Combatting the AI-Driven SaaS Slowdown
AI is contributing to a slowdown in sales for established B2B SaaS companies. We look at some of the evidence and explore mitigation approaches for SaaS companies.
Several industry experts and analysts are signaling how AI is contributing to a slowdown in sales for established B2B SaaS companies. Various factors are in play, including increased competition from AI-native startups, shifts in buyer behavior, and challenges in adapting to AI-driven expectations.
Let’s first look at how AI is driving this impact, then examine a few approaches to mitigate it.
The AI Halo (How AI freezes sales)
A survey by Gartner found that only 20% of companies have successfully deployed AI in their core business processes, while 70% are still in the experimental phase. This discrepancy creates a “smoke and mirrors” effect, where enterprises are unsure which solutions will deliver real value. Consequently, decision-makers are in a holding pattern, awaiting clearer signals about AI potential and implementation from both their internal efforts and from the market.
Historically, this is known as the “new product halo” effect. Tech companies with a strong market position have often announced new products well in advance of actual release to freeze buyers from adopting existing competing solutions- casting a halo around their announced products. By creating anticipation of greater things to come, they effectively shifted the market's focus to the promise represented by the announced product, often delaying purchases of competing products and aligning customers' expectations with their future offering.
AI is today generating a new product halo that may be delaying purchase decision making for existing SaaS products under the belief that better, AI-based solutions are just around the corner. Today’s lengthening sales cycles and reduced close rates for established B2B SaaS companies may be an indication of just this impact.
Sources: Gartner, Medium, SaaS Capital
The Replacements (How AI changes customer perspectives)
As AI advances from supporting roles to becoming core applications, traditional SaaS models based on interfaces, dashboards, structured data, and user-based pricing face obsolescence. Customers are realizing this. Again, declining sales growth, especially among midmarket SaaS firms, and a concurrent drop in both high-growth classifications and customer retention metrics are indications that customers are rethinking what solutions they really need.
Marc Benioff, CEO of Salesforce, has publicly discussed how AI could reshape the SaaS market. He has noted that AI’s increasing prominence could result in companies needing to rethink their sales models, especially as many traditional players struggle to innovate at the same pace as AI-native startups.
Customers are considering their new AI options judiciously, reconsidering use cases, value proposition, and pricing models. Some are even shedding legacy platforms in favor of building their own AI-powered alternatives, as seen with Klarna moving away from Salesforce and Workday. AI is changing customer perspectives about how they can best accomplish their goals going forward.
Sources: Tekpon, Business Insider, Wall Street Journal
The Middle Child (How midmarket SaaS providers are at special risk)
An AlixPartners study revealed that over 100 publicly traded midmarket software companies are facing significant risks due to the rise of generative AI. These companies are caught between agile AI-native startups offering low-cost, rapidly evolving tools, and tech giants like Microsoft and Salesforce investing heavily in AI.
Amidst the AI transformation, midmarket SaaS providers are under the greatest pressure. From the bottom come nimble, start-ups who are building novel AI-based products that reenvision how to deliver on the core value proposition of existing SaaS offerings. From the top come large-scale competitors who possess the resources needed to rapidly build-out their own AI enhancements, and who will be given grace by customers who’d rather wait for the AI innovations from the leader than switch to a new provider. Midmarket SaaS players don’t have such advantages.
Sources: AlixPartners
Mitigation Strategies
With these forces increasingly in play, B2B SaaS companies must adapt to the evolving landscape by embracing AI technologies, aligning their offerings with AI-driven expectations, and addressing the uncertainties in AI adoption to remain competitive in the market. To this end, SaaS Capital has outlined a few mitigation strategies that we believe are valuable and have adapted here. These are not the only ones, but are a good start:
Be the System of Record (SoR): Assure that your product’s core value is as a SoR- the online and archival single point of truth about business inputs, not just the transforming of those inputs.
Facilitate Network Effects/ Marketplaces: Facilitate commercial transactions between buyers and sellers and ensure/ guarantee that the underlying parties are healthy. To be sure, AI can enhance these capabilities, but the underlying value resides in the network or marketplace itself.
Get Close to Revenue Generation: Focus on business processes closer to revenue generation. While it can certainly augment revenue gen, these processes are less likely to be fully disrupted by AI.
Increase Buyer Focus: While AI product enhancements often revolve around revolutionizing how user needs are met, assure that someone with P&L authority looks like a genius for buying or personally using your SaaS product.
Sources: SaaS Capital
Rethinking Value from First Principles
More than anything else, the AI revolution requires SaaS companies to rethink from first principles: Who should we serve now? What are the root problems we should now focus on? How can value best be generated, differentiated, and measured in the light of evolving expectations and competitors? Etc.
Addressing the impact of AI on an existing SaaS business won’t likely just involve patching some AI into the existing product. It will take a customer-centric rethink to envision both product and business changes needed to compete in a new way within this new world.
(But yes, AI is bound to be part of the solution.)
Bill Haines, Partner