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2020 Why per-seat pricing needs to die in the age of AI | TechCrunch

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Why per-seat pricing needs to die in the age of AI

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Instead, create pricing models that maximize product usage

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and product value Videos
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Jake Saper Save

10:43 pm MSK • October 24, 2019

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ricing is the most important, least-

P
Jake Saper
discussed element of the software
Contributor
industry. In the past, founders could get
away with giving pricing short shrift Jake Saper is a partner at
Emergence Capital.
under the mantra, “the best product will ultimately
win.” No more. More posts by this contributor

• Why per-seat pricing needs to

In the age of AI-enabled software, pricing and product die in the age of AI
are linked; pricing fundamentally impacts usage,
which directly informs product quality.

Therefore, pricing models that limit usage, like the predominant per-seat per month
structure, limit quality. And thus limit companies.

For the first time in 20 years, there is a compelling argument to make for changing the way
that SaaS is priced. For those selling AI-enabled software, it’s time to examine new pricing
models. And since AI is currently the best-funded technology in the software industry — by
far — pricing could soon be changing at a number of vendors.
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Why per-seat pricing needs to die in the age of AI

Per-seat pricing makes AI-based products worse. Traditionally, the functionality
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hasn’t changed with usage. Features are there whether users take advantage of them or
not — your CRM doesn’t sprout new bells and whistles when more employees log in; it’s
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static software. And since it’s priced per-user, a customer incurs more costs with every user
for whom it’s licensed.
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AI, on the other hand, is dynamic. It learns from every data pointVideos
it’s fed, and users are its
main source of information; usage of the product makes the productAudio itself better. Why, then,
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should AI software vendors charge per user, when doing so inherently disincentivizes
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usage? Instead, they should design pricing models that maximize product usage, and
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therefore, product value.
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Per-seat pricing hinders AI-based products from
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capturing value they create
Mymore
AI-enabled software promises to make people and businesses far Listsefficient,
transforming every aspect of the enterprise through personalization. Software tailored to the
specific needs of the user has been able to command a significant premium relative to
generic competitors; for example, Salesforce offers a horizontal CRM that must serve users
from Fortune 100s to SMBs across every industry. Veeva, which provides a CRM optimized
for the life sciences vertical, commands a subscription price many multiples higher, in large
part because it has been tailored to the pharma user’s end needs.

AI-enabled software will be even more tailored to the individual context of each end-user,
and thus, should command an even higher price. Relying on per-seat pricing gives buyers
an easy point of comparison ($/seat is universalizable) and immediately puts the AI vendor
on the defensive. Moving away from per-seat pricing allows the AI vendor to avoid apples-
to-apples comparisons and sell their product on its own unique merits. There will be some
buyer education required to move to a new model, but the winners in the AI era will use
these discussions to better understand and serve their customers.

Per-seat pricing will ultimately cause AI vendors to

cannibalize themselves
Probably the most important upsell lever software vendors have traditionally used is tying
themselves to the growth of their customers. As their customers grow, the logic goes, so
should the vendors’ contract (presumably because the vendor had some part in driving this
growth).

Tethering yourself to per-seat pricing will make contract expansion much harder.

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However, effective AI-based software makes workers significantly more efficient. As such,
seat counts should not need to grow linearly with company growth, as they have in the era
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of static software. Tethering yourself to per-seat pricing will make contract expansion much
harder. Indeed, it could result in a world where the very success of the AI software will entail
contract contraction. Search

How to price software in the age of AIStartups

Videos
Here are some key ideas to keep top of mind when thinking about pricing AI software:
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• Start by using ROI analysis to figure out how much to charge Newsletters
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This is the same place to start as in static software land. (Check Advertise
out my primer on this
approach here.) Work with customers to quantify the value your Events
software delivers across all
dimensions. A good rule of thumb is that you should capture 10-30% — of the value you
create. In dynamic software land, that value may actually increase More
over time as the product
is used more and the dataset improves. It’s best to calculate ROI after the product gets to
initial scale deployment within a company (not at the beginning).My
It’s Lists
also worth recalculating
after a year or two of use and potentially adjusting pricing. Tracking traditionally consumer
usage metrics like DAU/MAU becomes absolutely critical in enterprise AI, as usage is
arguably the core driver of ROI.

While ROI is a good way to determine how much to charge, do not use ROI as the
mechanism for how to charge. Tying your pricing model directly to ROI created can cause
lots of confusion and anxiety when it comes time to settle up at year-end. This can create
issues with establishing causality and sets up an unnecessarily antagonistic dynamic with
the customer. Instead, use ROI as a level-setting tool and other mechanisms to determine
how to arrive at specific pricing.

• Use a volume-based pricing mechanism that encourages usage

A best practice in static software has been to price-discriminate using two-axis pricing
models, the first being volume, traditionally set on a per-seat basis, and the second being
features. The two-axis framework still applies in dynamic land, but the trick is to find a
volume-based lever that doesn’t restrict usage.

Specifically, identify a usage-agnostic metric that both grows as your customer grows
(volume-based) and that your product impacts meaningfully and measurably (value-
derived). A good example of this is Textio, an AI-based augmented writing service that helps
recruiters fill open roles faster. Their pricing is volume-based, tied to the number of hires the
company plans to make, with unlimited usage across unlimited users. This encourages the
buyer to deploy Textio to every recruiter and hiring manager and use it for every hire they
make. In turn, this allows Textio to maximize data collection and, thus, product value.
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Use this metric as the denominator of your volume-based pricing axis (e.g., per person to
be hired in the case above). It’s best to create buckets so that pricing falls into a reasonable
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denominator range (e.g., the price is $X per bucket of n to n+1,000 people to be hired)
instead of using granular increments. Layer on the feature-based pricing axis, ideally
positioned to mitigate any potential contraction issues with the volume
Searchaxis.

• Use pricing to improve product

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Most AI vendors are already ingesting each customer’s historicalVideos
data upon onboarding to
ensure recommendations are tailored. The breakout AI vendors of Audio
the future will find ways
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to share insights between customers. Pricing can be a critical lever towards jumpstarting
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these data networks.
Advertise
Events data set. They
Indeed, Textio used strategic discounting early on to build its proprietary
—
offered customers the opportunity to participate in their Data Exchange program, which
More network of users.
entailed discounted pricing and the benefit of insights from the broader
Over time, the value of being a part of such networks grows and discounts may no longer
be necessary. My Lists

Real estate is another industry where data networks are being built with strategic pricing.
Companies like CompStak and Crexi gives brokers credits as they submit data to the
system, creating a virtuous flywheel of proprietary commercial real estate data.

One important note: to build the trust critical to underpin such networks, AI vendors will
need very clear policies regarding what metadata is being shared and to invest heavily in
bulletproof infosec practices. Those that succeed will have amongst the strongest
competitive moats (we call them Coaching Networks) in an era in which static software
continues to commoditize.

While it may be too early to dictate exactly how pricing for AI software should be set, I’d
urge vendors to experiment with value-derived, volume-based models that don’t restrict
usage. Regardless of exactly which model they land on, I believe the most successful
players will start to hop off of the per-seat ship before it sinks them.

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