Consolidation Imminent Among Enterprise SaaS

It is hard to fathom a world without access to on-demand applications. Enterprise Software as a Service (SaaS) offers quick deployment, ease of upgrades, and lower total cost of ownership; as such it has become a fundamental pillar of business operations. Today, an estimated 70% of businesses use SaaS solutions to manage and scale daily operations compared to around 40% just five years ago.

This evolution is reflected in the high growth rate of pure play SaaS service providers. In 2020, aggregate revenues grew 31% YoY, and for 2021 and 2022 our algorithms predict a healthy annual revenue growth rate of ~34% and ~30%, respectively.

Our machines project 2021’s growth leader will be the Payment services segment (with triple-digit annual revenue growth). Additional expanding segments include Data Services (e.g. data sharing and storage), Human Resources (e.g. payroll and benefits), Communications (e.g. video conferencing) and, as always, Customer Relationship Management. The ongoing shift towards digitalization coupled with the pandemic have accelerated demand for online and contactless payments, as well as virtual communication and collaboration in workspaces. These technologies have embedded themselves into our daily lives and are now part of the norm.

With such large growth opportunities comes intense competition. There are more than 15,000 SaaS vendors and hundreds more are emerging every year. In a bid to stand out in a highly fragmented market, SaaS providers are channeling a lion’s share (~33%) of total revenues to sales and marketing. This compares with an average of ~16% for the S&P 500’s technology sector (XLK) and ~11% for the broader S&P 500.

As a result of relatively high operating costs among SaaS players, we envision a strong wave of consolidation in the near future which will lead to better cost management and holistic enterprise software solutions. This will spark additional growth for the overall SaaS industry and bring new innovation and agility to the enterprise market. We experienced similar consolidations among telecom players in the late 90s and early noughties.