AI SaaS Is Becoming a Commodity – What Business Models Still Work?

Margins are shrinking. Competitors are multiplying. If you’re building AI SaaS in 2024, the room for error is gone—and so, it seems, is the room for profit. The anxiety is justified: when every founder has the same access to foundational models, how do you avoid racing to the bottom?

Run the actual numbers: average gross margins for AI SaaS have dropped a full ten percentage points in just three years. It’s not just your imagination. But here’s what the math also says: differentiation isn’t dead, just hiding. The business models that survive are changing fast—let’s look at where the real leverage is now.

AI SaaS: Margin Pressure and the Commoditization Squeeze

Generic AI SaaS is getting cheaper to build—and harder to defend. As foundational models and APIs become commodities themselves, the knock-on effect is visible in the numbers. 78% (2020) to 68% (2023)—that’s the average gross margin decline for AI SaaS, according to McKinsey.

Most people skip this part: lower margins don’t just mean less profit per customer. They reduce your buffer for experimentation, for customer acquisition, for running the business at all. As API access gets cheaper and more widespread, the market fills with undifferentiated tools that do the same thing, the same way, for the same price—or less.

“AI SaaS companies must move beyond generic outputs and focus on domain expertise and sticky workflows to survive.”
— D.J. Patil, Former U.S. Chief Data Scientist; Data Science Partner at a16z

Founders are feeling the squeeze. The more accessible AI becomes, the less defensible any one product is—unless it solves a unique problem or fits so deeply into a customer’s workflow that switching isn’t worth the hassle.

The Thin Wrapper Problem: Why Most New AI SaaS Feels the Same

Here’s what the data says: 65%+ API-based launches (2023). That’s the portion of new AI SaaS startups last year that were essentially thin wrappers around someone else’s model, per Forbes Tech Council. It’s never been easier to stand up a chatbot or a doc summarizer. But that ease comes at a price—so does everyone else.

This is the thin wrapper problem. If your product is just a UI on top of an API, you’re competing with every other founder who had the same idea yesterday. Pricing becomes a race to the bottom. Customers churn as soon as the next wrapper adds a feature or drops their price.

“Defensibility comes from unique data and embedding into customer processes, not just slapping an AI interface on a generic task.”
— Sarah Guo, Founder, Conviction VC; Former General Partner, Greylock

In a world of generic wrappers, differentiation is fleeting and price is the only lever left—until someone goes free.

Verticalization and Workflow Integration: Where Defensibility Returns

So where do the numbers point if you’re trying to build something durable? Verticalization and workflow integration. 24% CAGR (vertical) vs. 11% (horizontal)—that’s the 2022-2023 growth differential for vertical/industry-specific SaaS versus horizontal platforms, as Gartner reports. Investors and customers are voting with their wallets: they want tools that solve real, gnarly, industry-specific problems.

Vertical SaaS means going deep, not wide. It’s building for freight logistics, dental practices, or legal compliance—not just “AI for docs.” The math is clear: when you integrate so tightly into a workflow that you automate away the painful steps, switching costs go up, churn goes down, and margins recover.

Most people skip this part: proprietary data is the real economic moat. If your SaaS gets smarter as it sees more unique customer data—data no one else has—your value compounds over time. That’s how you get back to higher margins and defensibility.

“Value now flows to companies embedding AI into end-to-end industry workflows, not just offering generic AI features.”
— Erik Bak-Mikkelsen, Research VP, Gartner

If you want to run the numbers on whether your SaaS is headed for commodity pricing or defensible growth, use a tool designed for the job. Model your SaaS defensibility and FIRE runway—track your margins, vertical growth, and workflow integrations to make every business decision a step toward financial independence.

Outcome-Based Pricing and Embedded AI: Shifting the Revenue Model

Margins aren’t just about what you build—they’re about how you charge for it. The fastest-moving AI SaaS vendors are shifting from seat-based pricing (a commodity in itself) to outcome-based billing. 18% (2023), 7% (2021)—that’s the percentage of vendors experimenting with outcome-based pricing, per McKinsey. In two years, that’s more than doubled.

This isn’t just semantics. When you anchor your pricing to delivered value—cost saved, revenue generated, hours automated—you tie your revenue to customer success. That’s defensible against churn and race-to-the-bottom pricing. It also justifies deeper workflow integration: the more you automate, the more value you capture.

“The AI SaaS companies that will thrive are those that tightly couple AI with business outcomes and deep customer understanding.”
— Michael Chui, Partner, McKinsey Global Institute

What the Experts Agree On: Data, Workflows, and True Differentiation

Here’s where the consensus lands: the winners in AI SaaS will not be those who simply add an AI feature and call it a day. Sustainable business models are being built on proprietary data, deep workflow automation, and embedding AI into the heart of customer processes. That’s how you create switching costs, compounding value, and real margins.

“Defensibility comes from unique data and embedding into customer processes, not just slapping an AI interface on a generic task.”
— Sarah Guo, Founder, Conviction VC; Former General Partner, Greylock

“Value now flows to companies embedding AI into end-to-end industry workflows, not just offering generic AI features.”
— Erik Bak-Mikkelsen, Research VP, Gartner

If your SaaS strategy is still “just add AI,” the numbers suggest it’s time to rethink. If you’re building for FIRE, only defensible income counts.

Empowerment comes from clarity—and the math is not ambiguous. The path out of commodity pricing is vertical, integrated, and data-driven. Subscribe for more data-driven breakdowns on how founders can build durable income streams and accelerate their path to financial independence.

Which AI SaaS business model do you think will survive the next wave of commoditization? Share your scenario or challenge below.

Sources

• How Generative AI Is Reshaping SaaS Business Models
• AI SaaS in 2024: Trends & Opportunities