BackSaaS startups rework pricing models amid shrinking budgets
Industry experts say that traditional SaaS pricing models like perpetual licensing and seat-based charges are facing challenges as clients expect greater value and flexible-pricing options.
PremiumThe software-as-a-service (SaaS) market is seeing a disruption as startups in the space are experimenting with new pricing models, prompted by longer sales cycles, customers seeking more value amid shrinking budgets and the availability of AI solutions, industry experts Mint spoke to said.
As businesses get more cautious and slash spending in the current sluggish market, they are pushing SaaS startups for larger discounts or value through bundling of solutions, experts said. And these startups are figuring out ways to cater to the demands of their tight-fisted clients.
Traditional licensing, which involves the customer purchasing software once and keeping it forever, sometimes paying an yearly maintenance fee, and seat-based pricing, where the cost of a product or service is based on the number of users that will have access to it have been the commonly-used pricing models across the industry.
“What we are generally seeing is most businesses have become quite stringent about renewals and there is some pushback in terms of pricing and discounts," said Rashid Khan, co-founder and chief product officer, Yellow.ai, a US-based customer service automation platform.
Khan said that Yellow.ai has traditionally been on consumption-based pricing where enterprises pay for what they consume at the end of the month. “With AI coming in, consumption-based pricing would become the norm. It's super hard to sell with licence-based models now because a lot of the cost associated with AI is very elastic. Every company today which is getting into offering some kind of AI solution is getting into consumption-based pricing."
Umesh Sachdev, CEO and co-founder of SaaS unicorn Uniphore agreed that pricing may change with AI. “We have a subscription-based pricing model of our AI-powered products and technologies. AI is one area of software spend that has the potential and room for pricing to go up due to the profound benefits this technology is delivering to enterprises around the world."
The SaaS ecosystem in India and globally has been facing growth and funding challenges after the pandemic that fuelled the digital economy ended.
Hemant Mohapatra, partner at venture capital firm Lightspeed India Partners, also agreed that the new pricing model increasingly being seen is consumption-based, as against the per-seat rate charged by tech companies. “When you price per seat, if people leave the company, the seat goes away, and then your ACV (average contract volume) comes down and people are getting fired a lot more now because everybody's cutting costs. So what people are starting to do now is, let me not charge you by number of employees or number of seats, let me charge you on consumption. That is what we are seeing happen in many of our other companies also."
“We've also implemented a newer pricing, which is based on volume of contracts," said Shashank Bijapur, CEO and co-founder, SpotDraft. The company continues with the seat-based pricing model. “Both of them are consumption-based in the sense that the more the seats, the more you pay. But the unit of consumption is people and workflows versus the unit of record that is there in the new model."
He explained with an example. “Let's say if you're a HubSpot user, which is a CRM, then one way to price it is to have the number of contacts, then the number of people you would reach out to. And the other way to price it is by the number of users that are using HubSpot."
Khan added that Yellow.ai is also experimenting with a value-based pricing model which he believes could emerge as a trend, particularly in customer service automation. “Value-based pricing involves setting prices based on the perceived value of our product or service to the customer, rather than just considering production costs or market prices. This approach ensures that pricing aligns with what customers are willing to pay for the benefits and outcomes they receive. Instead of charging based on usage, we're focusing on aligning our pricing with the value we deliver to customers."
The company, he said, is trying to work this out with select North America-based customers.
SaaS startup Plotline has also recently included a new pricing model. “Traditional SaaS licensing in our industry (mobile marketing) is based on usage. This typically means that for an experience-based platform like Plotline, our usual pricing for most of our customers is based on the number of experiences shown to the users," said Adarsh Tadimari, co-founder, Plotline.
He added that in the current market, the shift being observed is very similar to telecom operators in India offering unlimited calls/ messages for a fixed monthly fee.
“After getting this request from several customers, we've recently had to add a separate fixed-price model. Our fixed-price model, which is provided at a premium, does not depend on the number of experiences but provides stable billing cycles. This model ensures that the finance departments are aware of the expenses beforehand and, at the same time, continue to give the team value through desired activation, engagement, and retention through the experiences."
Mohapatra of Lightspeed India Partners, however, added that these business models don't change as frequently. He explained with the example of the internet. “After 30, 40 years of the internet being around, only one business model has really scaled globally, which is ad-based. 95% of the internet runs on an ad-based business model. And I would say SaaS has very standard two or three business models."
Bijapur noted that pricing models are evolving in the mid-sized market. “What you do want is higher annual contract values and lower sales cycles. So, the trick is to strike the right balance between the two…People are definitely asking for discounts and they're asking for more value and that is a function of the budgets and how their budgets have shrunk in some cases."
“What has happened is, the competition has become very price-sensitive. So, people are willing to reduce the price to whatever it takes to get the deal. That is something that wasn't happening earlier," he added.
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