Greater Sum Ventures (GSV) joined Stax at the first-ever Vertical SaaS Summit, where vertical SaaS leaders shared strategies, perspectives, and insights to grow beyond the subscription.
As experts in the private equity space, GSV concluded the summit with their session on what’s next for vertical SaaS solutions and how leaders can continue to drive growth during today’s economic climate.
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Growing beyond the subscription in the face of the first SaaS recession
According to Forbes, SaaS is experiencing the first industry-wide recession with mass layoffs and historic industry draw-downs. However, PE firms and private investors see the SaaS market as a large landscape that can be looked at through two lenses.
The first lens requires looking back at the last three years since the COVID-19 pandemic, from instability and deals halted due to the uncertainty of the economy to accelerated growth in 2021 when the market came back to life, to now—where interest rates are at all-time highs, and the SaaS industry is broadly prioritizing profitable growth. From an institutional valuation perspective, the market has notably slowed down.
From another lens, however, many peers and SaaS companies under the GSV portfolio are still growing well. Some verticals have even accelerated during the pandemic due to the nature of their services.
The path forward is to prioritize profitable growth with an emphasis on generating earnings.
Advantages of integrated payments vs. selling payments as an ISO
With a push to drive more revenue and grow beyond a recurring subscription, many vertical SaaS companies are beginning to see the value of offering payments within their products. However, there’s a difference between integrating payments with an ISV or payments partner versus reselling payments, like an ISO.
While being a reseller of payments is a fast and easy way to provide payment technology to users, it isn’t always an ideal solution.
Their other option outside of reselling payments was to build a payments company, which is a considerable expense of time and money.
GSV states, “That’s one reason we’re excited about Stax and have seen success with our partnership with Stax. Instead of having to build or buy a payments company, we can leverage the infrastructure Stax has, whether it’s the technology infrastructure, sales experience, marketing experience…Couple that with what we have within our SaaS platforms, and we can offer integrated payments.”
By partnering with a PayFac, there is a more seamless customer experience where data can flow back and forth. Users can marry data from the platform alongside their transactions, giving a concise report that no longer needs to be manually reconciled. And usually, that report can be built within the software itself.
How a multi-product platform in a vertical industry can lead to higher revenue gains
A core strategy for GSV and other PE firms is to offer multi-product platforms within their portfolio to bring complementary companies together and provide innovative solutions.
When products are integrated, businesses cross-sell without investing in developing a brand-new feature. The advantages of having sister companies that complement each other lead to profitable growth without additional expenses.
Another notable advantage of this is the ability for multi-product platforms to bundle their offerings at a discount—giving customers a longer lifetime value than with a single product.
Post-pandemic payment options: Card-present and digital payments
In a new world where in-person shopping and transactions were essentially halted, digital payments, contactless payments, and ecommerce exploded in popularity. However, vertical SaaS platforms should still consider the value of card-present options and evaluate the needs of their customers.
GSV shares, “There are a lot of verticals or use cases out there where card-present payments are still significant. You go to the doctor, and you pay in-person there; you go to your psychologist, and you pay in-person there; your orthodontist, etc. Now we have technology where card-present functionality can be integrated into the SaaS platform, just like card-not-present or ecommerce.”
This seamless integration eases the administrative burden of SaaS end-users and gives them access to more information. Consumers often expect their payments to be reconciled to the same account, with their card information securely stored for contactless payments in-person or digital payments online.
An example of using both contactless and card-present payments would be using card-present tokenization to store a customer’s card information when they pay in person and offering them a discount or loyalty membership that can later be paid for using their card on file.
These two methods help businesses drive more revenue to their bottom line.
Why vertical SaaS solutions command higher valuations
For GSV, payments are always the first thing they look at in terms of valuation or giving their partners an edge with supplemental revenue. Features such as surcharging ease the cost of the business using your SaaS platform.
Anytime a customer buys a service or product, there are many ways to integrate those to provide a better and more seamless customer experience, causing less friction.
It’s essential to define who you’re going to sell to and who your customers are. Vertical SaaS has the advantage of targeting niche markets. However, it’s ideal not to be too narrow that demand doesn’t exist. It’s most effective to define your market segment and understand it well before growing from there and moving to an adjacent market.
For investors, vertical SaaS companies that do complementary things also have the potential to integrate and cross-sell. Stax, for example, is an integrated payments partner with platforms that provide legal software services, professional service management systems, field service software, and more.
Payments revenue vs. recurring revenue vs. one-time revenue
Typically, investors or PE firms look at recurring revenue differently from one-time revenue because there are higher multiples and the potential for future success. With recurring revenue in SaaS platforms, you don’t need to find a new customer to get new revenue, making it easier to grow in some ways. In many cases, payment revenue is even looked at just like recurring revenue.
There are many examples within the GSV portfolio where the revenue they were getting from payments was as much or more than the SaaS revenue. Some businesses sometimes offer their SaaS platform for free and only rely on payment revenue.
The final word: Growing your SaaS value with integrated payments
Payments-Led Growth is a strategy for vertical SaaS platforms to drive revenue with payments. But how can you leverage payments to their fullest potential? It would be best if you had a partner that has the following:
- Payments expertise
- Flexible technology
- Adoption expertise
In short, you have to partner with a company like Stax that can help you with the sales, help you with the support, help you with that technical infrastructure that’s been there and done that. You focus on driving customers to your SaaS platform, while payments are a natural by-product.
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Quick FAQs about vertical SaaS
Q: What are the future trends for vertical SaaS?
Vertical SaaS is anticipated to continue its growth trajectory, with more businesses adopting tailored SaaS solutions specific to their industry needs. The integration of AI and the focus on niche markets are expected to be significant trends.
Q: How can vertical SaaS companies grow during an economic recession?
Vertical SaaS companies can focus on profitable growth by prioritizing integrated payment solutions, expanding their product offerings, and targeting niche markets to maintain and drive revenue during economic slowdowns.
Q: What are the advantages of integrating payments in SaaS platforms?
Integrating payments offers efficiency, enhanced customer experience, real-time analytics, and reduced errors. It allows SaaS platforms to offer seamless transactions and improve overall user satisfaction.
Q: How does a multi-product platform benefit SaaS companies?
Multi-product platforms enable SaaS companies to cross-sell and bundle services, leading to higher revenue without the additional cost of developing new features. This approach also enhances customer lifetime value.
Q: Why is payments-led growth a viable strategy for vertical SaaS?
Payments-led growth allows vertical SaaS platforms to generate supplemental revenue by integrating payment solutions, which enhances customer experience and streamlines operations.
Q: What challenges do vertical SaaS companies face during the first SaaS recession?
The primary challenges include managing high interest rates, maintaining profitable growth, and navigating market slowdowns while seeking operational efficiencies and new revenue streams.
Q: How do integrated payments differ from reselling payments for SaaS companies?
Integrated payments allow for a seamless data flow and better customer experience, whereas reselling payments can be simpler but may not provide the same level of integration or control over the payment process.
Q: Why do vertical SaaS solutions command higher valuations?
Vertical SaaS solutions often target niche markets with specific needs, leading to higher customer retention and potential for cross-selling, which can result in higher valuations due to consistent revenue streams and market demand.
