Revenew Playbook: Vertical SaaS

"Software is eating the world"

Hard to believe that it has already been more than a decade since Marc Andreessen’s famous claim. Since its introduction, Software-as-a-service (SaaS) has been one of the most transformative changes to have happened to business software over the last 20 years. But within the SaaS market, there is an increased focus on vertical SaaS (VSaaS) – industry-specific or niche-focused functionality that follows the SaaS playbook. The VSaaS market is anticipated to grow from US$ 152.80 billion in 2024 to US$ 512.75 billion by 2034 according to Future Market Insights’ Vertical Software report. Remarkably, there are now nine public Vertical SaaS companies reporting more than $1 billion in revenue. These companies have captured tremendous opportunities by digitising long-overdue analog industries, or sleepy business processes.

Vertical SaaS focuses on developing software solutions tailored to the needs of specific industries or niches, such as healthcare, finance, construction, shipping, automotive dealers, retail, hospitality, etc. These solutions address industry-specific challenges, such as client appointment scheduling, reservations management, employee (shift) management, and many more. Vertical SaaS presents a unique proposition: creating an ecosystem of solutions meticulously crafted for specific industry needs. This approach enables a more profound understanding and integration into your customers' workflows, fostering loyalty that's hard to shake. It also unlocks a treasure trove of opportunities for upselling and cross-selling.

Embedded Fintech and Vertical SaaS

While the initial wave of API-based solutions allowed platforms to tap into third-party solutions to enable specific functionalities like offering online payment acceptance, the economics associated with that functionality largely accrued to the third-party API provider. In recent years, we’ve increasingly seen API-based fintech solutions (like Stripe, Adyen, etc.) that allow platforms to not only offer certain functionality (e.g., online card acceptance, BNPL, etc.), but also enable them to capture a portion of these economics (e.g., payment fees). In fact, PayPal Ventures reports that a number of vertical SaaS platforms are now generating more revenue from their embedded payments offerings than their core subscription products.

Although monetising payments has become an attractive revenue generator for Vertical SaaS platforms, making sure your payments are profitable and protecting your bottom line is not as simple as it may seem. The question around how you ensure that you’re pricing in a way that makes sense for you and your customers often leaves those in charge of answering this question (often a CFO, VP of Payments or VP of Finance) baffled, with the answer most often being “I don’t know”. From what we’ve seen at Revenew, platforms who have a deep understanding of their payments’ financial performance are best placed to maximise the financial upside from their embedded payments while retaining their customers through ensuring margins are fair and competitive.

Pricing: Not a Once-Off Exercise

Platforms are unique in that they cater to both buyers and sellers - and building a robust platform payments strategy is beneficial to both. For buyers; they benefit from having access a variety of their preferred payment methods which reduces the risk of customer churn. For sellers; more payment methods means more buyers, which ultimately leads to more transactions. But payment processing fees associated with these transactions can pose a significant threat to profitability - especially for platforms operating under an IC++ model, and particularly when dealing with high amounts of low-value payments. This is what an effective platform pricing strategy typically looks like:

Leveraging IC++ Pricing: VSaaS platforms are charged IC++ fees by their PSPs, which generally offer lower rates compared to the blended rates available on the market, particularly for companies with substantial payment volumes.

Offering a discounted rate to customers: Platforms then pass on a discounted rate to their customers (hotels, gyms, marinas, etc.) that is below the direct PSP pricing but still higher than the IC++ fees the platform itself pays. This creates a margin for the platform. This can be in the form of a fixed, blended or even more dynamic rate structure. The most common we’ve seen used is a blended rate.

Managing Complexity: While the platform absorbs the complexity of managing IC++ fees and ensuring profitability, their customers benefit from a simplified, cost-effective solution.

For more context, you can also listen to João Moreira from Monite - a multi-level platform offering a blended rate to other platforms - speak to how and why it works for them here.

This approach presents a win-win scenario:

Cost Savings for Customers: Customers are charged less than they would be if they were to engage with a PSP directly. Often smaller businesses don't qualify for IC++ pricing due to lower payment volumes, making the platform's offer attractive.
Simplified Payment Management: Even if a customer was large enough to qualify for IC++ pricing, the complexities associated with this pricing model can be overwhelming. By leveraging the platform's blended rate, customers avoid these headaches entirely.

Taking a Step Back

When we take the above into account, this gives rise to another question: How do I protect my bottom line and maintain margin profitability?

There’s plenty to juggle: Platforms integrating payment processing services must carefully manage the dynamic relationship between fluctuating processor fees and their fixed or variable customer fees, and there are a number of considerations when developing an effective pricing strategy such as the popularity of different payment methods, other revenue streams, and fluctuations in scheme pricing. These variables introduce additional complexities and fees into your payment processing, making it vital to have a detailed understanding of your margins to avoid loss-making payments because the reality is that the floor is not zero: your platform may not only be giving its services away - it could actually be paying to do so. The success of a platform pricing strategy hinges on whether the platform’s fee (also known as the take rate) is greater than its processing fees (also known as the buy rate). From what we’ve observed at Revenew, platforms oftens struggle to accurately determine their buy rate (particularly when dealing with variable - and often opaque - IC++ fees).

To simplify how payments are managed, we’ve built Revenew and its suite of tools to empower platforms with all of the insights, data, and knowledge they need to gain an in-depth understanding of their business to answer questions like:

How many of my payments are loss-making? Why are they loss-making to begin with?
Which customers are my most profitable/ least profitable?
Which payment methods should I adjust to help me achieve my overall net margin goal?

Armed with this knowledge and the tools Revenew has built for its customers, platforms are able to easily diagnose margin health, implement intelligent pricing strategies and create advanced payment flows that cater to their unique needs without the need to do the heavy-lifting of building these capabilities in-house while simulatenously reducing risk and boosting profitability.

Making Informed Pricing Decisions

Using Revenew, VSaaS platforms can track key metrics such as revenue, margins, and processing fees in detail. Having these insights into your sellers’ performance helps you get to grips with who is generating your platform the most revenue and what the impact on your bottom line would be were you to lose them. This enables you to make more data-driven decisions around which sellers to incentivise to increase engagement and drive loyalty.

Gain real-time insights into payment trends: By understanding how your customers’ customers prefer to pay and how payment methods affect revenue, platforms can make informed decisions about which payment options to optimise for.
Analyse margin health: Revenew’s analytics tools can flag transactions that fall below margin thresholds, allowing platforms to take corrective action quickly. We have seen platforms losing $100k+ p/a unknowingly due to loss making payments.
Monitor the impact of processing fees on overall margins: If you’re on IC++, getting a breakdown of all the fees charged can be a headache. Revenew provides these out of the box.

Simplicity is The Ultimate Sophistication

Managing payment data and processing fees can be is complicated. Platforms need real-time access to consolidated reports on collections, margins, fees, payouts, chargebacks, and other key metrics which are not readily available today without a lot of manual leg-work. From what we’ve seen, platforms who are manually compiling this information are taking at least 10 minutes per payment as illustrated in our recent case study with B2B Fintech Infrastructure SaaS business, Monite. This can have a significant impact on operational efficiency, and the cost implications can be crippling - especially where margins are already razor-thin (see Revenew Co-Founder, Ben Foster’s, latest blog post where he underscores the importance of intelligent pricing solutions tools to help platforms avoid negative margins on low-value transactions).

Revenew’s automated reporting tools helps platforms simplify this process, allowing them to focus on delivering exceptional experiences for their customers on both sides of the equation rather than getting bogged down in cumbersome, time-consuming administrative tasks:

By automating the reconciliation of interchange++ (IC++) fees, platforms can minimise the risk of human error in financial reporting.
Streamlined processes mean less time spent on manual reporting, allowing staff to focus on automating repetitive tasks and driving customer engagement.
Revenew provides detailed reports that give platforms a clear overview of their payment activities and associated fees, helping you to define and execute a successful payments strategy.

To Infinity, and Beyond

Vertical software markets tend to have winner-take-most dynamics, where the vertical SaaS business that can best serve the needs of a specific industry is most likely to be the dominant vertical solution and can sell both software and financial solutions to their core customer base. Embedded payments have opened up a whole new world for vertical SaaS platforms, where we’re seeing a substantial portion of revenue being generated from payments. As platforms incorporate financial services with their existing offerings, they not only increase revenue per customer (between 2-5x according to a16z), but they expose new opportunities in markets previously deemed too small, or not cost efficient to acquire customers, to be viable. As platforms continue to evolve and expand, having an intimate understanding of your payments’ financial performance becomes a crucial component of your business’s viability and retaining customers.

By utilising Revenew’s detailed payment insights and intelligent pricing controls, platforms can significantly improve their financial performance while staying focussed on delivering second-to-none customer experiences. In a landscape where competition is fierce and consumer preferences are rapidly changing, platforms that embrace innovative payment strategies and dynamic pricing models will be well-positioned for sustainable growth. If you’re a vertical SaaS platform and you would like to discuss how we can help level up your payments intelligence, boost your margins and improve your operational efficiency with best-in-class tools, reach out to us by visiting https://revenew.co/contact or send us an email at info@revenew.co.