Software’s pricing revolution

GTMfund's industry viewpoint, seat-based pricing, and what this means

Sep 06, 2024

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Software is undergoing a pricing revolution

Software is undergoing a pricing revolution. It’s something that we discuss internally a fair amount and my partner Max Altschuler has written about on LinkedIn.

We’re not the only ones talking about it. Sarah Tavel from Benchmark penned her now famous “Sell Work, Not Software” early in the AI wave and added an addendum more recently (Part I / Part II). Jamin Ball from Altimeter did a deep dive on the Death of Seat-Based Pricing in his newsletter here. Both great reads.

I connected with Max to get his thoughts and share this viewpoint on software pricing and the revolution it’s going through - let’s get into it.

GTMfund’s viewpoint

Software is undergoing a pricing revolution.

In reality, software was undergoing a pricing evolution before AI. Led by dev tool and infrastructure companies, more and more B2B software tools were pricing on usage – a proxy for value delivered – versus the traditional seat-based pricing model. For a long time, seat-based pricing made sense. The promise of software was to make every employee in your organization more efficient. Success was measured in incremental efficiency gains.

Outreach was a great example of this. If we could make each BDR in your GTM organization 25% more efficient, you got 25% more leads, pipeline, and value from the same number of employees. Thus, we priced per employee. Everyone did, because it correlated nicely with (1) our intuitive understanding of software and (2) the economics behind it.

As software evolved, pricing evolved with it. Cloud infrastructure, API-first companies, and dev tools didn’t make sense from a seat-based perspective. The value for the customer was based on usage, not the number of employees leveraging it. There was also a COGs component from the software companies themselves. More and more tools were no longer R&D upfront, followed by 90%+ margin distribution from that point forward. There was real cost to delivering the product to customers, and that cost impacts pricing.

Then, AI arrived, and the pricing evolution turned into a revolution.

For the first time, you could sell the work, not the efficiency. This changes everything. Selling technology starts to look more and more like selling services. You sell real value and outcomes, not arbitrary metrics like per-headcount efficiency.

Taken one step further, if we do our job correctly, you should be able to achieve your goals without needing to hire more people. You can replace that BPO or outsourcing contract in its entirety. You can cancel that agency agreement. You can readjust your hiring plans from the top down. Software can deliver you the work – the actual value from soup to nuts.

Change has arrived. And beyond the technology itself, there are macrotrends behind the pace of change and adoption. We’re living in a post-ZIRP era. Companies are no longer orienting themselves towards growth at all-costs. It’s all about efficiency, margin, and cash flow. AI is perfectly suited to this trend. If you can sell the outcome, you’re saving organizations meaningful headcount and operational overhead. And if companies don’t need to hire as many employees, the concept of seat-based pricing erodes even further. All of the baked-in annual NRR and revenue growth from customer headcount expansion evaporates.

Some of you might read this and feel pessimistic about the future of software. We feel the opposite. The pricing and language around software have to change, but it also opens up entirely new horizons of value creation. Markets that previously seemed unattractive from a traditional software or seat-based perspective suddenly open up. If you’re selling the outcome – and depending on what exactly you’re selling – there’s the potential to charge substantially more than you did before as the value of your technology expands. Your employees no longer have to spend time doing menial, repetitive tasks and can instead expend energy on the creative and unique work that makes humanity special.

This isn’t the death of seat-based pricing. It’s the first day of a new generation of software. The day we finally get to deliver on the initial promise of SaaS from 25+ years ago: true automation and value creation.

📹 Upcoming digital live events

The Future of Outbound: An Ecosystem-Led Approach - September 24th at 10am PST / 1pm EST

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👂 More for your eardrums

The GTM Podcast - subscribe on Apple, Spotify, YouTube or wherever you listen.

GTM 110: Vertical SaaS Secrets and Unlocking Growth with Price’s Law with Dennis Lyandres

Dennis Lyandres is currently an Advisor at Iconiq Capital. Before that, Dennis spent 8.5 years with Procore during which time Procore grew from $10m to over $900m+ in revenue and went public on the NYSE. Dennis started at Procore as EVP of Sales in 2014, before moving to the CRO role in 2018 where he was responsible for driving revenue across all customer-facing functions including Sales, Marketing, Customer Success, Rev Ops, Procore.org and Business Development. Before joining Procore, he held various sales and sales management roles at Cloudera and Pentaho.

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🚀 Startup to watch

Rollfi - this is GTMfund’s partner for insurance benefits. It integrates with any payroll provider and benefit programs can be easily managed - they make the whole process easy!

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See more top GTM jobs on the GTMfund Job Board.

If you’re looking to hire incredible startup talent, reach out to our search firm partner as a resource: Integrity Power Search (IPS). They are also available to support candidates looking for their next startup opportunity.

🗓️ GTM industry events

Upcoming go-to-market events you won’t want to miss:

GTMfund + Operator SaaStr Happy Hour: September 11 (San Mateo, CA)
SaaStr Annual: September 9 - 12 (Bay Area, CA)
GTMfund Dinner: September 17 (Boston, MA)
INBOUND: September 18 - 20 (Boston, MA)
GTMfund Annual Retreat: October 4 - 6 (San Diego, CA)
GTM Summit: October 14 - 16 (Austin, TX)

That’s it, that’s all for now. Keep your eyes out for a very exciting announcement next week.

✌️ Scott