Vertical SaaS has consistently been a darling of the tech industry, as upstarts, like ServiceTitan for contractors and Auditboard for accountants, are poised to make a splash when they go public in 2024. Yet, pundits believe we are still in the early innings of this market’s expansion, with sources predicting the market size to increase at a CAGR of 12.6% and grow to a >$400B total addressable market (TAM) by 2032. This suggests a huge opportunity for vertical SaaS players.
In spite of these tailwinds, not all vertical SaaS companies are thriving. This is largely driven by end customers’ increasing expectations and demands for vertical SaaS platforms to consolidate and become end-to-end solutions rather than having to manage a profusion of point solutions. As such, vertical SaaS companies are feeling the pressure to bolster their core product offerings without having a clear line of sight to optimal price increases.
Stripe, the leading B2B payment processing platform, has published numerous reports stating that their Stripe Connect users’ number one request is access to platform-level payment analytics. And, for companies like ServiceTitan and Mindbody, the leading wellness booking platform, payment processing and analytics is one of the most frequently demanded “add-on” features as they aim to check the box as a holistic, vertical SaaS solution.
Historically, it has been hard for vertical SaaS companies to build a payment processing and analytics stack as it was complex and required significant capital investment without the guarantee of additional revenue. But there have been key developments that have changed this including software solutions that allow you to avoid this capital outlay, alignment of incentives from the end customer who now see the value of being able to have visibility and control over their payments. We will go deeper into each one of these developments now.
Vertical SaaS platforms recognize that processing payments is no longer that complicated
Processing payments is a historically arduous process; one which requires infrastructure investment (i.e., becoming a PayFac), or taking on liabilities (e.g., fraud, compliance), and most vertical SaaS companies would consider this a distraction to core business operations.
Despite their unattractive margin profile (0.75-1% of transactions), the sheer volume of payments processed by PayFacs, like Stripe and Adyen, makes them great businesses. MindBody was an early mover among vertical SaaS platforms that capitalized on this opportunity. When they filed their S-1 in 2016, payments already accounted for 39% of their revenue. If this split remained the same today, it would represent over $130M in annualized revenue.
The calculus for vertical SaaS platforms integrating payments processing appears straightforward, but monetization has remained a bottleneck. That is until PayFac agnostic payment infrastructures, like Payabli and Tilled, came along. These platforms allow customers to capture a significant amount of payment processing revenue while avoiding cumbersome integrations, substantial administration and compliance costs, and associated risks.
Now, vertical SaaS platforms can monetize their merchants’ payables volume, an often neglected, but very lucrative, revenue source. And, the incremental product value of becoming an all-in-one solution for end customers cannot go understated.
End customer buy-in is accelerating the payment monetization playbook
Payment processors, like Stripe and Ayden, or POS players, like Toast and Square, have been intentionally opaque about processing fees (they tend to add few additional layers beyond transaction fees). As businesses continue to diversify their payment methods and products, there is increasing pressure on both payment service providers (PSPs) and POS platforms to maintain profitability under a single blended rate. As a result, tiered, usage-based pricing is now commonplace across cloud services, as well as increased fragmentation in PSPs’ blended rate. For vertical SaaS platforms, now is a unique opportunity to educate end customers on how payments impact their bottom line, as it is no longer feasible to build profitable, global businesses with a single blended rate.
Platforms must think about payments at the transaction level. We see examples of this in companies like Revenew that assist vertical SaaS companies in recognizing the substantial opportunity that payments provides, as well as the hidden costs of payment processors. Revenew specifically offers customers full payment transparency down to the individual transaction level, as well as the tools to optimize payments as a profitable revenue stream. This is the best of both worlds for businesses, where they now have insight into what they are paying for and how they control the cost of this line item.
Keeping church and state is becoming more apparent to business owners
We have spoken to several business owners who depend on vertical SaaS to run their businesses; from restaurant owners to beauty salons to commercial contractors. While most were quick to adopt POS platforms catering to end consumers, several are now realizing the negative effects of being beholden to a single platform. Many of these businesses are now keen to diversify beyond a single POS solution and adopt analytics platforms to keep their POS systems in-check.
As noted above, Revenew provides businesses with payment transparency. That said, businesses are also seeking out customer data platforms (CDP) that leverage payment data to identify revenue opportunities. In the past, companies were dependent on payment processors or POS systems for this data. Now, more and more solutions are coming to market that specifically focus on providing these analytics. As a result, businesses are able to achieve a duality of objectives for merchants, where customers are not beholden to a single payment provider, but instead have greater visibility and control over their payments.
In addition to building out payments processing as a revenue channel, we see an ancillary opportunity for vertical SaaS companies to distinguish themselves by providing automated ways for businesses to optimize their operations (i.e., adjusting menu pricing, bundling services or products, etc.). Bikky, a CDP platform for restaurants, has become a leader in this vertical, helping single locations and franchises bolster their operations and having a material effect on the margin profiles for these businesses. We expect more of these payment-centric, CDP businesses to come to market in other verticals.
Vertical SaaS companies that leverage payments to differentiation will thrive
Over the last two years, most tech companies have focused on cost-cutting. And, in spite of the forecasted growth for vertical SaaS, companies in this category are aware of the macro trends and are desperate to become more capital efficient and identify new revenue drivers.
While a steadfast focus on core operational metrics and a continued expansion of product suites are key ingredients to success, taking control of end customers payments will put vertical SaaS providers in the driver’s seat. Payments can provide an immediate monetization opportunity; one that scales with the success of end customers and reveals the drivers of profitable growth.
As the saying goes, when your customers’ needs are your true north, everyone wins.
