Over the course of 2023, the tech industry has experienced a paradigm shift where stakeholders are no longer solely focused on revenue growth, but are looking at revenue growth in combination with profitability. This has echoes of the not-so-distant past when tech firms evolved from focusing merely on user acquisition to having to deliver user monetisation.
With the world braced for another year of economic unpredictability, it’s no surprise that investors now expect tech businesses to be able to chart a course to profitability much earlier.
While there are a number of things that impact profitability, including controlling costs, growing revenue in the right way is crucial. And achieving that involves getting pricing right, both to deliver a good value proposition to customers, and ensure good margin performance. Strategically leveraging pricing, and adapting as your product evolves, is an indispensable — yet often overlooked — tool.
For our Software Pricing Predictions Report 2024, we spoke to some of the industry’s top experts and VCs and conducted extensive research into what to expect from pricing over the next twelve months.
Here are the key trends in pricing for 2024 and beyond.
There is no “one size fits all” — pricing will become more creative
Our research highlights that pricing is not a one-size-fits-all approach. The experts we spoke to agreed that businesses will continue to shift away from traditional subscription pricing towards a more usage-based approach, particularly via a variety of hybrid models that combine subscription pricing with variable components based on product usage.
Companies are also adopting a more thoughtful and creative pricing approach, starting earlier in a company's life. Historically, pricing and billing infrastructure topics were deemed more relevant to Series B stage companies and beyond.
Melissa Donohoe, Investor at Notion Capital points out that now, “it's a topic almost from the start. It's in the discussion as much as hiring and Go To Market,” which will help drive companies to be more intentional with pricing in 2024.
AI companies will drive industry-wide pricing innovation
The rise of AI-native companies will be a key driver in the change of attitudes in the B2B software sector towards pricing. Kyle Poyar, Operating Partner at expansion-stage VC firm OpenView, is “keeping an eye on the creativity of emerging players — like AI-native companies without an installed base — to see the traction they have with more disruptive pricing models.”
AI-native businesses are also expected to lead the charge in pricing innovation in 2024 out of existential necessity. We’ve already seen AI businesses already starting to adapt to the variable costs associated with AI technologies over the past year.
Going forward, integrating usage-based elements or subscriptions into pricing models will be critical for sustaining the operations of these businesses. One example we’ve already seen is Stability AI trying to “strike a balance between profitability and openness” by charging commercial customers a subscription fee.
An interesting secondary effect is that the customers of AI-native B2B software companies tend to be other B2B tech companies, who are likely to learn from their experiences as customers and apply some of these learnings to their own pricing.
For example, businesses that enjoy the experience of being able to flex their usage and control their costs on that basis - which leads to more confidence that the value they derive from is aligned to its cost - will be encouraged to explore new pricing models for their own products that involve smart, usage-based elements.
A robust tech stack will be needed to keep up with pricing innovation
One prediction for 2024 that every expert highlighted is that having a robust tech stack will be needed to execute a modern pricing strategy. A company I spoke to recently said “Pricing is a process and a technology problem. But without the right technology, we can’t even build a simple process.”
Kyle Poyar of OpenView points out that “many companies are running into limits with their existing tech stack, which doesn't allow them to monetize their products as they would like to.” He’d like to see more companies adopt a modern pricing tech stack “to enable more rapid pricing iteration, and price testing of both subscription and usage models – because these models actually are going to exist side by side.”
Despite the tech downturn, there is still VC capital out there to be won - but the bar to reach it has been significantly raised. In order to satisfy the scrutiny of VCs, anxious to know that their investment will be used efficiently and return a profit, showing the value you provide aligns with your pricing will be more important than ever.
Melissa Donohoe, of Notion Capital explains that “especially for companies looking to fundraise, it’s important to be mindful of how investors value different revenue streams and pricing models and to get smarter about how you can leverage tools to forecast that out.”
Eli Potter, VP of Sales and CS at Insight Partners also advises that “a lot of companies struggle to articulate customer value of their products, and many want to talk about productivity or making you 30 percent more efficient — that’s not as interesting as impacting top line revenue or growth rates. It’s a lot more impactful to focus on recurring customer value and outcomes that drive recurring revenue.”
Pricing must evolve with your business
Pricing has always been pivotal to tech, but it has often been overlooked or under-appreciated as a factor that propels success. It’s only when it goes wrong - such as with this year’s cautionary tale at Unity, whose CEO attempted to change its pricing model too quickly and with too little consultation, leading to a severe backlash — that people appreciate what a delicate, impactful lever it can be.
But as the rise of AI-integrated products and services continues to bring disruption — and with that, opportunity — to the software space, businesses must ensure they are embracing pricing innovation. With the continued shift of focus from raw revenue generation to profitability, we expect to see businesses invest in the methodologies and tools that will allow them to take a more intentional, thoughtful and creative approach to pricing in the year ahead.
Lead image via m3ter.