The last blog post introduced the Potential Advantages of Software as a Service (SaaS) and how it might seem easy to sell it all over the world. See the first blog here.
Estimates for the size of the worldwide SaaS market vary, but according to Gartner, 2011 worldwide SaaS revenues were US $12.1 billion (revenue numbers will be given in US $, unless noted otherwise), a growth rate of 21 percent over 2010, double the estimated 10% increase in total worldwide software from 2010-2011. Since SaaS growth is expected to remain at this level or increase, predictions are for worldwide SaaS revenues to exceed $20 billion by 2014. This growth is being driven by increased acceptance of SaaS as an enterprise deployment model. IDC (International Data Corporation) predicted that at the beginning of 2009, 76% of U.S. organizations deployed at least one SaaS-delivered application for business use and this number is steadily increasing since then.
Despite the rapid growth and acceptance of SaaS, the Gartner Group estimates that SaaS revenue only comprises 3.4% of total worldwide software sales, which is estimated to be $357 billion in 2011, according to Digital Planet 2010, published by the World Technology and Services Alliance. This estimate might seem low based on subjective factors, such as the amount of innovation flowing from SaaS, willingness of professional investors to fund SaaS companies and worldwide customers of all sizes accepting the SaaS delivery model. According to an IDC (International Data Corporation) poll of 100 CIOs from Fortune 500 companies in June 2008: “73 percent of large companies have adopted or plan to adopt SaaS solutions in the next 18 months.” The most common SaaS solution from this IDC survey was on-demand CRM software.
Of the worldwide SaaS market of $12.1 billion, the 10 largest SaaS markets, including the U.S., account for 90% of world SaaS market total. The U.S. alone is 60% of the worldwide total and the next 9 countries account for another 30%:
Implications for SaaS vendors expanding into these markets are as follows:
- (The Best Prospects) The UK + Ireland, Canada and other English-Speaking Countries in the Top 15 SaaS Markets in the World (Australia + New Zealand, Singapore)
Several English-speaking countries rank as top SaaS markets outside the U.S., such as the UK + Ireland (2nd largest SaaS market in the world), Canada (5th), Australia/New Zealand (11th) and Singapore (15th). These are the most promising locales for a U.S. SaaS company to consider first as new international territories, as they have a high number of internet users, well-developed internet infrastructure for web marketing and web sites and software not requiring translation from English. Conveniently, sales / support can be conducted in English as well. These are the best territories to develop and test a U.S.-based SaaS vendor’s international expansion strategy.
Two other markets in the top 10 are receptive toward English as a language for business, have a relatively high percentage of English-speaking professionals and some of the highest internet usage rates in the world: Benelux and Scandinavia + Finland.
- (Medium Difficulty: Second Stage) Germany, France first, then Italy, Spain
Germany and France are large markets, ranked 3rd and 4th in the world for SaaS market size. Italy and Spain are medium markets, ranked 12th and 13th. These four large European countries, which combined with the UK account for 65% of total European GDP, have a high number of internet users and fair internet infrastructure for web marketing. However, translating software and web sites into German, French, Italian and Spanish are required to initiate distribution of SaaS products. Also, the organizations and businesses that will be the SaaS target markets tend to be slower to innovate with new technologies than the countries listed in the previous sections.
- (Difficult: For a Later Stage) Japan, South Korea
The 5th largest SaaS market in the world, Japan, is notoriously difficult for non-Japanese software vendors because of language barriers and resistance to businesses from outside Japan. In addition, despite the success of a few large SaaS vendors, there are significant cultural barriers to sales because enterprise software customers from this country insist on buying through Japanese re-sellers. This requires a software vendor to establish relationships with Japanese partners, who extract higher commissions than partners from other countries. Software and web-site translation into Japanese, a double-byte character set (DBCS) language, is a must.
The language translation issue is the same for South Korea, another medium-sized SaaS market, ranked 16th in the world. South Korea is developing rapidly and less resistant than Japan to non-Korean vendors. Translation into Korean is absolutely required to enter this market.
- (Difficult: Also for a Later Stage)Brazil
The 10th largest SaaS market in the world, Brazil, is a regional power and becoming much more important in the world as one of the rapidly developing BRICS countries, which are Brazil, Russia, India, China and South Africa, which was recently added, though it is a good deal smaller than the others. Brazil is the 5th most populous country in the world and in 2010 its economy, on a purchasing power parity (PPP) basis, was the 7th largest in the world. In 2011, Brazil, UK and Russia are forecasted be bunched tightly as the 5th–7th largest economies in the world. Brazil is becoming an important country to be reckoned with and should be considered for SaaS vendors’ international expansion.
However, starting a business in Brazil is difficult because of protectionism and bureaucracy. Also, software and web-sites need translation into Portuguese. This market is better addressed after a SaaS vendor has some experience in other international markets.
- (Challenging: IP Protection Issues and Very Low Price Levels)China, India
China is rapidly developing, with its torrid economic growth from the last 30 years continuing unabated. The Chinese total software market is the 4th largest in the world, while its SaaS market is estimated to be the 6th largest. The actual size of the Chinese software market would be two or three times larger if its piracy rates were more in the line with the U.S. and Western European standards.
According to Springboard Research, India is one of the fastest-growing SaaS markets in Asia, from a small base and low price levels, however.
Unfortunately, operating in both China and India, even with the superior protection of SaaS products vs. on-premise software, still entails significant IP risk of theft and counterfeiting. Note the theft and hacking issues Google has faced with its SaaS software. According to The Global Information Technology Report, produced by The World Economic Forum and Insead, in 2010-2011, China’s software piracy rate was 79% and India’s was 65%6. These compare with the U.S.’ software piracy rate of 20%, the UK’s at 27% and Japan’s at 21% (same source). Also, in both China and India, the prices for software can only command 10% to 20% of the price level charged in the other top SaaS markets. For these reasons, neither China nor India are good candidates for a SaaS vendor just starting sales expansion outside its home market. Nevertheless, because of the growing influence and economic development of China and India, they need to be reevaluated as a SaaS vendor builds its international capabilities.
The next in this series of blog posts will introduce The International Marketing, Sales and Support Model.
About the Author
Jay Greenwald is the Managing Partner for International Revenue ACCELERATION, a consultancy that helps on-premise enterprise, SaaS and Cloud software vendors expand their sales, channels and go-to-market capabilities outside their home countries. His enterprise software sales, product and M&A experience spans the U.S. and 65 countries.
Mr. Greenwald has published International Markets for Enterprise Software Vendors: Europe, East Asia, Latin America, Rest of World. You can find this book on Amazon by searching for “Jay B. Greenwald” on Amazon or at this URL.
Mr. Greenwald earned his MBA from Harvard Business School.