In its India SaaS Report 2022, Bain & Company identified the country's SaaS ecosystem as the second largest in the world. Despite a challenging global economic environment, the SaaS sector in India has continued to thrive and is set for more growth in the coming years. SaaS solutions have become highly attractive because of attributes like pay-as-you-go pricing, low CapEx, fast deployment, and on-demand scalability. Indian software vendors are wisely leveraging these value propositions to distinguish themselves in the global arena.

What's working in favour of the Indian SaaS ecosystem

India's steep growth in the SaaS industry and the ecosystem's resilience to macroeconomic volatility comes from several factors:

Customer preferences and accessibility

Digital adoption is booming across B2B and B2C markets worldwide. Businesses must continually innovate and adopt new technologies to remain competitive. In the current economic conditions, companies are naturally gravitating towards SaaS to optimize their costs.

There are still thousands of small, medium, and large businesses in India and other developing markets that are just starting their digital transformation journeys. This presents a vast area of unrealised potential that will contribute to the future growth of the SaaS sector. Additionally, increased broadband availability is quickly bridging the digital divide and helping SaaS companies take their offerings to even the most remote markets.

Vendor efficiency

Today, Indian SaaS businesses stand out in the global market for multiple reasons. A 2023 EY report that surveyed Indian B2B SaaS CXOs states that 80 per cent of Indian SaaS companies have a burn multiple of less than 1.5x, while 54 per cent of all respondent companies have a burn multiple of less than 1x.

Such fantastic financial discipline and capital efficiency could partly be driven by proximity to tech talent, which is abundant in the country. With a strong operational foundation, mature product stacks, hybrid GTM strategies, and the ability to deliver cost advantages for customers, Indian SaaS vendors have the right combination to establish a winning position in the global market.

While India currently holds around 5 per cent of the global SaaS market, that share is growing rapidly. Bain's analysts predict that India will capture ~8 per cent of the global market in the next five years.

The presence of opportunities doesn't mean an absence of challenges

The past few years have been a time of extremes for SaaS. After riding the pandemic-driven digital economy boom, the SaaS market went into correction mode in 2022. Both global and Indian SaaS providers have been reeling from the reality check ever since.

Growth rates dropped, and funding—especially for late-stage startups—took a hit as company valuations deflated and founders faced pressure to show profitability. Globally, the industry also saw massive layoffs from both tech giants and startups. However, 96 per cent of Indian SaaS unicorns and potential unicorns that participated in a recent survey stated that they actively hired and grew their workforce.

There's also the impact of hybrid and remote work models on SaaS. Working remotely has helped companies realise the incredible value of operating in the cloud, both for business continuity and reducing costs. Businesses opting for remote and hybrid work models can now achieve significant cost efficiencies—if they have the right SaaS tools. There is growing demand for full-featured applications that can go above and beyond while keeping costs low. India's SaaS sector is uniquely positioned to meet the need for robust functionality at efficient prices.

Market trends to keep in mind

Technology-wise, niche markets, like vertical and micro SaaS services, have continued to gain in importance, with businesses expanding their cloud strategies, adding more depth and breadth to their tech stacks, and looking to fill functionality gaps. The ramp up in company-wide digital transformation efforts has also increased the appetite for platform suites that offer unified operations and greater flexibility in interoperability, extensibility, and customisation.

Security and privacy are now seen as core tenets of software delivery. Businesses are paying extra attention to these aspects to ensure control over information in the cloud and built-in compliance with national and regional data laws. As customer needs and expectations evolve and market competition intensifies, it will be paramount for SaaS vendors to have strong unique selling propositions.

The way forward for SaaS

Given the current economic circumstances, businesses are focused on optimising for better value. One way businesses look to achieve this with their SaaS investments is by optimising adoption rates and time to value. Companies are increasingly searching for technology solutions that can go live and start delivering ROI quickly.

At the same time, the role of AI in SaaS continues to evolve rapidly, and the industry is still contending with associated challenges, like data quality, consistency, privacy, and accountability. While a substantial amount of early hype around generative AI has now cooled down, there are still vast possibilities for how AI can empower SaaS and improve business efficiency.

As these trends play out, economies slowly recover from the disruptions of the last few years, and the market for SaaS solutions continues to grow, India's SaaS companies should maintain a cautious business approach focused on low burn rates, customer and employee retention, and relentless R&D. This strategy will provide a solid foundation to help the sector continue to grow steadily.

By Praval Singh, VP – Marketing and Customer Experience, Zoho Corp.