The Software as a Service (SaaS) era is ending—at least, that’s what some online observers have been suggesting of late. In a recent post on X, Sam Lessing, a General Partner (GP) at Slow Ventures, challenged the long-held belief that SaaS is the pinnacle of software business models. Forbes recently took up Lessing's claim in an article entitled The End of the SaaS Era: Rethinking Software's Role in Business.
So, are we really witnessing the death of SaaS?
The State of SaaS Today
SaaS often uses a product-led growth (PLG) strategy in which new product releases and frequent feature updates are enough to motivate customers to acquire and expand their use of the given product. Despite this goal, closing deals with prospects and expanding their footprint within existing customer organizations remain difficult for many SaaS vendors. This often results from a misalignment between the price charged by the SaaS vendor and the value created by the software for customers.
So why do SaaS vendors consistently fail to achieve profitability and sustainable growth? Does this struggle indicate that the entire business model is irreparably flawed, or does it stem from other issues?
After more than a decade of experience with SaaS, vendors, and their investors are discovering that the promise of high margins and exceptional customer lifetime values (LTVs) has been overstated. These headwinds aren’t just up-and-coming or startup SaaS vendors. Even stalwarts of the SaaS ecosystem, like Salesforce and Workday, are seeing the loss of major customers. Shadow IT and low-code development platforms also erode the value of SaaS and increase customer churn.
Maturing Perspectives on Cloud-Hosted Software
Despite these challenges, the critical role software plays in meeting business challenges is hard to overstate. From the enterprise IT point of view, SaaS products have moved from the early “hype” stage of enterprise adoption to a more mature and nuanced view. Enterprises have learned that SaaS products are not standalone tools. They must work in concert with internally developed products and other SaaS solutions if they are to deliver significant value in the pursuit of an organization’s corporate goals.
Now, let’s return to our earlier question. Is the struggle to achieve strong ROI for SaaS users inherently flawed? Are the shortcomings of popular SaaS products likely to lead to a decline in the utility and viability of SaaS products in the long run?
As I see it, the answer is unequivocally NO.
The Evolution of SaaS and the Gartner Hype Cycle
In the commentary questioning the future of SaaS, we can observe the typical pattern of the well-known Gartner Hype Cycle. The Hype Cycle is a visual representation of a common behavioral pattern arising with each new technology paradigm or industry-wide innovation. From GenAI to Cloud Computing to Quantum Computing to the technology of the dot-com era, the Hype Cycle repeats over and over again.
In the early stages of the Hype Cycle, we see rapid and widespread adoption of a new technology, quickly hitting a peak of interest from the marketplace. That peak is buoyed by inflated expectations of customers. Meanwhile, the “buzz” drives a mass of companies to invest and attempt to cash in on the innovation. But the peak is short-lived because of high expectations, resulting in a “trough” of disappointment and disillusionment. The trough of disappointment winnows out early adopters who rushed into the new technology without strategic alignment to the strategic goals of their enterprise. At this stage of the cycle, the lessons learned by the early adopters, both good and bad, often lead to a long, slow slope upward of improving value and productivity.
Challenges Reinforce the Value of Innovation Triggers
Yes, we are now seeing some long-time enterprises turning to alternatives to SaaS. In some cases, these challengers even publicly debate the worthiness of the new paradigm, as we see with Klarna stepping away from Salesforce and Workday. But upon closer inspection, you will find those challengers do so after a deep analysis of their strategic goals and how to best meet them using a data-driven, buy-versus-build analysis. Meanwhile, the debates occurring in the public commons don’t invalidate the Innovation Trigger phase of the Hype Cycle. Instead, it provides a means for the providers, in this case of SaaS solutions, to further improve their products, incorporate the lessons learned and best practices of the early adopters, and drive their products to new heights of productivity, improved workflow, and greater focus of internal IT staff on adding value to their business.
Innovations, like SaaS products, mature slowly by incorporating the institutional knowledge of thousands of customer organizations and multiple individual users. This body of knowledge helps ensure that the public now has a reliable knowledge base for how best to apply and deploy the innovation and provides a solid checklist of use cases where the innovation is not applicable.
It All Comes Down to Strategy
SaaS products have been the rage for more than a decade due to the wide range of benefits they offer. SaaS benefits are distinct depending on what demographic is asked. For enterprise IT customers, SaaS provides solutions to their business problems, available from the comfort of their browsers and billed at regular intervals from their operational rather than capital budgets. For investors and entrepreneurs, SaaS offers an approach to quickly bring products to market with extremely high margins and potentially long customer lifetime value (LTV). SaaS vendors themselves enjoy the benefits of a software development process that is free from the physical distribution and deployment challenges we face when using physical media.
While all of these benefits of SaaS products have changed the landscape of enterprise IT, one irreducible fact remains. Only those organizations that use strategic thinking, thoughtful planning, and data-driven analysis when deploying any software product, SaaS or otherwise, will reap the greatest benefits of the newest innovations.
For everyone else, results will vary.
