The software-as-a-service (SaaS) industry once promised a golden age of recurring revenue, infinite customer lifetime value (LTV), and market dominance. However, recent trends suggest that the business model many saw as "beautiful" is now proving to be more of a dream than a long-term sustainable reality. The SaaS era may be fading, but that doesn't mean the software itself is no longer valuable. It's time to rethink how software is used in business.
The Decline of SaaS as a Standalone Model
- Limited Lifetime Value (LTV) One of the most appealing aspects of SaaS was the idea that acquiring a customer once meant they would pay forever. In reality, customers face a constant barrage of competitive offerings, new pricing models, and better technologies. LTV is not infinite, as companies must continuously fight to retain customers in the face of market saturation. Pricing pressures and commoditization make it more difficult to justify the continuous, long-term value promised by the SaaS business model.
- Commoditization of Software As the tech landscape evolves, software has become increasingly commoditized. What was once considered cutting-edge technology has become a standard utility. The rise of AI and machine learning makes it easier than ever to build or replicate many software solutions. As the code depreciates in value, SaaS companies face a reduction in differentiation and pricing power. Over time, this commoditization erodes the very value proposition that SaaS companies once thrived on.
- The Sales Challenge: Product-Led Growth (PLG) No Longer Works The Product-Led Growth (PLG) model has long been touted as the new way to acquire users without high sales and marketing costs. However, the harsh reality is that software is hard to sell well, particularly in commoditized markets. Even with a margin-expanding product, the absence of a clear budget line-item in most organizations means it's hard to convince decision-makers to allocate funds for new SaaS tools. This challenge is compounded by the fact that even when deals are closed, the revenue generated from these deals is increasingly less frequent or tied to a smaller percentage of value created.
Here are the charts that support the discussion about the decline of the SaaS business model and the growing value of alternative assets:
- Churn Rates in SaaS Businesses Over Time: This chart demonstrates the increasing churn rates SaaS businesses face, rising from 4% in 2015 to 7.2% in 2023, indicating how retaining customers has become more difficult as competition grows and pricing pressures increase.
Growth of Alternative Assets vs. SaaS Commoditization: This chart compares the growth in the value of alternative assets like real estate (green line) versus the commoditization of SaaS software (red line). The data suggests that while SaaS is becoming more commoditized and less differentiated, alternative assets continue to grow in value, supporting the argument that real, tangible assets are becoming more valuable in this changing landscape.
The New Playbook: Software as a Leverage Tool for Real Asset Acquisition
While the SaaS dream may be on the decline, software still holds tremendous value — but not in the way most people expect. The future of software lies in using it to increase the operational efficiency of traditional businesses, enabling significant performance improvements that, in turn, create a competitive edge.
- Enhancing Business Performance by 20-30% If software can make a traditional business run 20-30% more efficiently than its current operations, it creates an enormous opportunity for competitive advantage. This improvement, however, is not the endgame. The true strategy lies in leveraging that software advantage to buy real-world assets — the scarce and irreplaceable resources that competitors will soon find themselves bidding for.
- Using Software as a Business Weapon By utilizing the leverage provided by software improvements, companies can take over underperforming businesses, realizing immediate wins in both growth and margin expansion. Eventually, as competitors catch up and software becomes a table-stakes commodity, the business's core operational improvements will endure. In this scenario, the software itself isn't the primary asset — it's the means to acquire real, tangible assets that hold long-term value.
- A Case Study: Metropolis at Slow Ventures One example of this new model is the success pioneered by Metropolis, a portfolio company at Slow Ventures. They used software to operate parking lots more efficiently and now own significant real estate assets that provide ongoing returns. Software was merely the tool to gain a foothold in the asset-heavy space of real estate, where tangible, non-commodifiable assets continue to generate revenue.
A Viable Solution: Leveraging SaaS for Strategic Asset Acquisition
So, how can companies overcome the commoditization of SaaS? The answer lies in repurposing software as a catalyst for broader strategic goals. Instead of focusing on SaaS as a final product offering, businesses should leverage software to enhance core operations and unlock value in real-world sectors.
- Reframe Software as a Competitive Enabler Rather than seeing SaaS as an end-all business model, companies should adopt the mindset that software is an enabler for outperforming competitors in traditional industries. The efficiency gains that SaaS offers can be deployed in sectors such as real estate, manufacturing, logistics, and energy, where operational efficiencies create tangible value that cannot be easily replicated.
- Deploy AI and Automation for Strategic Advantage AI and automation tools, which can be embedded in SaaS solutions, are powerful levers for optimizing operations. However, companies need to go beyond merely automating workflows and instead focus on how these technologies can scale up entire sectors. AI-driven efficiencies can unlock value in areas like supply chain management, customer service, and manufacturing, leading to cost savings and enhanced productivity.
- Combine Software with Asset-Heavy Ventures By integrating SaaS and digital tools into industries with high physical asset requirements, companies can achieve a dual advantage: operational efficiency plus asset ownership. Owning the underlying physical infrastructure, which appreciates over time, allows companies to weather the inevitable commoditization of software.
Reimagining Software for Sustainable Growth
The era of SaaS as an ideal business model may have come to an end, but this doesn't signify the end of software itself. It's time to reconsider the role of software as a tool for gaining leverage and obtaining real-world, tangible assets that create long-term value. Companies that embrace this mindset and incorporate software to optimize traditional asset-heavy businesses will be well-positioned to succeed in the future. While SaaS as a standalone product may become standardized, its role in driving strategic asset acquisition could open up new opportunities for growth and profitability.
