Deep Thoughts #1 Consumption-Based Pricing and Five Predictions for the Future of SaaS

The death of per seat pricing and rise of consumption based models will change how software is consumed and sold. But how?

TLDR.

AI is shifting SaaS pricing from a per-seat basis to consumption-based models, aligning value with usage. This trend is particularly evident in infrastructure/dev tools like Twilio and AWS. The rise of LLMs is accelerating this shift, challenging the traditional SaaS business model. Usage-based companies are growing as AI enables more work with fewer people, necessitating new pricing heuristics…

Introduction

Is Seat-Based Pricing Dead?

AI is changing how SaaS buyers think about value and what prices they can extract from customers. While most SaaS companies charge on a per-seat basis, tools are using consumption-based pricing. This is frequently seen in the infrastructure/dev tool space where software vendors want to align value to the price they charge (think Twilio or AWS. )

Nonetheless, with the Rise of LLMs, SaaS vendors are looking at more consumption-based pricing to better offset LLM utilization and align products to their value.

If AI delivers on its promise, it may spell the end of the SaaS business model as we know it. Historically, cloud software businesses charged a recurring fee based on the number of software users—the SaaS model. In contrast, infrastructure/dev tools software companies took a different approach—a consumption-based pricing model (or one based on some utilization metric). This type of pricing is growing in the traditional SaaS space as companies look to extract value from user actions.

Usage-based companies are growing…

With historical app-based software, application usage closely mirrored the number of people (seats.) There’s only so much work one person can do, and as one hires more and onboards more seats, usage grows linearly. That linear revenue growth can turn exponential when more SKUs are pushed forward.

But with AI, you can “do more with less.” However, with fewer people inside companies, how do you properly anchor your value to the organization?

With fewer seats to anchor revenue, companies must use different heuristics to extract the value they create for the end company.

Take, for example, a company like Zendesk, which runs support desks for software companies. In an AI-first world, there are fundamentally fewer humans in companies doing support, so you can’t anchor your “value” to a number of humans who use your software.

Instead, companies will want to align pricing based on their customers' usage, which is a quantifiable metricized outcome the customer wants. In fact, Zendesk is already changing its pricing for its AI agent (see this article).

Predictions

Prediction 1: Consumption-based Pricing will become the Norm

Not all software will transition to a purely consumption-based model, but the reliance on per-seat pricing will diminish. Companies will increasingly seek to align their costs with actual usage, ensuring fair pricing that reflects the value delivered.

Prediction 2: UI/UX will Change Based on How People Use the Product

As consumption-based pricing gains traction, UI/UX design will shift from the needs of human users to those of agents who directly interact with the databases and others’ APIs.

Prediction 3: Billing Software will Grow More Robust to Track Utilization and Revenue

With the rise of consumption-based pricing, robust billing software will become essential. These systems will need to accurately track utilization and revenue, providing detailed insights into customer usage patterns and to understand how customers adopt, use, and expand with their product.

Prediction 4: New Metrics will be Used to Understand Software Dynamics

Traditional metrics may no longer suffice in a consumption-based model. New metrics will emerge to capture software dynamics better, focusing on usage patterns, efficiency gains, and customer outcomes. These metrics will provide deeper insights into how software delivers value. Whether that is based on a percentage of annualized guaranteed spend, expansion timeline by segments, or costs per action, we will use these new metrics to right size valuations for the industry.

Prediction 5: Sales Roles will Change

Sales roles will evolve in response to the shift towards consumption-based pricing. Sales teams must focus more on understanding customer needs and usage patterns, offering solutions that align with actual consumption, and demonstrating clear ROI. This shift will likely lead to new compensation models and sales strategies. It will also mean that salespeople will have to be better equipped to handle onboarding and/or account management. My guess that this role will become increasingly blended as AI takes over outbound.

Overall, it's an exciting time for the future of SaaS, and we are at a clear inflection point. If you have any other predictions or trends, please email me at joshuaevanschoen at gmail dot com!