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Understanding The Market Requires You To Understand Market Psychology
The SaaS market opportunity is way bigger than you think
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Understanding The Market Requires You To Understand Market Psychology

Posted: 03 Feb 2021 09:05 PM PST

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The SaaS market opportunity is way bigger than you think

Posted: 03 Feb 2021 01:22 PM PST

Why we are still in the early stages of the SaaS opportunity:

In April 2020, ecommerce spending exploded globally. In 8 short weeks, US ecommerce spending as a % of total retail sales grew from 16% to 27%. For the 10 years previous, ecommerce penetration had been growing at a modest 1% or so per year. Ecommerce sales essentially grew by 10 years in 8 weeks.

While it remains to be seen how much of the growth will be maintain post-pandemic, one things is for certain - the world isn't going back to the way it was before. Ecommerce now needs to be a core aspect of every retail companies strategy. Ecommerce companies like Shopify and Amazon have seen their TAM grow massively and their valuations have grown to reflect this.

What if I told you something very similar is happening right now in SaaS?

Enterprise SaaS spending

Amazingly, in 2020, cloud/SaaS spending is still only 9.1% of total global IT spend.

But this is changing rapidly. A Gartner report expects worldwide spending on public cloud services to grow by 18.4% in 2021. The same report expects cloud spending to be 14.2% of global IT spend by 2024.

In some areas of the world, this shift to cloud is happening at a far faster rate. A Flexera report (which focused on companies in N.America and Europe with over 2000 employees) shows that cloud spending grew from 25% to 30% of total IT spend in 2020, outstripping on-premises software for the first time ever. SaaS spending is growing particularly fast. 56% of companies said that they have seen their SaaS spending grow in 2020.

Much of this growth has been accelerated by the pandemic:

"Moving forward, digital transformation will not be subject to the same ROI justification it was pre-pandemic as the mandate for IT becomes business survival, rather than growth."

Much in the same way that the pandemic has made ecommerce a core part of any retail company's strategy, the pandemic has made cloud/SaaS a core part of every company's plans. Remote/distributed working is a key trend that is here to stay. Employees need to be able to be access their work from wherever they are. Therefore, on-premise software just doesn't cut it anymore.

"The pandemic validated cloud's value proposition," said Sid Nag, research vice president at Gartner. - "The ability to use on-demand, scalable cloud models to achieve cost efficiency and business continuity is providing the impetus for organisations to rapidly accelerate their digital business transformation plans. The increased use of public cloud services has reinforced cloud adoption to be the 'new normal,' now more than ever."

More Apps

At the same time that IT spend on cloud & SaaS is increasing dramatically, the total number of apps that an individual business uses is growing too.

The Okta "business at work" report shows that the average number of business apps used by an Okta customer has increased by about 22% in 4 years. Up from 72 apps to 88 on average. Companies with over 2000 employees use an average of 175 business apps each!

Interestingly, companies are increasingly "double-dipping" when it comes to "best of breed" apps and software bundles. 78% of of companies who use Microsoft Office 365 have also adopted one or more of best of breed apps that Microsoft competes with. Companies are increasingly willing to pay for both Microsoft Office (which has Microsoft Teams) and apps like Slack and Zoom.

"It's clear our customers are prioritizing functionality and employee needs over bundling"

What does this mean for investors?

The accelerated trend towards more cloud/SaaS software will create lots of opportunities for investors. Here are the 4 most important takeaways:

The total addressable market for enterprise SaaS in general is growing rapidly: As cloud spending grows from 9% to 15% to 30% of IT spend, the market opportunity for cloud providers will grow with it. Companies like ServiceNow, Salesforce and Microsoft will gain big as they enable large-scale digital transformation. The only thing better than a massive market is a massive market that is growing fast.
The potential market cap for SaaS companies is way bigger than you think: 15 years ago, business software was mostly reserved for large companies. The TAM for Oracle was relatively small since they only sold software to very large companies. But today, SaaS companies can sell to businesses of all sizes. Companies like Asana and Zoom can sell to both small businesses and Fortune 100 companies. Combine this with a growing appetite for cloud and an expanding number of apps per business and the potential size of these companies is way bigger than expected. 15 years ago, nobody would have dreamed that a company like Docusign would have a market cap of over $42 billion.
SaaS is not a winner-takes-all market: As we saw before, many customers are willing to pay for point solutions and software bundles that operate in the same space. Enterprise SaaS is not a winner-takes-all market. Large incumbents and point solutions will continue to grow. There is room for both Zoom and Microsoft Teams.
We are still early in SaaS: While cloud has been around for over 20 years, we are still really only in the beginning of the cloud transformation. Global cloud spending is still only 9.1% of total IT spend. This percentage will get a lot, lot higher.