Last week, Anthropic launched a legal plugin for its Cowork assistant. Shortly thereafter, stock market chaos ensued, wiping $300B off software and data stocks. The technology-heavy Nasdaq Composite dropped for three straight days starting from February 3. Many investors are worried that AI could dampen the prospects of SaaS companies like Adobe, SAP, Salesforce, ServiceNow, Thomson Reuters and Workday. However, SaaS products do more than just accomplish tasks. Let us understand what else people buy when they buy B2B SaaS products.
Reliability and security: You pay SaaS companies to get your job done—every time. They ensure high availability and durability, allowing you to focus on your core competency. These applications typically come built-in with industry standard security protocols that often win over your IT department. When something breaks, you can generally expect prompt, high-touch service to get things up and running again.
Integrations: You pay for the integrations that facilitate your business processes. Imagine a sales rep closing a deal in Salesforce that then automatically creates a sales order in SAP. Or think about all the data connectors in Tableau that power your business intelligence. You pay because you would rather not deal with third-party integration negotiations and software maintenance.
Best-in-class: You pay for the most up-to-date way of doing things. SaaS companies exist to serve you the best possible version of their products. Their product managers speak to their customers every day to learn, validate and solve pain points.
AI enables you to build many SaaS alternatives quickly. However, if these alternatives are to replace SaaS, they also need to address the what else that people buy SaaS products for. Some tech-savvy companies would try to build their own alternatives and perhaps succeed to varying degrees. Even so, most companies would probably prefer to not do this undifferentiated heavy-lifting. They would prefer to focus on their core competency instead.
This does not mean AI has no future in SaaS—quite the contrary. AI will turbocharge many SaaS products—by running inside applications. The likely winners would be companies which can create the most value using AI—particularly the ones that can do away with expensive workforce training needed to use many SaaS products. New SaaS or SaaS-like companies will pop up but existing ones with strong distribution have the odds stacked in their favor—as long as they do not fumble.
AI has made the competitive moat of SaaS narrower. This puts pressure on the pricing models of established players. To adapt, SaaS is already moving away from seat-based to consumption-based pricing. This pay-as-you-use pricing is more aligned with clients’ business outcomes. It also means the value to clients is increasingly in line with the cost to SaaS providers. This commoditizes task execution. In a world where task execution is a commodity, AI-powered alternatives would replace B2B SaaS when they can address the what else in addition to accomplishing tasks.