expense, but rather just a part of operating costs.

The future of SaaS will also depend upon businesses' ability to integrate and partner with peers to refine products and services. Being a real challenge and a great chance at the same time, interconnectability will define the SaaS market's winners.

And we hope you'll be among them.

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