25% of B2B SaaS Sales Are Headed to Cloud Marketplaces
In February 2020, the public cloud market surpassed a $1 trillion market cap, with a 45% growth rate, as reported in Bessemer Venture Partners’ 2020 State of Cloud report. In 2015 they predicted that number would reach $500 million in 2020, yet the actual growth of cloud companies consistently outpaced even the most optimistic projections with that market cap now hovering around $616 billion for the top five public cloud companies.
Now—a happy consequence—cloud marketplaces are on a similar trajectory of growth and have opened up a powerful go-to-market channel for sellers that you probably haven’t heard of yet.
Cloud marketplaces like AWS Marketplace, Azure Marketplace and Google Cloud Platform Marketplace are digital storefronts where companies can list their offerings for software buyers to find, purchase and provision software.
And there are some pretty amazing opportunities for doing business this way. Scaling companies like Snowflake, PagerDuty, Sisense and many more (including more than 35% of Forbes’ Cloud 100 companies) as well as startups like Astronomer, CloudZero and Rill Data have already embraced the movement to marketplace, which has allowed them to tap into $250B+ (and growing) of committed enterprise spend that now flows into all the major public cloud providers.
Beyond access to this massive pool of pre-committed cloud spend, B2B marketplaces unlock larger buyer budgets, accelerated deal velocity and valuable co-sell opportunities with the cloud providers. Not to mention 73% of B2B buyers prefer the convenience of digital buying through ecommerce, web direct or marketplaces (more on that later).
Needless to say, the benefits of the marketplace for both buyers and sellers are extensive, and this is just the beginning. To capture and quantify this movement, Tackle developed the first of its kind State of Cloud Marketplaces Report with insights from Bessemer’s Byron Deeter, Bob Goodman and Mike Droesch.
The report is based on survey data collected from software sellers and buyers of companies at every level of ARR and across verticals like devops, security, training and education, analytics/business intelligence, IT and several others.
This data revealed a clear picture of where cloud marketplaces are heading in 2021. Here’s what we learned.
What’s accelerating this marketplace movement?
The COVID-19 pandemic has driven two simultaneous trends that are converging to accelerate adoption of marketplace buying and selling: migration of software to the cloud and a rise in B2B ecommerce as a means of digital buying.
Companies migrating to the cloud are bringing buyers with them
The adoption of cloud-based services has been on the rise for the past two decades, and now there’s no question that wide-scale cloud use is here to stay. 50% of all enterprise workloads and data are expected to be in the public cloud within the next 12 months, and Sid Nag, Research Vice President at Gartner, has said that “at this point, cloud adoption is mainstream.”
As companies continue to prioritize and even mandate cloud-first—and there are many different versions of what “cloud-first” means these days—one thing that is consistent is that the commitments buyers are making to cloud technology continue to increase. Marketplaces complement these commitments and give buyers the option of using both first- and third-party services to consolidate and “burn down” their cloud spend.
Cloud migrations and commitments also cause companies to rethink their tech stack. Under cloud-first mandates, most companies will look at all the layers of their software stack to determine if they have the right tools to operate in the cloud era. This creates opportunities for cloud-forward software companies to meet buyers where their mindsets (and their wallets) already are.
B2B buyers want ecommerce buying experiences
B2C ecommerce is years ahead of B2B transactions in terms of ease and speed, and software buyers are eager for it to catch up. And why shouldn’t they be? McKinsey reports that ecommerce saw 10 years of growth in Q1 of this year alone—and it’s not slowing down.
It’s no surprise, then, that the State of Cloud Marketplaces survey found that nearly half of software buyers have purchased software through a marketplace in the past year and 74% say they’re likely to make future purchases through marketplaces.
Across our 200+ customers, we see common buyers across solutions. In many instances these are still departmental buyers, but once buyers buy via the marketplace, it’s hard to go back to the friction-filled experience of traditional software buying.
While the marketplace movement has been underway for some time, we’re still in the departmental phase of adoption. The value of simplified procurement and faster deployment are traditional buyer-level benefits as marketplaces offer a way to facilitate access to tools.
Why? Marketplaces offer a better experience, simplify budgeting, require fewer one-off contracts and help enterprises mitigate the risk of cloud commitments. Similar to how we’ve seen more companies adopt a “cloud-first” mindset, we expect to see cloud-forward companies set “marketplace-first mandates” for software purchases. We’ll dig more into this in a moment.
Digital selling meets buyer expectations and demand
The intersection between cloud spend and digital buying preferences have led marketplace growth to plow past expectations. Jay McBain of Forrester expected that “17% of B2B transactions would happen via ecommerce, web direct and marketplaces by 2023.” The reality? Marketplace transactions could hit that number later this year or in early 2021.
That’s a good thing! That means marketplace adoption is starting to make its way across the chasm and it’s serving both buyers and sellers. Tackle’s survey found that 70% of sellers are ready to invest more in marketplaces as a go-to-market strategy. What’s more is that the majority of those sellers (64%) say they will implement it as one leg of a three-legged go-to-market stool alongside direct and channel sales.
The COVID-19 pandemic has left many businesses rethinking their plans on the spot, and most of the State of Cloud Marketplace respondents now plan to invest more in Marketplaces for their go-to-market strategy.
How do cloud marketplaces serve both buyers and sellers?
Because cloud marketplaces naturally complement the push toward cloud-first solutions and give SaaS companies the chance to fulfill digital buying preferences and unlock shorter sales cycles and new budgets, more buyers look to marketplaces for their software needs. Here’s why:
Marketplaces simplify and expedite procurement on both sides
If you’ve ever spent months on a sale only to have the budget fall through, or played email tag trying to finalize a contract, then you know how challenging traditional software sales can be. You can also bet that if that process is tough on your team, then it likely isn’t fun for your buyers, either.
When it comes to the sales process, cloud marketplaces have clear benefits. 68% of buyers and 64% of sellers said the number one reason they use marketplaces is to simplify the procurement process. Procurement today requires many steps for a new vendor, but the marketplace can eliminate the frustration by easing new vendor onboarding, opening opportunities for better deals on core services, and—the big win—consolidating budget and contracts.
In most cases, unique contracts aren’t needed for marketplace purchases. Since buyers have existing cloud agreements already in place, sellers show up as a line item on the buyer’s cloud provider bill.
All of the top reasons why sellers like cloud marketplace sales are associated with deal ease and speed or benefits from cloud provider partnerships.
Another reason both buyers and sellers are flocking to marketplaces is because of the easier access to budget. When enterprise buyers align themselves with a cloud provider, they may sign an enterprise agreement, which is a contract that locks the seller into a committed spend over a certain amount of time. This committed spend is a “use it or lose it” situation, so your buyers can use marketplace software purchases to use up this budget.
Easier procurement and allocated budget mean that marketplace deals happen faster than direct, and 62% of software sellers in our survey noted accelerated deal velocity as their motivation to sell on the marketplace. At Tackle, we’ve seen companies reduce sales cycle times on cloud marketplace transactions by anywhere from 20% to 50%.
Marketplaces will enable creative and flexible new business models
The first-wave leaders in cloud marketplace sales are enterprises with ARR of $100 million or more, representing 30% of respondents in the State of Cloud Marketplace survey. Unsurprisingly, these high-revenue companies complete the most marketplace transactions than any other ARR band.
There’s still plenty of representation of emerging companies though, with 39% of survey respondents in the $0-20M range. This segment of sellers are looking to scale their go-to-market with the marketplace, and the marketplace’s mounting flexibility in business models could help them do just that.
While we expected to see a bell curve of marketplace sales adoption by ARR, the distribution was fairly even between the high and low end.
Product led growth and cloud are reinforcing pay-as-you-go business models, and software providers will need to innovate to enable these types of agreements. This type of flexibility is complex for product teams to solve, especially as they weigh this against the feature demands of their customers and prospects.
Marketplaces provide a combination of contracts and consumption solutions (metered) as a way to offer new consumption-based licensing models without needing to fully re-engineer your product. We’re seeing vendors combine the idea of contracts via the marketplace with metering solutions to enable creative business models that work for their customers, like a baseline contract plus a usage-based monthly consumption charge. Engineering these types of solutions into products can be complex and time-consuming, especially if you’re thinking about doing it for more than one cloud.
By marrying these flexible business models with efficient customer acquisition strategies on the marketplace, early-stage “marketplace-native” companies could complete more deals faster. Integrating the marketplace as a sales channel early on may give them an advantage over non-marketplace competitors.
Marketplaces are a win-win for buyers and sellers
Significant shifts in software don’t happen all that often—and they certainly aren’t usually a win-win dynamic. However, transacting via marketplaces truly helps both buyers and sellers. Buyers can use cloud provider commitments to consolidate cloud solutions under a single bill and contract, while sellers can access new budgets and cut down on transaction time.
Cloud marketplaces represent an enormous opportunity for software sellers as more buyers increase cloud usage and look for ways to simplify software buying. If you want to learn more about cloud marketplace macro trends, read the full State of Cloud Marketplaces 2020.