Unlocking the Future: How AI is Revolutionizing Vertical SaaS Revenue

This is the first installment of a two-part series on AI Inside Vertical SaaS.

In 2020, we discussed how fintech enhances vertical SaaS (VSaaS) by increasing revenue per customer by 2-5x. Fast forward four years, and VSaaS is now scaling again, this time propelled by artificial intelligence.

The Evolution of Vertical SaaS

Vertical software markets often feature winner-take-most dynamics, where the best-serving vertical SaaS solution dominates the market. The first wave brought services online, such as Shopify for e-commerce and ServiceTitan for service workers. The second wave combined cloud and fintech, allowing VSaaS companies to embed financial services within their offerings. For instance, Toast now generates over 80% of its revenue from financial technology solutions, achieving a $1.5 billion ARR.

We are currently witnessing the beginning of a third wave: cloud + fintech + AI, which is transforming labor into software.

AI Increases VSaaS Revenue Per Customer

To illustrate AI's impact on VSaaS, consider Mindbody, which serves fitness and beauty studios. Initially, Mindbody facilitated online bookings and scheduling. Then, they expanded to offer payroll and payment processing. However, fitness studio operators still require personnel for operations like marketing, sales, and customer service.

AI can significantly reduce labor costs in these areas, increasing the take rate of VSaaS companies by 2-10x.

Beyond Mindbody, the potential exists for a future vertical SaaS platform to eliminate labor across business operations entirely.

It’s Just the Beginning

AI is ushering in a new era for vertical SaaS, augmenting and automating tasks in marketing, sales, customer service, and finance. This shift will enable VSaaS companies to enhance their software offerings, leading to increased revenue per customer and opening doors to previously inaccessible markets.

Building here? We at team a16z would love to talk to you.

Footnotes:

1. Assuming an average ACV of $6k ($500 per month), Mindbody could double their ACV by offering additional AI-driven services.

At a macro level, total US software spend was just 3% of total labor spend in 2022, indicating vast growth opportunities for VSaaS companies to replace labor with software.