SaaS vs Custom Software: Guide for Business Decision-Makers

Software as a Service (SaaS) and custom software development cater to different sets of business needs. When building a business application, organizations must thoroughly understand these distinct approaches to meet their objectives effectively.

This guide presents the key differences between SaaS and custom software, particularly in terms of capabilities and business fit. Based on these differences, we’ll highlight crucial aspects to consider when choosing a development approach to benefit decision-makers looking to sharpen their digital transformation strategies.

SaaS vs Custom Software Market Share in the Global Business Technology Landscape

SaaS and custom software represent the two primary approaches to business technology implementation, with SaaS solutions accounting for approximately 70% of new business software implementations and custom development holding around 30% (as of fourth quarter 2023). The percentage of SaaS vs custom software adoption in Europe shows a similar pattern at 75% and 25%, respectively.

The SaaS market offers approximately 25,000 software solutions to businesses, making it the largest category of business software available today. Organizations pursuing custom development can choose from about 4,500 development firms and countless freelance developers globally.

However, while SaaS prevails in the number of implementations and available products, custom solutions lead when it comes to strategic value for specialized operations. Figures from market intelligence firm Gartner indicate that businesses implementing custom solutions report an average ROI of 55% over five years, while SaaS implementations average 42% over the same period.

Why is SaaS More Popular Globally While Custom Software Dominates Specialized Industries?

By the second quarter of 2024, SaaS platforms overtook traditional on-premises software across most business categories for the first time since cloud-based software emerged as a viable business model. SaaS has now passed 70% market share of business software. There has already been a strong trend of on-premises users shifting to SaaS in the last four years.

SaaS offers a diverse selection of applications catering to various price points, which enhances accessibility for businesses globally. This plug-and-play approach provides immediate functionality with lower upfront costs.

There are several reasons why certain industries prefer custom-built software over off-the-shelf solutions:

• Highly regulated industries like healthcare and finance have specific compliance requirements that standardized solutions can’t fully address.
• Businesses with truly unique operational models find that custom development delivers superior competitive advantage and intellectual property protection.
• Large enterprises are generally less price-sensitive than SMBs when it comes to technology investments.
• Custom software represents a capital asset on the balance sheet, making it the preferred choice for businesses focused on building long-term value.

Ultimately, custom software commands the highest satisfaction ratings in specialized industries among major technology approaches (leading SaaS, legacy systems, and hybrid solutions), albeit with only a razor-thin margin according to a 2022 Deloitte Digital Transformation Survey.

SaaS vs Custom Software Differences in Features and Implementation

Before examining user demographics, it’s crucial to understand the fundamental differences in how SaaS tools and custom software solutions are implemented and function within business environments.

SaaS users have a wide variety of pre-built solutions to choose from – with options in functionality, user interfaces, integration capabilities, and price points. Custom software users are limited only by their development resources and timeline.

One difference that stands out is that SaaS solutions typically come with standardized features that businesses must adapt to, while custom-built solutions are designed around existing business processes. The standardized workflows in SaaS can sometimes be more efficient, especially when implementing industry best practices.

When it comes to the implementation timeline, SaaS users are able to deploy solutions within days or weeks, whereas custom software typically requires months or even years of development. SaaS applications have more immediate availability, allowing businesses to address urgent needs without extended development cycles.

Demographics and Behavior: SaaS vs Custom Software Users

Understanding the typical characteristics of organizations that choose between SaaS and custom software development can provide valuable context for decision-makers. Based on recent publicly available global data, here are key takeaways on the differences:

Budget and Company Size

Custom software users generally have larger technology budgets than SaaS users. In a 2024 survey (from US-based research firm Clutch), businesses implementing custom software reported an average annual technology budget of $5.2 million compared to $1.8 million for SaaS-focused organizations.

Enterprise and specialized industry segments prefer custom software. According to a 2022 Gartner report, custom development leads the market in specialized business segments with unique operational requirements or strict regulatory compliance needs, capturing 62% market share. Furthermore, custom software dominates the enterprise segment of companies with 5,000+ employees and with 58% market share.

Company Age and Maturity

Younger companies prefer SaaS, while established businesses prefer custom development. In a December 2023 survey, the percentage of SaaS users (68%) significantly outnumbered custom software users (32%) in businesses less than 5 years old. This pattern reverses in more established businesses.

This aligns with company maturity demographics, as SaaS leads among growth-stage companies with a 72% share compared to 28% for custom software. Conversely, organizations older than 15 years prefer bespoke solutions over SaaS products.

Solution Loyalty and Switching Patterns

Solution loyalty to both approaches is high and steady. SaaS providers enjoy a slightly higher retention rate with 76% of users remaining for five years, compared to 71% for custom software (according to a report from Technology Business Research).

Businesses switch between approaches for various reasons:

• 32% of those who switched from custom to SaaS cited better cost efficiency
• 47% who moved from SaaS to custom development wanted better alignment with business processes
• 38% switched from SaaS to custom for better functionality (reporting, automation, etc.)
• 35% went from custom to SaaS seeking improved functionality

Other factors like user experience, data ownership, and scalability played smaller roles in switching decisions.

Security Perceptions and Feature Adoption

Custom software users feel more secure than SaaS users. While security experts debate whether custom solutions are inherently more secure than SaaS, perception matters. A 2022 survey found that businesses feel more secure using custom applications than SaaS ones. Among those who experienced security breaches, 68% of custom software users reported full data recovery compared to only 52% of SaaS users.

SaaS users are more responsive to system updates. SaaS platforms perform better than custom software when it comes to user adoption of new features (based on a 2021 report from Prosci). The feature adoption rate for SaaS is 62% versus 47% for custom software, indicating that SaaS users more readily adapt to new functionality.

SaaS users also report higher satisfaction with updates (74%) compared to custom software users (58%). A key factor is that SaaS solutions typically incorporate more user feedback in their development cycles, whereas custom software updates often focus on internal stakeholder requirements.

Investment and Cost Structure

Custom software users spend more on initial development. The global average initial investment per user for custom software in 2022 was $4,200 compared to $170 for SaaS users (according to Statista). This reflects the difference in approach: upfront costs for custom development versus subscription fees for SaaS.

For businesses looking to minimize upfront capital expenditures and optimize cash flow, implementing SaaS appears to be the more optimal route. However, for those building long-term strategic assets and highly differentiated capabilities, custom development delivers higher ROI over 5+ year periods. Total spending on SaaS subscriptions over 5 years typically exceeds initial custom development costs (72% higher according to a 2023 analysis).

Artificial Intelligence Features in Modern Business Software

Artificial intelligence has become a crucial aspect of modern business software, enhancing user experience and providing innovative features. Both SaaS and custom software development approaches have made significant strides in

integrating AI into their solutions.

SaaS Focus on Accessibility and Standardization

SaaS providers’ approach to AI emphasizes accessibility and standardization. These AI-powered features are designed to work within the cloud environment, leveraging vast datasets across multiple clients. This approach ensures that AI capabilities are regularly updated and improved based on wide-ranging inputs. SaaS AI-powered features include:

• Virtual Assistants: Many SaaS platforms include AI assistants that help users navigate the software and perform routine tasks more efficiently
• Predictive Analytics:

  SaaS solutions use AI to analyze user data and predict trends, providing valuable business insights

• Automated Workflows: AI-powered automation helps streamline operations, improving efficiency and reducing manual effort

Custom Software Focus on Proprietary Processes

Custom software development takes a different approach to AI implementation, focusing on tailored algorithms that address specific business challenges. This approach allows for:

• Deep Integration: AI features in custom software can integrate deeply with proprietary business processes
• Specialized Algorithms: Development teams can create AI models trained specifically on company data
• Competitive Differentiation: Unique AI capabilities can provide significant competitive advantages in specialized industries

The choice between these AI approaches often hinges on whether standardized AI capabilities meet business needs or if proprietary AI features are required to address unique challenges.

SaaS Marketplaces and Custom Development Firms

SaaS marketplaces and custom development firms are the primary platforms for accessing business software solutions. Both approaches offer a wide range of options, including industry-specific tools, productivity solutions, and enterprise resource planning systems.

Revenue and Solution Preferences

SaaS marketplaces and custom development generate significant revenue, with SaaS generating $149.6 billion in 2023, while custom development generated $78.3 billion. SaaS users tend to spend less initially, with an average implementation cost of $20,000 per application, compared to custom software users, who spend an average of $250,000 per application.

In terms of solution preferences, SaaS users tend to prefer applications in the following categories:

• Customer Relationship Management: SaaS users overwhelmingly choose ready-made CRM solutions like Salesforce and HubSpot
• Productivity: SaaS users prefer productivity tools like Microsoft 365 and Google Workspace
• Marketing Automation: SaaS users tend to prefer marketing platforms like Marketo and Mailchimp
• Project Management Tools: Tools like Asana, Monday.com, and Trello dominate this category

Custom software users, on the other hand, tend to prefer applications in the following categories:

• Enterprise Resource Planning: Custom users often develop tailored ERP systems that precisely match their unique business processes
• Manufacturing and Operations: Custom users prefer specialized applications that control proprietary manufacturing processes and operations
• Logistics and Supply Chain: Custom users develop tailored solutions for their unique supply chain requirements
• Financial Services Platforms: Specialized financial applications with custom security and compliance features

These preferences highlight how business needs drive software selection decisions. Organizations typically choose custom software when they require deep alignment with unique processes or competitive differentiation.

Aspects to Consider When Choosing Between SaaS and Custom Software Development

The differences between SaaS and custom software users can significantly impact an organization’s overall technology strategy. Choosing between these approaches is a decision that should be taken with considerable thought. Many businesses implement hybrid approaches—using SaaS for standard functions while developing custom software for core differentiating processes.

To help make these decisions, here are the most important considerations:

Target Market and Competitive Landscape

If your business operates in a highly competitive industry where operational efficiency is the main differentiator, implementing SaaS is likely optimal. Conversely, if you compete in markets where unique capabilities and intellectual property provide a competitive edge, custom development is preferable.

Investigate the preferred approach of market leaders in your industry. As the above-mentioned figures indicate, organizations with higher technology budgets tend to prefer custom software, which may provide insight into strategic technology investments in your field.

Business Process Standardization

SaaS is built around standardized best practices and workflows that work across many organizations. If your business model aligns with industry standards, SaaS can provide immediate value with minimal adaptation.

However, if your business operations involve unique or proprietary processes that provide a competitive advantage, custom-built software that precisely matches your internal processes may be necessary. Consider how willing your organization is to adapt processes to match standardized software versus maintaining your unique workflows.

Development Considerations

When weighing implementation factors, consider:

• Technical Requirements: Custom solutions require expertise in JavaScript, Python, .NET, and SQL, while SaaS implementation typically requires configuration expertise rather than coding skills
• Implementation Timeline: SaaS implementations typically range from 2-12 weeks, while custom development projects usually take 6-18 months depending on the complexity
• Budget Constraints: Consider both initial and long-term costs—SaaS has lower initial costs but potentially higher lifetime expenses through recurring subscription fees
• Talent Availability: Custom development requires ongoing access to skilled developers, while SaaS requires less technical expertise for maintenance

Consider hybrid development approaches, which can balance speed-to-market with differentiation. Even with existing SaaS solutions, custom development of key integrations and extensions through third-party integrations and microservices can enhance value while maintaining the benefits of both approaches.

Long-term Strategic Considerations

As your business grows, your software needs will evolve. Consider:

• Scalability: How will the solution perform as your business expands?
• Flexibility: How easily can the solution adapt to changing business requirements?
• Integration: How well will the solution connect with your tech stack?
• Data Security: How will sensitive information be protected?
• Vendor Lock-in: With SaaS, what happens if the provider changes terms or goes out of business?

Cost Analysis Over Time

Perform a thorough cost analysis that extends beyond initial implementation:

• SaaS: Lower initial investment but ongoing subscription-based models that increase as user counts grow
• Custom Software: Higher initial investment but the potential for lower long-term costs and asset creation
• Hidden Costs: Factor in implementation, training, integration, and maintenance costs for both approaches
• ROI Calculations: Consider both tangible and intangible returns, including operational efficiency, competitive advantage, and strategic positioning

SaaS and Custom Software Comparison Chart

For executives and product managers tasked to work with technical teams, the table below provides a comprehensive comparison of both approaches:

Making the Right Decision for Your Business Objectives

There are numerous considerations when implementing new software. Executives and project managers can get caught up in technology options, cost implications, and project execution. One factor that could give businesses a leg up against competitors is taking the time to understand the differences between custom software and SaaS products within their industry and tailoring their approach accordingly.

When resource constraints exist or if your business is still testing a market opportunity, consider starting with SaaS solutions. To execute this effectively, make the effort to understand who your users are and factor that into choosing between SaaS and custom development.

Because of advances in development technologies and integration capabilities, businesses can now implement hybrid approaches that combine SaaS and custom elements with minimal risk. While choosing between SaaS and custom software is important, this gives companies more bandwidth to focus on improving business outcomes, strengthening customer relationships, and building sustainable competitive advantage.

Ultimately, the right solution is the one that best aligns with your business objectives while balancing immediate needs with long-term strategic goals. Whether you select a SaaS solution, invest in custom software development, or implement a hybrid approach, ensure your chosen software aligns with your unique business requirements and growth trajectory.