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 report, growth and customer retention have slowed considerably over the past few years, mostly as a result of AI’s rapid advancement.
More than 100 mid-market software companies are involved in the “pressure cooker” of developing AI models, according to the report, which did not name certain companies. 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 culture
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 various 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 surge in AI.
To arrive at these conclusions, the study looked through 122 publicly traded software companies with less than$ 10 billion in annual revenue. 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 online money retention rate decreased as well, which suggests that client retention is declining. In the second quarter of 2024, these businesses’ NDR rates were at their lowest point of 120 %, which was previously the case in 2021.
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. The report recommends considering mergers and acquisitions, including using outcome-based pricing models, and using AI agents as the main items.
