Over the past few decades, the software industry has experienced change at the fastest rate we’ve ever seen. Here’s a look at three key ways the software landscape is changing, and what ISVs can do to respond.
1. The land grab era is over
The days when an ISV could launch a new product and secure market share because it was new—or there was simply no other option—are long gone. This “land grab” era, when the ISV that was first to market could stake a large portion of it, is over.
A quick search by category on any major business app store shows just how much competition there is. Searching for marketing apps on the Salesforce AppExchange, for example, returns 284 options, while a search for collaboration apps gives 378 solutions to chose from.
“The whole SaaS market is not saturated yet, but the major horizontal categories are,” said Clement Vouillon, a Senior Research Analyst at Point Nine Capital, in a recent post on Medium. “In many non-saturated verticals or niches, the trend is going toward more and more competition.”
Now, software vendors must differentiate and add value—through technology, services, support, or some combination of these. Many ISVs don’t and won’t have the resources to provide these value-adds at a rapid enough pace, if at all.
Thus, partnerships and go-to-market strategies will be key. Affiliate, referral, reseller, technology and alliance partnerships will be crucial to an ISVs success.
2. The cost to acquire customers is higher than ever, cutting profits
Cost of customer acquisition (CAC) is on the rise. In the crowded market, customers have to sort through hundreds of applications available in dozens of different app stores to find a solution.
Given this reality, it shouldn’t be a surprise that the online advertising can be hit or miss. On the other hand, full scale thought leadership and content marketing programs are expensive and time consuming.
Wore, ISVs may find it more difficult to raise capital in a highly competitive market, since the chances of any one solution of becoming a category-defining tool with large IPO potential are lower. To raise funding in this environment, ISVs will need to show strong CAC improvement as well as solid ROI to justify additional spend on sales and marketing activities.
We believe to lower the cost of CAC, ISVs will have to invest in partnerships. Partners are often experts in a region, vertical, or other defined segment, and they can take on the costly burden of reaching and educating customers and close the deal.
3. The channel works, but partner programs need to be data-driven
Nearly 70 percent of ISVs already work with the channel in some way, with almost half—49 percent—offering referral programs, 46 percent distributing through cloud service providers, and 26 percent working with managed service providers (MSPs).
However, there is still much room to improve. “I think channel distribution is one of the most promising and untapped acquisition channels for SaaS, especially for SMB SaaS startups,” said Tomasz Tunguz, Partner at Redpoint Ventures, in a recent blog post. He continues: “[O]nly 23 percent of SaaS revenues are through channel sales. As the SaaS industry continues to mature, we will see a shift toward more channel distribution models.”
What’s holding ISVs back? Part of the problem is that the partner function is, more often than not, a “soft skill” that is not well measured and understood. This means that many ISVs view partner programs as a necessary evil, one that struggles to justify its value and cost.
The fix for this issue is straightforward: ISVs need to define what success looks like for their partner programs, and find tools that can track and measure their partner activities. This includes functions such as optimizing spend and lead support, customizing revenue shares and prices, and measuring the outcome of leads and the value they drive to the business.
Learn more at AppDirect Engage
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