AI is Good News for SaaS
Just like SaaS turned out to be for on-prem
We all understand the profound impact of mobile products like the iPhone on everyday life. AI’s potential feels similar. AI & mobile seem to have lot in common.
Yet the comparison with mobile doesn’t reveal much about the road ahead for SaaS businesses contemplating the impact of AI. A much better analogue is the transition from on-premise software to SaaS of the 2000s & 2010s.
Why?
Most b2b software businesses weren't directly impacted by mobile. Yet every legacy, on-premise software business had to adapt to the rise of SaaS, which offered a dramatically new technology paradigm.
The good news is that moving to SaaS was a major boon for many, if not most, legacy software businesses. In fact, even many of the large on-prem software players who were slowest to make the SaaS transition are flourishing. Older software companies like Microsoft, Adobe, and Autodesk all had challenges in moving quickly to embrace the cloud, but all are thriving today.
Why?
Business software is sticky: customers satisfied with an existing, standard paradigm — which on-prem once was — won’t rush to try something new.
Expanded value: compared to locally installed software, SaaS could go much deeper into customers’ workflows and drive greater impact on business outcomes.
Better products: transitioning to SaaS yielded on-prem software developers orders of magnitude more data on product usage, enabling product development to more closely map to customer needs.
Better economic model: the transition to SaaS converted lumpy license revenue into steady recurring revenue, creating a more predictable economic model that’s been welcomed by investors.
The pace of AI development today is stunning. The infusion of AI into b2b software will likely happen much faster than the on-prem to SaaS transition, so software companies today should not be complacent.
Although AI is a potential threat, I think it’ll prove a net positive for SaaS companies today just as the SaaS transition was a net positive for on-prem companies of yesterday. AI will expand the aperture of value creation, enabling much better products.
Today’s SaaS customers will prefer to get AI from their current vendors rather than make the risky leap to new ones. Particularly since the greatest near-term benefits for these customer from AI will likely derive from understanding their data stored in existing SaaS applications.
It’s not yet clear how the economics of AI-based software might evolve from today’s SaaS pricing models. But I suspect that if customer value creation significantly improves, then so will vendor economics. Not all of today’s players will adapt to AI, but I think the median SaaS company will find it a compelling growth opportunity.