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Software-as-a-service has become a fundamental technology approach in modern business operations. It’s gradually dismantling traditional software restrictions by eliminating the need for on-site installations, shifting management and maintenance responsibilities to a third-party vendor, and enabling remote access to applications from recognized devices.
This flexibility is accompanied by equally agile pricing models, which have evolved several times since the advent of SaaS. This article will unpack how SaaS monetization has changed over the years and discuss the latest iteration in that evolution: outcome-based pricing.
The Evolution of SaaS Monetization
SaaS pricing initially took the form of subscription-based, one-size-fits-all models, ushering in a simplified monetization process. But this approach created difficulties for companies with changing needs and limited budgets. To offer more flexibility and value to users, SaaS providers then adopted tiered pricing approaches, later followed by per-user pricing, usage-based approaches, and hybrid models.
Each stage of this evolution has attempted to align monetary value with actual business outcomes, but ultimately, that goal has yet to be achieved. A disconnect between customer expectations and vendor offerings remains.
Also known as value-based or results-based pricing, an outcome-based pricing model sets predefined business objectives that are directly tied to the cost.
For example, this would include:
Marketing automation that charges based on leads generated or successful conversions;
A customer service solution that justifies pricing according to resolution rates;
Robotic process automation that adjusts fares based on cost savings achieved;
HR software pricing based on employee retention improvements.
In essence, outcome-based pricing is effective because it enables true alignment between vendors’ and customers’ goals. By establishing a connection between cost and measurable results, businesses can avoid overspending driven by usage-based models, which do not guarantee value.
Core Principles
For the approach to be truly effective, there are a few crucial considerations to factor in. Here are some of them:
Value Alignment
As in the aforementioned examples of outcome-based models, it’s vital to demonstrate a clear link between the SaaS services and measurable outcomes. This will help motivate and incentivize both the provider and customer to do what’s necessary to achieve successful results.
Quantifiable Metrics
After you have ensured value alignment, the next step is to establish consensus about the pricing thresholds and timelines that will provide structure for the agreement. This is vitally important because a lack of predefined and clear metrics could result in disputes between the vendor and partner, ultimately damaging the relationship between the two parties.
Shared Risk and Reward
By sharing any potential wins and losses, both the customer and provider are equally invested in the relationship’s success. However, to ensure positive outcomes, it’s essential to put the right capabilities and risk management systems in place.
Outcome-Based Pricing in Action
Novartis
Novartis is one of the earliest pioneers of outcome-based pricing in the pharmaceutical industry. The firm bases its medicine prices on three areas of value:
Patient outcomes;
Overall benefits to the healthcare system;
Meaningful impact to society.
Novartis has embraced an approach where drug costs are determined by the treatment’s performance in real-world clinical settings. The company shares risk in its relationships with payers—if their medicine doesn’t perform as expected or promised, the payer receives a rebate or discount.
Zendesk
In the customer experience industry, Zendesk was the first company to adopt outcome-based pricing for AI agents. This innovative shift meant that customers would only pay based on the number of issues resolved autonomously by AI.
Salesforce
Initially following a per-seat pricing approach, Salesforce has shifted its model, now requiring customers to pay for value rather than access to features. Agentforce’s starting price was originally quite low, at $2 per conversation, but its inexpensiveness demonstrates Salesforce’s confidence in the popularity of the product.
Siemens
Outcome-based pricing has existed for years in industries like manufacturing. Siemens’ Energy Performance Contracts are a well-known example. This contracting approach applies to Siemens’ building automation and energy management systems. Instead of charging customers for the system installation itself, the user pays based on the energy savings achieved.
Where AI Fits In
AI has accelerated the shift toward outcome-based pricing, as it provides the capabilities required to implement, measure, and honor these flexible pricing agreements. Additionally, AI can now complete tasks that used to require entire teams and departments, eliminating the need to purchase one-size-fits-all licenses that may become unnecessary as business dynamics fluctuate.
As a result, the focus of monetization has moved to results instead of consumption or licenses. Due to the unpredictable nature of outcome-based models, businesses need automated and accurate tools to measure performance.
Through predictive analytics, automation, and real-time insights, AI enables:
Tailored functionality to accommodate customers’ unique needs and priorities;
Transparent reporting and efficient tracking of metrics;
A clear understanding of the value delivered.
With AI, you make the move to outcome-based pricing exponentially easier using its ability to automate and execute entire processes without manual intervention that introduces the risk of human error. AI also enables SaaS vendors to proactively adapt services based on predictions about customer needs, set realistic and achievable goals, and use continuous learning to consistently iterate and improve on the pricing contract.
Key Challenges
Given the ever-changing timeline of SaaS monetization, it’s important to note the challenges associated with shifting to an outcome-based model. These include accurately measuring and attributing outcomes, defining clear and measurable goals, managing pricing instability, and navigating the potential for margin erosion.
To overcome the challenges of value attribution, incentive alignment, operational complexity, and establishing long-term sustainability, you’ll need to:
Pilot programs with trusted customers;
Deploy data analysis tools to isolate your software’s impact;
Foster a collaborative, transparent relationship with partners;
Implement clear communication channels and feedback loops;
Adapt the pricing model as changes and issues arise.
In Conclusion
Outcome-based pricing represents a major stride toward a value-driven software monetization landscape that prioritizes customer satisfaction, strong partnerships, risk mitigation, and revenue growth for all parties involved. To succeed in your adoption journey, ensure you’ve covered all the considerations outlined in this article—and prepare to enjoy prosperous, meaningful relationships with your SaaS customers moving forward.
