According to a new research from consulting firm AlixPartners that was released on Monday, midmarket software companies must rapidly transition away from traditional SaaS designs or risk losing ground to AI-powered businesses. According to the review, growth and client retention have slowed considerably over the past few years, mostly as a result of the fast advancement of AI.
More than 100 mid-market technology firms are “pressure cookers” of developing AI models, according to the report, who declined to name particular organizations. We think that some mid-sized enterprise software companies will face challenges in the coming 24 weeks, according to AlixPartners.
Stuck in the middle of the AI arms competition
In what the document called a “big squeeze,” middle-sized software firms are being taken advantage of on both sides.
On the other hand, fast-paced AI companies are using artificial intelligence much more quickly than traditional software companies to create new software.
On the other hand, tech giants like Microsoft and OpenAI are investing billions in specialized AI tools, a level of expenditure that smaller businesses are unable to match. Additionally, legacy software is typically more expensive to develop than AI devices, which further reduces the income margins of smaller SaaS companies.
Due to the economies of scale created by large user bases, larger enterprise software companies can even package AI apps and tools with different features at lower overall costs. In contrast, smaller software companies still rely on conventional per-seat pricing schemes, which are typically more expensive for consumers.
suggested adjustments to adapt to the increase in AI.
To arrive at these opinions, the study looked at 122 software companies whose annual revenues are under$ 10 billion. The study found that sales growth had slowed over the past few years because only 39 % of these companies had met the required number of high-growth companies in 2024, down from 57 % in 2023. This figure is expected to drop even further, down to 27 % in 2025, according to experts.
The average retention rate for online dollars decreased, which suggests a declining consumer base. In the second quarter of 2024, these businesses had a median NDR rate of 120 %, which dropped to 108 % from the previous year.
Half of the businesses surveyed anticipate making major modifications to their business models in the coming year to keep up with the rapid changes brought on by the continuous AI growth. Building AI providers as key items, switching to outcome-based sales designs, and considering mergers or acquisitions are some suggestions in the document.
