The world of software is comprehensive and has been one of the fastest changing sectors over the last decade. Here we’ll look into how many sub-sectors, with their own unique business models, have emerged from the use of software, where the industry is headed, and analyse key financial information such as market size, multiples and KPIs.
Building custom software has become inefficient and expensive for many companies, which is why streamlined business models have emerged that allow a one-size-fits-all software to be accessed online, and illustrates how many customers rely increasingly on renting services rather than owning the underlying assets. We’re not going to look into the pros and cons of owning vs renting a software in terms of cost, security, customisation, etc. as we focus instead on the financial planning, strategy, and valuation of the industry. The word ‘software’ to describe innovative industries is not even used much anymore, as the industry is so vast, so we naturally refer to its sub-sectors much more frequently now, such as SaaS, Enterprise software, and so on, thanks to the success of Software as a Service business models in the past years. However, as the industry changes, our terminology is also likely to change 1. As many sectors overlap, we will look at the industry as a whole, which can include different business models:
- Software as a Service (SaaS) companies, providing software packages and web apps via the internet, as a service, for both consumers, small and big companies. SaaS may bundle different web apps and services together.
- Platform as a Service (PaaS) products allow businesses and developers to host, build, and deploy consumer-facing apps.
- Infrastructure as a Service (IaaS) provides highly scalable and automated computer resources. Its services can include accessing and monitoring computers, networking, storage, and others.
- Enterprise Software is software that organisations buy and install on their servers, built specifically for enterprises’ needs
- Operating Systems are software products that support a computer’s basic functions
- Apps are applications installed directly on the customer’s computer desktop or mobile phone
The global business software and services market size was valued at USD 429.59 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 11.7% from 2022 to 2030. This does not include the smaller consumer software market that is also growing fast and is closely linked to the Apps market.
The software industry is comprehensive thanks to its wide applications in almost every sector. The industry is so vast that we refer more often to its subsectors, such as SaaS, but many sectors can overlap or target similar customers. These subsectors differ in terms of target customers (enterprises, small-medium businesses, consumers or having multiple target customers), revenue model (one-time payment, recurring payment, additional services) and delivery of the product (online, on-site, desktop, mobile), barriers to entry, sophistication and hardware needed.
Growth is expected to continue to be stronger than the overall economy due to synergies with existing and emerging tech sectors, and due to the consolidation and automation needs of businesses. The sector is at the shakeout stage, where growth is still abundant, but competition is rising and some winners will emerge. The expected financial crisis will affect all industries to some extent. This is a very interesting sector for investors and entrepreneurs to invest into, as revenue volatility tends to be low by focusing on recurring business, which also means that retention is one of the most important success factors for companies in the industry.