Why AI Is 10xing SaaS!
how is AI expanding the whole software industry in the next 5-10 years!
Many discussions today around AI look into the technical aspect but are missing the broader picture.
They’re missing a key point. AI will work as a new “computing layer” on top of the commercial web infrastructure we’ve created in the last 30 years. It will enable a 10x expansion of the current software paradigm.
In short, when we say “AI is eating software,” what we really mean is a creative paradigm, not a destruction paradigm.
AI will make software vertically way more valuable, as it will operate on basic economic assumptions (by making it cheaper, better, and way more customized), thus changing the underlying business models.
This is where market expansion theory comes in handy before I analyze how the software industry might grow tenfold in the coming decade!
Market expansion theory is a mental model that predicts the development of a core technological cycle, the first stage of which is “a layer on top.”
Rather than replacing what was before, the new tech cycle will build upon making it many times bigger.
In a second phase, we’ll see the emergence of native AI players, which will completely redefine the space and transform it into something different.
A third phase is the maturation of that cycle.
From a commercial standpoint, the timeline for it is usually 10-30 years to develop fully!
So bear with me!
In all this, incumbents will initially make the most of this first wave. But over time, native generative AI companies will dominate the market!
That doesn't mean all incumbents will disappear. It simply means we'll see a reshuffling of the competitive landscape (in 10-30 years), with new players dominating the big ones.
And that process might require 5-10 years to kick off!
The mother of modern market expansion
One of the most successful market expansions in modern business history was achieved by Apple.
As the company moved from a niche PC maker, it jumped to new markets until it created a whole new market with its iPhone (what is known as a blue ocean; or at least it used to be so).
As Apple created new products, those new products also comprised new technologies, and they were coupled with a different distribution model.
Platforms dominate distribution
When Apple jumped from computers to the iPod, it started to understand that a product alone wasn't enough to create a whole new market.
It needed a new distribution method and a new platform to enable consumers to consume content at a different level.
From there, the iPod, iTunes, and a new distribution model (single songs could be consumed instead of buying entire CDs) created a whole new distribution platform.
TDM: Technology + Distribution + Monetization
Netflix started as a DVD rental company. That was the most viable way to start a business that could compete with existing players like Blockbuster. Netflix could have tried to play it bigger.
Netflix had known for years that being a competitive player in the DVD rental space was "just the beginning of something else."
In a Wired article entitled "The Netflix Effect" from 2002, Reed Hastings, still current Netflix's CEO, highlighted:
The dream, 20 years from now, is to have a global entertainment distribution company that provides a unique channel for film producers and studios.
Thus, Reed Hastings was well aware of the potential of building a platform, yet he knew it took time to achieve the viability of that business model.
Netflix could have burned all its capital to enter that market early on.
Yet, Netflix's first announcement of "streaming" on its financial statement was in the 2007 annual report, which was presented in 2008.
According to the 2009 annual report, streaming is mentioned 88 times (FourWeekMBA analysis).
That is when things started to pick up!
Netflix jumped from a smaller, limited market to a much larger one with fewer physical constraints.
As Netflix switched from DVD rental to streaming, fulfillment costs related to DVD delivery slowly abated.
As of 2007, when Netflix's revenues were still fully derived from DVD renting, DVD rentals accounted for over 10% of its revenues (FourWeekMBA Analysis).
And suddenly, Netflix jumped from a limited market to an unlimited digital market without physical constraints besides server costs.
By 2019, server expenses increased by $18 million as more streaming was served on the platform (FourWeekMBA Analysis). And yet, this model was way more scalable.
Other examples that we're looking at currently are all around us.
Another interesting one is Uber and how, as the company scales, it explores new ways to achieve its mission.
However, be careful not to take this step too quickly, as a false step might lead to inevitable business deaths.
Technological platforms mature with the birth of an economic ecosystem around them. Conversely, "business platforms" require technological, distribution, and monetization changes that provide a new way of doing business and the basis for new business models to emerge.
Logical only in hindsight
While it makes sense to consider market expansion this way, it's essential to understand that this is logical only in hindsight.
In reality, companies need to adjust as they experience market changes.
For instance, Netflix has survived two eras of changed content distribution formats, and its survival is all but granted.
And in the next era, where augmented reality might become the next available consumer platform, the whole TDM framework might change again!
How is this playing out as we speak for the SaaS industry?
Just recently, deep tech VC a16z published some interesting research about market expansion theory in the era of AI.
We pretty much (their thesis is, on which I agree entirely) AI will expand what used to be vertical software niches to make them an expanded, enhanced version of themselves, based on this new AI paradigm.
Market expansion theory is a critical mental model in business strategy, especially in this area.
That’s particularly evident in the current AI-driven transformation of industries, where technological advancements are making untapped markets viable.
AI and Vertical SaaS (VSaaS): Transforming Business Potential
The application of Artificial Intelligence (AI) in Vertical SaaS (VSaaS) platforms exemplifies this theory.
VSaaS companies are uniquely positioned to use AI to revolutionize niche markets, offering industry-specific solutions that were previously impractical.
Why?
AI reduces labor costs,
Enhances customer retention by increasing Lifetime Value (LTV),
And optimizes operations to lower Customer Acquisition Costs (CAC).
The interesting part is AI will start unlocking the above impact, starting from real-world niches as mundane as:
Chiropractors: Streamlining patient management and billing systems.
Laundromats: Automating inventory and customer engagement.
Veterinary Services: Enhancing operational efficiency through scheduling and diagnostics tools.
This might sound trivial at first, but it will add a lot of value to the real economy, thus turning these niches into expanded markets!
Key Contributions of AI to Market Expansion
AI redefines what is possible within VSaaS and beyond, turning small, overlooked industries into major growth opportunities:
AI Enhances Revenue Potential: By automating complex workflows, VSaaS can multiply revenue per customer up to tenfold, addressing inefficiencies and maximizing profits.
Expanding into New Markets: Traditionally too niche to be profitable, markets like dry-cleaning services or chiropractors become accessible with AI-driven solutions.
Lowering CAC with AI Tools: Innovations like AI-powered voice agents and chatbots minimize acquisition costs and resolve staffing issues.
Targeting Labor Costs for Growth: By automating labor-intensive tasks, VSaaS enables businesses to reinvest in growth areas.
The Underserved Niche Industries
AI has revealed that over 600 industries with unique workflows and operational needs remain underutilized in the VSaaS landscape.
By tailoring AI solutions to these specific requirements:
Segmented Opportunities: High-revenue sectors benefit from AI copilots, while low-revenue industries thrive through full automation.
Viable Market Transformations: AI shifts the perception of small, high-labor-cost markets, rendering them viable through efficiency gains.
Realizing Billion-Dollar Markets with AI
AI doesn’t just replace labor; it redefines how industries operate.
For instance:
Dry-Cleaning Services: Automated inventory and pickup systems reduce costs while improving service levels.
Veterinary Clinics: AI-enabled diagnostics tools and customer management systems streamline operations.
Chiropractic Offices: Enhanced scheduling and patient management systems free practitioners to focus on care.
Recap: In This Issue!
The Broader Picture: Market Expansion Theory
Discussions around AI often focus on technical aspects but miss the bigger picture: AI's role in market expansion.
Market expansion theory explains how technology not only competes within existing markets but creates entirely new opportunities, reshuffling industries over decades.
Incumbents benefit initially, but native AI companies will dominate in 10–30 years, leading to significant shifts in the competitive landscape.
Historical Lessons in Market Expansion
Apple's Evolution:
Transitioned from a niche PC maker to a global disruptor with the iPod and iPhone.
Innovated distribution models (e.g., iTunes) that complemented new technologies to create entirely new markets.
Netflix’s Pivot:
Shifted from DVD rentals to streaming, unlocking a digital, scalable market free from physical constraints.
Built a global entertainment platform, maturing alongside advancements in content delivery and monetization.
TDM Framework: Technology + Distribution + Monetization
Platforms thrive when they integrate:
Technology: Foundational innovations enabling new possibilities.
Distribution: Creating efficient channels to reach users (e.g., iTunes, streaming services).
Monetization: Building sustainable business models around emerging ecosystems.
AI as a Catalyst for Market Expansion
Enhancing Revenue Potential:
AI multiplies customer revenue by up to 10x through workflow automation and labor cost reduction.
Lowering Customer Acquisition Costs (CAC):
Innovations like AI chatbots and voice agents optimize customer engagement, addressing staffing challenges and reducing costs.
Expanding into New Markets:
Previously niche industries (e.g., chiropractors, laundromats, veterinary services) become viable thanks to AI's efficiency.
Transforming Underserved Industries
Over 600 industries remain untapped, each with unique workflows and challenges.
AI tailors solutions to these markets:
High-Revenue Sectors: Utilize AI copilots for decision-making (e.g., veterinary clinics).
Low-Revenue Sectors: Leverage full automation (e.g., laundromats).
Realizing Billion-Dollar Markets
Small markets scale dramatically with AI:
Dry-Cleaning Services: Automated logistics improve cost efficiency.
Veterinary Clinics: AI diagnostics streamline workflows.
Chiropractic Offices: Enhanced patient management frees practitioners to focus on care.
Lessons for the Future
Platforms evolve as economic ecosystems form around them.
Market shifts, such as AR and next-gen technologies, could redefine the TDM framework, prompting companies to adapt quickly.
Market Expansion Theory In Action!
Existing Market: Online Retail (Amazon)
Expanded Market: Smart Home Devices (Amazon Echo)
Expansion Strategy: Amazon expanded from its core online retail business by introducing Amazon Echo, a smart home device equipped with the virtual assistant Alexa. This move allowed Amazon to enter the growing market of IoT (Internet of Things) and voice-activated technology.
Existing Market: Search Engines (Google)
Expanded Market: Operating Systems (Android)
Expansion Strategy: Google expanded from its dominant position in the search engine market to create the Android operating system for smartphones. Android's open-source nature helped Google gain a significant presence in the mobile device market, further extending its reach into the tech ecosystem.
Existing Market: Social Networking (Facebook)
Expanded Market: Virtual Reality (Oculus)
Expansion Strategy: Facebook ventured into the virtual reality market by acquiring Oculus VR. With Oculus, Facebook aimed to create immersive social experiences and expand its presence beyond traditional social networking into the realm of VR technology.
Existing Market: E-commerce (Alibaba)
Expanded Market: Cloud Computing (Alibaba Cloud)
Expansion Strategy: Alibaba leveraged its e-commerce success to create Alibaba Cloud, a cloud computing and infrastructure service. This expansion allowed Alibaba to provide cloud solutions to businesses while diversifying its revenue streams beyond e-commerce.
Existing Market: Ride-Sharing (Uber)
Expanded Market: Food Delivery (Uber Eats)
Expansion Strategy: Uber expanded its services by introducing Uber Eats, a food delivery platform. This strategic move allowed Uber to capitalize on its existing driver network and expand into the food delivery market, offering additional revenue streams.
Existing Market: Streaming Music (Spotify)
Expanded Market: Podcasting (Acquisition of Anchor and Gimlet)
Expansion Strategy: Spotify expanded from being a music streaming platform by acquiring podcasting companies like Anchor and Gimlet Media. This move aimed to capture the growing podcast audience and diversify Spotify's content offerings.
Existing Market: Electric Vehicles (Tesla)
Expanded Market: Energy Storage (Tesla Powerwall)
Expansion Strategy: Tesla expanded its focus from electric vehicles to energy storage solutions with the introduction of the Tesla Powerwall. This allowed Tesla to address renewable energy needs, making it more than just an automaker.
Existing Market: Social Media (Snapchat)
Expanded Market: Camera Technology (Spectacles)
Expansion Strategy: Snapchat expanded into hardware by releasing Spectacles, camera-equipped sunglasses that allow users to capture and share moments seamlessly. This move aimed to diversify Snapchat's offerings beyond its social media platform.
Existing Market: Online Payments (PayPal)
Expanded Market: Peer-to-Peer Payments (Venmo)
Expansion Strategy: PayPal expanded into the peer-to-peer payments market by acquiring Venmo. Venmo's social payment platform allowed users to send money to friends and family, complementing PayPal's online payment services.
Existing Market: Software (Microsoft)
Expanded Market: Cloud Computing (Microsoft Azure)
Expansion Strategy: Microsoft expanded into cloud computing with Microsoft Azure. Leveraging its expertise in software and enterprise solutions, Azure became a leading cloud platform, offering a wide range of cloud services to businesses globally.
Existing Market: Online Search (Baidu)
Expanded Market: Autonomous Vehicles (Apollo)
Expansion Strategy: Baidu, often called the "Google of China," expanded into autonomous vehicles with its Apollo project. By combining its expertise in AI and data analysis, Baidu aimed to develop self-driving technology and participate in the future of transportation.
Existing Market: Video Streaming (YouTube)
Expanded Market: Subscription Streaming (YouTube Premium)
Expansion Strategy: YouTube expanded its video-sharing platform by offering a subscription-based service called YouTube Premium. This allowed users to access exclusive content, ad-free viewing, and offline downloads, providing an additional revenue stream.
Existing Market: Mobile Phones (Samsung)
Expanded Market: Consumer Electronics (Samsung Smart Appliances)
Expansion Strategy: Samsung expanded its product portfolio from mobile phones to include a range of consumer electronics, such as smart TVs, refrigerators, and washing machines. This diversification aimed to create a more extensive ecosystem of connected devices.
Existing Market: Social Media (LinkedIn)
Expanded Market: Professional Learning and Development (LinkedIn Learning)
Expansion Strategy: LinkedIn expanded into the professional learning and development space by offering LinkedIn Learning, a platform for online courses and skills development. This move aligned with LinkedIn's mission to connect professionals and empower their careers.
Existing Market: Ride-Sharing (Didi Chuxing)
Expanded Market: Autonomous Driving (Didi Autonomous Driving)
Expansion Strategy: Didi Chuxing expanded into the autonomous driving field by launching Didi Autonomous Driving. Leveraging its extensive ride-sharing network, Didi aims to develop self-driving technology and play a key role in the future of mobility.
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Ciao!
With ♥️ Gennaro, FourWeekMBA
