AI is going to kill seat-based SaaS models

AI goes to kill seat-based SaaS fashions

Tags: Fred Hsu, saas

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I’m going to allow you to in on just a little secret: I’ve damaged the phrases of use for SaaS software program and shared a license earlier than.

Stunned? My guess can be no … since you’ve in all probability performed it too.

Basically, per-seat licensing has been a good way for SaaS firms to cost a subscription and gather dependable income. It’s helped firms like Salesforce, Zoom, and Field develop into massive, profitable organizations. However there’s additionally no query that this success and income reliability comes at a price, the place pricing shouldn’t be tied on to how a lot a buyer makes use of a service.

In brief, seat-based subscription fashions have a number of issues however have been “good enough” for a very long time. Nevertheless, as extra SaaS providers leverage AI to reinforce human work, it should make much less and fewer sense to cost per human seat and extra sense to cost for what is definitely getting used to get work performed: the compute energy wanted to run more and more clever and helpful AI-enhanced providers.

This shift from human to AI-based productiveness goes to basically alter how SaaS firms promote their providers. If SaaS firms don’t begin fascinated about this inevitability, and pricing it into their fashions, AI could cannibalize their income over time.

AI and the SaaS pricing equation

For service fashions by which AI can present worth, similar to in customer support or CRM, the AI itself goes to actively scale back human work over time. What does this imply in apply? Within the customer support sphere, for instance, bots will work alongside people, so people will function with higher productiveness. However SaaS firms that combine AI whereas persevering with to cost on a per-seat foundation will truly be dis-incentivized from making customers extra environment friendly. Give it some thought: firms will lose income as they improve AI, as a result of every particular person (every seat they promote) will have the ability to do extra, and fewer folks shall be wanted to do the identical job. So this pushes distributors to pull their heels on innovation.

On prime of all of that, it will get fairly darn costly to do the analysis for creating good AI and to run the system 24/7. Compute energy can simply take a stable chunk of income. So, SaaS firms with AI integration will begin to promote fewer seats whereas their system turns into dearer to develop and run.

Given these developments, the calculus for the overwhelming majority of SaaS firms wants to vary — each for the shopper and for their very own long-term viability. In any other case, in 5 or 10 years, many of those firms shall be in for a impolite shock as AI cannibalizes their income.

Anticipate to see SaaS firms begin charging based mostly on utilization. Which may imply charging for AI work – as a result of it prices compute cycles. The extra effectivity a buyer needs, and the extra they depend on the AI, the extra they are going to find yourself paying for service, however the much less they are going to pay for employees.

Utilization-based pricing isn’t a novel thought. Amazon has been the plain pioneer behind pay-as-you-go SaaS pricing. It was no shock for AWS to introduce a pay-as-you-go mannequin, as a result of the service supplied with AWS shouldn’t be based mostly on human customers or account administration time. As a substitute, clients are charged for the kind of computing unit being consumed. For instance, EC2 costs in cloud compute items. Getting much more granular, Lambda costs by the execution second, whereas S3 costs by the gigabyte of used disk area.

Utilization-based pricing opens the door to a extra granular expertise by which the shopper solely pays for what they use. It’s the equal to purchasing a ticket to a single soccer sport, versus being pressured to purchase a season go, even for those who can solely make it to that one sport. However usage-based fashions additionally produce other constructive byproducts. They take away the flexibility for purchasers to “cheat” by sharing accounts, they usually take away the motivation for the SaaS supplier to push clients to overbuy licenses to be able to “plan for growth.”

Identical to Amazon’s providers, AI-enhanced SaaS firms that cost based mostly on utilization will introduce higher elasticity, higher person expertise, and extra effectivity into their methods, resulting in much less churn and extra long-term income stability.

Fred Hsu is CEO of