Vertical SaaS is gonna get smashed
Here's why AI is gonna disrupt it, and why horizontal SaaS will follow
🚨 Why Vertical SaaS Is Set to Face Major Disruption
📉 The Deflationary Impact of AI and Automation on SaaS Margins
🎯 Vertical SaaS in the Crosshairs: Industries Most at Risk
💼 What This Means for Investors and Founders
🔚 The End of the High-Margin SaaS Era?
For years, Software as a Service (SaaS) has reigned supreme as one of the most profitable and sustainable business models in tech. With the ability to achieve 80-90% margins and a predictable, recurring revenue stream, SaaS has reshaped entire industries and created a wealth of innovation. But despite SaaS’s dominance, it faces a new and perhaps insurmountable threat: the deflationary impact of AI and automation.With the rise of GPT models, low-code platforms, and in-house AI-driven solutions, the era of high-margin, vertical SaaS may be coming to an end.
Here’s why vertical SaaS is about to get hit hard, what this could mean for businesses and investors, and why tech may soon align with broader economic norms in ways it hasn’t before.
🚨 Why Vertical SaaS Is Set to Face Major Disruption
1. The Operational Cost Conundrum
While SaaS enables high gross margins, it does so with a hefty trade-off: operational expenditure (OPEX). For larger companies adopting SaaS solutions, the costs of managing and maintaining "bums on seats" (human users actively engaging with software tools) add up quickly. Although these tools improve efficiency, they also drive up internal costs for the companies using them. This is a particular pain point for vertical SaaS products, which target specific industries and are highly dependent on user engagement and customization.
As AI-driven solutions become more advanced, businesses will soon question whether they need to pay SaaS providers for niche products—or if they can achieve the same results using in-house AI models and automation. What was once the unique value proposition of SaaS—outsourcing software and its management—is becoming something large companies can replicate internally with their own AI capabilities.
2. GPT Models & AI-Driven Solutions as Game-Changers
The emergence of GPT models and other AI-driven solutions has fundamentally expanded what’s possible in terms of automation, efficiency, and scalability. Companies are no longer limited to buying specific software tools; they can now build intelligent, AI-powered applications to manage workflows, handle data, and even automate complex decision-making processes.
These capabilities have, in effect, expanded the engineering workforce exponentially without adding headcount. Businesses can now rely on AI to manage repetitive tasks, process data at unprecedented speeds, and provide insights that once required entire teams of employees. This development is especially problematic for vertical SaaS, which has relied on its expertise in specialized fields as a differentiator. Now, companies can leverage AI to replicate that expertise, reducing their dependence on industry-specific SaaS products.
3. Low-Code and No-Code Solutions Drive Competition
Alongside AI, low-code and no-code platforms are making it easier for companies to create their own tailored solutions without needing extensive software development resources. These platforms allow companies to rapidly deploy applications, customize workflows, and integrate new capabilities into their existing tech stack—all without the traditional costs of software development or customization.
With low-code solutions, the barriers to entry for developing and deploying customized software are lower than ever. This shift has fueled a wave of competition for traditional SaaS providers, especially those operating in vertical markets. Where once companies might have purchased a subscription for a specialized SaaS product, they can now create their own tailored software solutions that suit their unique needs, circumventing SaaS subscriptions altogether.
📉 The Deflationary Impact of AI and Automation on SaaS Margins
Deflationary pressures from AI and automation are likely to have a profound impact on SaaS margins in the coming years. While high-margin SaaS models have been the standard, with margins reaching up to 90%, the broader economic landscape doesn’t support such extremes for the long term. Historically, average gross margins across industries hover around 40-50%. As AI and automation improve, SaaS and technology companies may find their margins compressing toward these norms, particularly as customers become less willing to pay premium prices for services they can replicate with in-house AI.
SaaS has historically thrived because of its recurring revenue model, high customer lock-in rates, and scalability. But as customers move toward in-house solutions, margin compression is inevitable. This isn’t just a race to the bottom in terms of competition; it’s a fundamental shift toward aligning technology margins with broader economic realities. Here are the driving forces behind this deflationary trend:
Increased Availability of AI Tools: AI solutions are becoming cheaper and more accessible. Companies no longer need to rely on SaaS providers for industry-specific software when they can use AI models to perform similar tasks autonomously.
Reduced Need for Human Intervention: AI-driven software automates more tasks, reducing the need for software that merely assists human users. With AI doing the heavy lifting, the premium on SaaS tools decreases.
Shifting Customer Expectations: As companies become accustomed to AI-driven efficiency, they may start to question the value of traditional SaaS products, especially those with high price tags and limited flexibility.
🎯 Vertical SaaS in the Crosshairs: Industries Most at Risk
The impact of this shift will be felt across all sectors, but vertical SaaS—software tailored for specific industries—is especially vulnerable. Here are a few examples of sectors where we’re likely to see this disruption first:
Healthcare: AI models can now handle various administrative and diagnostic tasks, reducing the need for specialized healthcare SaaS.
Financial Services: Automated financial analysis and risk assessment powered by AI threaten the high margins of SaaS products built for finance professionals.
Retail and E-commerce: With AI able to manage customer service, sales analytics, and inventory in real time, the need for industry-specific SaaS decreases.
Manufacturing: Low-code tools and AI-driven automation enable manufacturers to build solutions tailored to their own workflows, bypassing traditional SaaS.
Vertical SaaS providers face a new reality in which the uniqueness of their offerings is eroded by general-purpose AI models that can be fine-tuned for any industry. This not only threatens the core value propositions of these SaaS products but also their premium pricing structures.
💼 What This Means for Investors and Founders
The changing landscape of SaaS has significant implications for both investors and entrepreneurs. Here’s what to keep in mind:
Be Cautious of High-Margin SaaS Investments: For investors, it’s critical to consider the longevity of any SaaS business’s margins, especially in vertical markets. High margins have long been a hallmark of SaaS, but these may erode as companies transition to in-house AI solutions.
Consider Outcome-Based Models: As traditional SaaS subscription pricing faces challenges, outcome-based or usage-based models may become more attractive to customers. Businesses that adapt their pricing to reflect value delivered rather than just user access will have a competitive edge.
Focus on Adaptability and Innovation: Entrepreneurs should prioritize flexibility, AI integration, and low-code solutions in their products. SaaS providers that integrate AI to create hybrid solutions, enabling both autonomy and customization, will be better positioned to thrive in a landscape dominated by automation.
🔚 The End of the High-Margin SaaS Era?
SaaS has been a groundbreaking business model, and its impact on technology and business is undeniable. But the era of high-margin, vertical SaaS may be drawing to a close. With AI-driven solutions, low-code platforms, and deflationary pressures on the rise, the high margins and exclusive pricing power of SaaS are set to diminish. The alignment of technology with broader economic norms is not just a trend but a significant shift in the industry’s trajectory.
Before setting out a business model or making an investment, it’s essential to consider these evolving dynamics. As margins compress and companies seek alternative solutions, the SaaS model will have to evolve—or risk losing its foothold in the market. This transformation signals an exciting new phase for tech, one where innovation, adaptability, and efficiency will become the true measures of success.
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