The Vertical SaaS + Payments Playbook
Tactics to increase your TAM, improve net retention, and increase ARPU
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If you’re building a vertical SaaS company and thinking of adding payments, this post is your new bible.
Pairing vertical SaaS with payments is still one of the most underrated ways to build a big business. So I called up my friend (and vertical SaaS founder), Luke Sophinos, to share his hard earned playbook.
He’s been working to scale CourseKey, a vertical SaaS company for trade schools, for the past decade. He’s experienced first hand the wonders of adding payments to a thriving SaaS platform. Money printer go brrrrrrppp.
For more from Luke, subscribe to his Substack and follow him on X.
First off, what’s this playbook you speak of?
Vertical software and payments go together like peanut butter and jelly.
Vertical software is technology purpose built for a specific industry.
And this playbook outlines how to add a fintech module - specifically payments - to an existing industry specific software - usually something already embedded in a core workflow.
If you can own key workflows either BEFORE or AFTER the actual transaction takes place, you can expand into OWNING the transaction itself.
Nearly EVERY SINGLE large scale Vertical Software player has successfully launched payments and used it as a growth lever, a second act of sorts, and expanded their average revenue per user (ARPU).
A few examples:
Toast (Restaurant Software)
Cloudbeds (Hotel Software)
Storable (Storage Unit Software)
Tribute Technology (Funeral Home Software)
Tithely (Church Software)
Dutchie (Cannabis Store Software)
Ok, so why do it?
#1. TAM Expansion:
In vertical software, where you maniacally focus on serving one industry, you are artificially constrained by Total Addressable Market (TAM). For example, if you serve auto mechanics, there are only so many mechanics in the country (approx. 160,000 in the USA by my count). You can’t wake up one day and also sell the same software to funeral homes. It doesn’t work that way.
So the natural extension is to make their customers YOUR customer. You need to own a piece of the actual revenue that flows through the industry, and not just function as an expense line item on the P&L.
This is how industries that look somewhat small on the surface can actually become massive - they get multiple bites of the same apple by layering on new revenue streams and monetizing various participants.
Some quick math to illustrate this point…
There are roughly 1 million restaurants in the US. At $50 / restaurant a month we’re only looking at a $600M market size. For VCs who are looking for multi billion dollar outcomes, that’s perhaps too small to be venture backable on the surface.
But WAIT a second - those 1 million restaurants do nearly $1 TRILLION in revenue per year. If you get a piece of that, it becomes a very different market size.
VC’s didn’t realize this until relatively recently, after previously refusing to fund a lot of vSaaS companies due to preconceived TAM concerns.
See how Toast views their market size, directly from their IPO filing:
Toast identified multiple revenue layers past the initial insertion point.
#2. Improved Retention:
If you can own the transaction you’ve got yourself an AMAZING moat. People don’t like messing with payments.
Now you're probably saying, “Well then how am I going to sell my product to them?”
The crazy reality in a ton of industries is that they're using horizontal payment tools like QuickBooks or Bill.com. The result? It’s not BUILT for their industry and their specific use cases. They’re creating work arounds and frustrated.
In the Trade School space, schools were leveraging freaking PayPal. In 2024 we built payments and nearly doubled our growth rate…
If you’re doing a good job, they are not going to get rid of you. Especially if you're industry-specific and receptive to their needs, meeting consumers where they want to transact.
#3. It’s a “free” product:
My favorite part about embedded payments is you don’t need to charge a monthly SaaS fee for it. We’re all accustomed to this, whether you're buying movie tickets, or paying the bill at a restaurant. If you’ve been solely selling SaaS based products, your customer base will be extremely excited that this is “free”.
What does that mean? Since it’s a purely commission based model, and the cost can be passed onto the end consumer, sales are going to be FAR easier, especially to existing customers who use you for something else today. And that’s the beauty of layering on products over time - you can monetize different players, and levels, in the ecosystem.
#4. It should MASSIVELY scale your revenue.
The combination of selling your first “free” product, stronger retention, and the fact that you drastically improved your TAM leads to only one destination. Revenue.
At my business, CourseKey, which offers software for Trade Schools, our SaaS business is growing about ~20% year on year (we’re at a good scale, ~300 enterprise customers). But payments is looking like it’s going to grow at ~200% (!!!!).
Remember, my disclaimer here is that this is ONLY if you have some scale and own the before / after transaction workflow. You don’t lead with payments; you earn the right to offer it.
Ok, so here’s exactly how to do it…
Step #1: Build / scale a wedge product
Your wedge product is your “get-in-the-door” product. It needs to be easy to implement, prove your reputation, and have a fast go to market cycle.
It has to solve a specific problem for a specific industry really well. This is typically a SaaS product, like a CRM or appointment booking system.
Launch this into an industry, and own a SPECIFIC workflow.
Step #2: Build / scale a few other additional product lines with the goal of owning workflows that are BEFORE or AFTER the transaction workflow that you want to own.
Now that you’ve proven your reputation, it’s time to launch a SaaS product before or after the transaction to ideally own one or both of those workflows.
A few examples:
If you're building software for restaurants, you could launch a menu-based SaaS product with demand-based pricing (before).
If you’re building software for hotels, you could launch a marketing automation tool that helps hotels find prospective customers (before). You could also launch a review tool for hotel guests following their stay (after).
If you’re building software for schools, you could launch a CRM (before), and then an attendance product (after).
Step #3: Speak to your existing customers about payments, and if you own the before / after transaction it’s likely they will be VERY receptive to you also owning the transaction itself, as it’s easier to consolidate on fewer vendors (especially for industries with less frequent tech refresh cycles).
Now it’s time to put your product hat on. Go out and survey the market. Talk to as many customers as you can. Study their workflow. What are they using for payments today? If it’s a horizontal provider (PayPal, Bill.com, etc.), you just hit the jackpot. If it’s an industry-specific provider, but they aren’t owning before / after the transaction, you still have a competitive advantage.
Step #4: Pick a Partner to Build with
There’s no need to build a payments ecosystem from scratch. You can take technology providers that are already out there and tweak them to better serve your industry. The classic go-to’s are Stripe and Adyen. There are a lot of providers you can adopt that will require more engineering work, but give you significantly better economics. An example of this is Fidelity Payments or Cardknox. Reach out to me and I can send you my big list.
In short, the more work you do, the more economics you get. You can make payments as flexible and bespoke as you’d like, from branding, to customer service, to existing product integrations. It’s a spectrum.
Step #5: Negotiate Your Take Rate
Here’s a good overview of take rates. I’ve seen folks get as high as 1.25% per transaction. The dollars can get big fast.
In schools, we were amazed to see that BILLIONS were flowing through our 300+ customers, and we were well positioned to “get in the way of the money.”
Step #5: Launch to SMB customers, then refine and launch to Mid Market Enterprise Customers.
Ensure you’re at feature parody with their existing provider. If you are, and you match their take rate, there is no reason they shouldn’t want to go with you if you own the workflow before and after the transaction.
Accidents happen at intersections (or integrations) and payments are something that’s too important to mess up.
You may even undercut their existing provider to get in the door, since you are already monetizing them through another revenue stream (like SaaS for a CRM). Or you may give a temporary discount on your existing core product to get customers to adopt the new payments module. Both are tried and true incentives, as you are striving for total wallet share.
A word of caution:
Don’t launch an MVP when it comes to payments. Payments are TOO important to screw up. They are the lifeblood of any business. Launch a really strong V1. Do it with a few design partners. Rushing it to market can get you into trouble. But with embedded solutions you should have A TON of great features relatively quickly. Lean on your partners.
Other ancillary payments features you can add to improve the odds of prospects going with you:
Automated A/R notifications, text messages, emails
Integration with their ERP (you’d be shocked at the number of payment solutions out there that don’t do this yet)
Dashboards and / or reports on everything / anything they are doing in excel
Now what happens? Keep selling, keep building features, add more third party integrations and watch a few magical things happen…
First, Attach rates increase as customers adopt multiple products
Then, Retention rates increase as you become stickier and harder to displace
And finally, Revenue growth rates increase
I’ve run this playbook myself and have many friends who have done the same. It’s an absolutely beautiful playbook - so much so that there are Private Equity and Growth Equity firms who have raised billions of dollars with the singular goal of buying vertical SaaS companies, implementing payments, and then flipping them.
Don’t let them capture all the value here. You can run the same playbook.
I wish you luck out there. You’ve got this!
A big thanks to Luke for sharing all his earned secrets as a vertical SaaS founder and payments expert. Please check out his newsletter where he writes about all things vertical SaaS - case studies, playbooks, and how-to’s on Twitter and my Newsletter. He also recently dropped a 1,000 page content hub called the Vertical SaaS Bible.
Excellent article CJ!
Great post!
Slight typo - "parity" not "parody"