In recent years, we’ve witnessed a significant shift in the technology landscape, with AI-enabled automation, data, and cloud-native architecture emerging as powerful enablers of business transformation. This evolution has transformed how SaaS applications are built and deployed. Most users will experience the power of AI-enabled automation through the SaaS applications they use daily.
Today, delivering superior user experiences is not a one-time event. Expectations change with each new set of features and capabilities and every emerging alternative to address business challenges, creating a flywheel for innovation. The ability of a SaaS provider to systematically capitalize on this flywheel effect directly impacts net revenue retention (NRR) and growth.
The financial prospects for SaaS and cloud software are incredibly promising. By 2027, global revenue from SaaS and cloud software is projected to reach a staggering $1,004 trillion, growing at a Compound Annual Growth Rate (CAGR) of 18.5%, significantly higher than the slightly more than 3% CAGR observed in perpetual licensed software. Notably, SaaS applications, which accounted for over half of total cloud software revenue in 2023, are expected to maintain their robust growth trajectory, reaching $504 billion in revenue by 2027. The assurance of business transformation, ongoing disruptions, and the rapid pace of supplier innovation all point to double-digit growth in the near future.
The Rapid Rise of Generative AI
2023 was a landmark year for AI, with GenAI dominating conversations across industries. The advent of GenAI marks a new chapter in the digital journey, necessitating adjustments in strategy, structured investment in new technologies, and the cultivation of new skills within organizations. GenAI is poised to significantly influence where and how investments in AI are made, with its software experiencing a 5-year CAGR of 37% and representing nearly 30% of AI spending. From the start, IDC has invested in developing research and methodologies, including a GenAI Path to Impact Framework that features more than 260 industry and functional use cases. This high-impact work continues to evolve alongside GenAI infrastructure, software, and services advances.
GenAI is initially poised to revolutionize SaaS applications in three key areas: enhancing user productivity, data, and model-driven analytics for faster decision-making and creating dynamic, personalized content for superior user engagement. IDC CloudShare emerging ISV research shows that more than 50% of ISVs are investing significantly in generative AI with a focus on automated testing and improving quality assurance (40.2%), providing smart recommendations (39.8%), autonomous developer training (37%), and rapid prototyping to accelerate innovation (33.7%).
These advancements will enable Independent Software Vendors (ISVs) to optimize customer experience, accelerate innovation cycles, and adapt to future customer needs and market trends more efficiently. Longer-term, advanced, and GenAI will disrupt how applications are developed and transform the traditional categories used to define business software, i.e., enterprise resource management, supply chain management, customer relationship management, and human capital management, to name a few.
Navigating the Monetization Dilemma
One of the most pressing challenges facing SaaS providers is monetizing GenAI features. The variable cost associated with GenAI usage introduces complexity to the monetization strategy. While some providers grapple with whether to charge directly for these innovative features or enhance product value indirectly, it’s clear that developing an effective monetization strategy is crucial for achieving lasting impact. According to IDC SaaSPath 2024 research, 77% of buyers are willing to pay between 10% and 30% more for GenAI-enabled SaaS applications.
The GenAI Journey for SaaS Providers
The journey towards integrating GenAI into SaaS offerings has accelerated rapidly over the past 18 months. As mentioned, more than half of ISVs are already investing significantly in GenAI, with established plans for training and purchasing GenAI-enhanced software and services. This investment reflects the growing buyer demand for GenAI across all industries and geographies, underscoring its potential to redefine the SaaS landscape. Currently, AI is considered integral to the application’s value.
The Role of Use Cases in Driving GenAI Adoption
As the variety and number of use cases for GenAI expands, the focus is increasingly shifting toward revenue generation. Tech buyers are willing to invest in software with embedded GenAI capabilities, indicating a readiness to spend more on these advanced features. This trend highlights the importance of prioritizing and addressing industry-specific use cases with the greatest near-term opportunity to enhance value while exploring opportunities to expand into new use cases systematically.
The convergence of SaaS and AI, particularly GenAI, represents a significant milestone in the evolution of business software technology. As we navigate this new era, organizations must adapt strategies, invest in cutting-edge technologies, and embrace the opportunities presented by GenAI. At IDC, we are committed to supporting businesses in this journey by developing, defining, and defining the value for GenAI use cases to drive business impact across industries and functions.
