Vik Singh wrote a great post in VentureBeat last week titled “Why Salesforce Needed to Buy RelateIQ” in which he talks about a new era in SaaS, the Predictive Era, the era of intelligent software. We’ve just seen one of the first acquisitions in the category with RelateIQ*, but I believe we will see many, many more for a few reasons.

First and most importantly, prediction provides competitive differentiation in an increasingly competitive market. It’s no longer sufficient in most horizontal SaaS categories to provide a cloud-based alternative with similar features to traditional software incumbents. RelateIQ showed this to some extent in CRM. The company uses natural language processing to reduce data entry. But this trend is as true for email marketing tools as logs analysis, for calendars as lead prioritization tools.

This differentiation is made possible because tens of thousands of customers already store the data required to feed machine learning algorithms in the cloud. As a result, predictive SaaS companies can easily access this data. For example, Vik’s company, Infer*, uses a customer’s Salesforce data, among other data sets, to predict which leads will convert to help sales teams prioritize their time. By prioritizing sales leads better, Infer doubles the effectiveness of the sales team.

Third, machine learning is becoming an increasingly available skill set in the job market and the predictive ability of predictive models is improving.

Last, the costs to build models has plummeted as cloud infrastructure costs have fallen. Amazingly, Amazon has reduced prices 42 times in the past few years.

Predictive SaaS companies will face a few challenges as they go to market. First, these companies must rise above the noise of the market. Many companies promise prediction and learning, but few truly deliver it. This is key to winning customers at scale from incumbent players. Second, predictive technologies work better with larger data sets. This typically means predictive SaaS companies should focus on mid-market/large customers and/or teams within businesses that generate large amounts of data. Last, the company has to create a machine learning team.

I’m really excited by the potential of prediction in SaaS. My partners and I at Redpoint have been actively investing in predictive SaaS and are proud to back RelateIQ, Infer, and Refresh among others. Particularly in the broad horizontal SaaS categories, prediction will be one of the key differentiating factors for SaaS in the next five years.

(*) Denotes a Redpoint company