Last week I listened to an interview of Benchmark partner Eric Vishria where he talked about the three generations of Software-as-a-Service (SaaS). I like how he framed the idea and wanted to capture the concept here. I’ve thought deeply about the first and second generations of SaaS, but haven’t spent enough time thinking about the third. Let’s dive in.
1st Generation SaaS
The 1st generation of SaaS is defined as moving legacy enterprise applications into the cloud and delivered as a service. Sometimes the technology is literally the legacy solution (previously called Application Service Provider) but more often it’s a new product that’s natively SaaS. Like traditional enterprise software, it’s sold by salespeople, typically with contracts and the usual enterprise process. The huge innovation is the ability of the software vendor to abstract away most of the customer headaches that come with managing software and deliver it as a monthly or annual fee. This, combined with more efficient product development, due to customers always being on the same version, makes for an excellent business and customer model.
Examples: Pardot, Salesforce
2nd Generation SaaS
The 2nd generation of SaaS reimagines business software as more of a consumer product where you can sign up for a free trial or a free, limited version without talking to a salesperson and become productive immediately. This category is often called bottoms-up or freemium as it starts with functional business users getting a job done and spreads in organizations without I.T. involvement. 2nd generation SaaS is bought differently than 1st generation SaaS and feels more natural as both a buyer and user of the product.
3rd Generation SaaS
The 3rd generation of SaaS is SaaS delivered exclusively as APIs — a way for software programs to talk to other software programs without a user interface. APIs are the building blocks of modern software development representing re-usable components that make programming faster and more productive. APIs can now power many aspects of software that 5-10 years ago would have been custom including user authentication/oAuth, sending/receiving email, video conferencing, payment processing, recurring billing, testing, visualizations, reporting, analytics, and much more.
All three generations of SaaS are growing fast and have tremendous runway ahead. Look for the 2nd and 3rd generations to grow even faster and become more commonplace.
SaaS is an incredible segment of the software industry and understanding the three generations helps frame the thinking about product types.