This article was originally published on Forbes Council.
Software as a service (SaaS) pricing stands as a pivotal factor that delineates the trajectory of growth and sustainability. The intersection of artificial intelligence (AI) and large language models (LLMs) with SaaS heralds a shift from rigid, traditional pricing models to flexible, usage-based frameworks.
The narrative is clear: The need for flexible pricing and billing models is now more relevant than ever. This change isn't fleeting; it's a harbinger of a more profound shift in tech companies' pricing strategies, and we're just at the beginning of this change.
The Catalyst For Change
Forbes notes that the AI market is on a trajectory to reach a staggering $1.8 trillion by 2030, reflecting a compound annual growth rate (CAGR) of 37.3%. This surge in AI carries a ripple effect, impacting SaaS pricing models. The traditional flat-fee models now give way to more flexible pricing paradigms that align with the evolving software usage patterns propelled by AI and LLM technologies.
Also, the digital boom of the pandemic era set the stage for an expanded horizon for many tech companies. However, as we transition into a "new normal," a corrective shift in digital consumption patterns emerges. Today's consumers seek a pricing model that reflects their usage, ensuring they pay for the value they derive.
The Shortcomings Of A Flat-Fee Model
A flat-fee model operates under the presumption of predictable consumer demand. When there are sharp fluctuations in demand, as we're seeing in this pandemic-transformed world, companies face the risk of offering too much (or too little) for the set fee.
The inflexibility of a flat-fee model is that it doesn't adjust based on market conditions, consumer demand, inflation and more. This mismatch can lead to:
Lower growth. Companies might struggle to acquire new customers if they perceive the flat fee as not aligning with their variable needs.
Increased churn. Existing customers might leave, feeling they're not getting enough value for the fixed fee they're paying.
Lesser annual contract value (ACV). With tighter budgets, potential clients might hesitate to commit to a flat fee, leading to a reduced ACV for businesses.
Reducing lifetime value (LTV). If customers feel the flat fee doesn't adjust to the changing economic environment (like offering discounts), their lifetime value to the company might diminish, as they might opt for more flexible pricing models elsewhere.
The Ushering In Of The New Norm In SaaS Pricing
According to a 2022 OpenView survey, 61% of SaaS companies either have usage-based pricing or are actively testing it. Additionally, a trend toward complex hybrid models is evident, with 46% of companies either offering usage-based subscription plans or testing usage-based pricing alongside traditional subscriptions.
The shift toward hybrid pricing models in the SaaS world isn't just a fleeting market trend; it's indicative of a paradigm shift that is poised to reshape the industry at its core.
Also Read: Unraveling 2024's Premier Subscription Management Tools
How This Market Trend Will Change The World Of SaaS For Good
By offering pricing that adapts to individual usage patterns, companies signal a commitment to value delivery tailored to each customer's needs.
For example, Microsoft originally sold software licenses as one-time purchases with the option for businesses to acquire volume licensing agreements. With the introduction of Azure, Microsoft embraced a service-centric approach, charging for computing services based on actual consumption. This model includes services such as virtual machines, storage and bandwidth, which are billed on a per-use basis.
Microsoft also offers a hybrid benefit option for customers who have existing on-premises licenses. This allows customers to use their on-premises licenses in the Azure cloud and receive a discount on the Azure service, thus providing a bridge between traditional licensing and modern cloud consumption models
Fixed subscriptions also offer a steady revenue stream, while usage-based elements capture additional value during high-demand periods—especially for enterprises.
We worked with Yellow.ai, which previously adopted the traditional seat-based pricing, to shift to a more hybrid pricing model. Its hybrid pricing model blends tiered packages with interactive customization. This approach provides a safety net against market volatility and ensures a more predictable and sustainable revenue model.
As companies gain more granular insights into how customers use their products through usage-based metrics, they can funnel these insights back into product development.
The Future Of SaaS And Pricing
As SaaS companies evaluate the options to provide hybrid pricing, they need robust, more flexible billing tools to navigate its complexities. Here are five steps to take in order to get started while navigating through this shift:
1. Assess current infrastructure by identifying gaps in billing and customer service.
2. Seek expertise and consider hiring or consulting specialists in usage-based pricing.
3. Upgrade system by adapting internal software for tracking and billing.
4. Strengthen data analytics to decipher customer usage patterns and set pricing tiers.
5. Monitor and adapt by continuously reviewing the new pricing model's performance and adjusting as necessary.
Hybrid pricing models represent the future of SaaS pricing. The tech industry's journey is a tale of continuous evolution. As businesses adapt to the new norms of SaaS pricing, it's pivotal to ensure these pricing models not only allow you to navigate the complexities but also fuel unparalleled growth.
