Why all the SaaS? Should Execs and Investors think differently in an era of AI? Probably.
The Software as a Service (SaaS) market is still rocking and rolling but it is shifting in form.
Market Size: The global SaaS market was valued at approximately $273.55 billion in 2023 and is projected to reach over $900 billion by 2030. This growth is fueled by the growing number of cloud-based applications across almost every industry from construction to creators. Lots of stats/facts here.
Growth Rate: By the end of 2024, it is expected that 99% of companies (!!!) will use at least one SaaS solution, reflecting the widespread adoption of these tools in every corner of the business world . Currently, enterprises use an average of 371 (!!!) different SaaS applications, wow.
But, we are starting to see two major categories in the SaaS landscape:
Vertical SaaS (vSaaS) and Functional SaaS (fSaaS). Here is where I can see AI playing a different role between helping a business grow incrementally and efficiently (vSaaS) vs exploding as it gains capacity and capability at a transformative rate (fSaaS).
Vertical SaaS
Vertical SaaS products are designed to cater to the specific needs of a particular industry or sector. These solutions are deeply specialized, with features and functionalities tailored to meet the unique demands of industries such as healthcare, finance, real estate, or retail. By focusing on a niche market, Vertical SaaS companies can offer highly customized solutions that address the exact pain points of their target audience, often leading to higher customer satisfaction and loyalty and frankly an easier time building customer communities especially if your clients aren’t really competitive because of geographic or other reasons.
Examples of Vertical SaaS:
Veeva Systems (https://www.veeva.com): This is a leading Vertical SaaS provider for the life sciences industry. Veeva offers cloud-based software solutions for customer relationship management (CRM), content management, and data management specifically tailored to pharmaceutical and biotechnology companies.
Procore (https://www.procore.com): A SaaS company serving the construction industry, Procore provides project management software that helps manage everything from schedules and budgets to blueprints and quality control on construction projects.
Epicor (https://www.epicor.com/en-us): Catering to manufacturing, distribution, retail, and services industries, Epicor provides ERP (Enterprise Resource Planning) solutions that help businesses manage their operations, finance, and customer relationships.
Functional SaaS
Functional SaaS, on the other hand, is designed to perform a specific function or set of tasks that are common across multiple industries. Instead of focusing on a single industry, Functional SaaS products provide solutions that can be applied to different business functions such as sales, marketing, customer service, or human resources, regardless of the industry in which they are used. Worth noting that a lot of functional SaaS products will also have the ability to attempt multiple functions although just like vSaaS they don’t always stretch in ways that are as beneficial outside of the first vertical or functional respectively.
Examples of Functional SaaS:
Salesforce (https://www.salesforce.com): A widely used “CRM platform” which is really a whole ecosystem at this point, Salesforce provides tools for managing customer relationships (including support), sales processes, and marketing.
Slack (https://slack.com): A communication and collaboration tool that can be used by any organization, Slack facilitates team communication through channels, direct messaging, and integrations with other tools, making it an enabler for better communications like a comms director would.
HubSpot (https://www.hubspot.com): Likely you heard about it first for marketing but sales and customer service tools are present.
The Future: Shifting from Vertical SaaS to Functional SaaS with AI
As artificial intelligence continues to evolve and integrate into SaaS solutions, the way we think about Vertical SaaS versus Functional SaaS needs to shift. The traditional appeal of Vertical SaaS has been its ability to provide highly specialized solutions tailored to the unique needs of a particular industry. However, AI is poised to disrupt this paradigm by enabling Functional SaaS solutions to offer industry-specific depth and customization that was previously only possible with Vertical SaaS and lots of years of human experience. As that historical experience and context gets absorbed it lessens the need for humans to do the repetitive or commoditized tasks and only focus on specialized tasks.
Why Functional SaaS Will Outpace Vertical SaaS
Scalability and Flexibility: Functional SaaS platforms, powered by AI, can offer a broad range of features and functionalities that are easily adaptable to different industries. This scalability makes it easier for businesses to adopt and integrate Functional SaaS solutions into their existing workflows, regardless of the industry and in doing so also learn outside in from other verticals about what good sales or any other function looks like.
AI-Driven Customization: With the power of AI, Functional SaaS products (related to the ongoing and early thinking of Service as a Software) can automatically adapt to industry-specific requirements by analyzing data, learning from user interactions, and fine-tuning functionalities to meet specific needs at a rate exponential to a human workforce especially when you think in terms of employee turnover. This means that even though the SaaS solution is designed for a core function agnostic to industry to start, it can learn and evolve to become as specialized as a Vertical SaaS product while the opposite feels exponentially harder to see (vSaaS → fSaaS).
Ease of Integration: Functional SaaS solutions, especially those driven by AI, can integrate seamlessly with other software systems and platforms, making it easier for organizations to create a unified tech or data stack. This ease of integration leads to better data flow, improved automation, and a more cohesive IT ecosystem over time.
So, what does all of this really mean?
The future of SaaS lies in leveraging the power of AI to transcend the limitations of industry-specific Vertical SaaS. By focusing on Functional SaaS, businesses can access flexible, scalable, and cost-effective solutions that provide deep industry context and customization. As AI continues to mature, it will bridge the gap between generalization and specialization, making Functional SaaS the preferred choice for organizations looking to optimize their operations and drive innovation. The shift from Vertical to Functional SaaS is not just a trend; it’s a strategic evolution that will define the next generation of software buyers and perhaps make it possible for little companies to act big and big companies to get nimble again.
Are you ready to hire SaaS instead of license it? If so, get in touch.
