The SaaS subscription bubble is bursting. What emerges?
Many folks in the modern workforce can barely recall a time when enterprise software wasn’t charged for by the seat, on a recurring monthly basis. When that software evolved into SaaS and revenue models turned increasingly recurring, enterprises slowly but surely embraced the shift.
However, the economic and technological ecosystem surrounding enterprise SaaS — especially of the sales-led variety — is changing. For this reason, the time-tested model that has enterprises paying more and more, every year, in perpetuity, is falling out of favor. Slowly, up until now, but soon, all at once.
What’s driving this?
Inflationary environment
For the past year or so, organizations of all shapes and sizes have been far more vigilant about their expenses. CFOs are under constant pressure to optimize budgets, and recurring costs are an obvious target for scrutiny. In particular, high-dollar vendors, especially those whose products are not essential, are facing increased examination. Sales-led enterprise SaaS products, which often come with hefty price tags, are prime candidates for cost-cutting measures.
The question many CFOs are asking is whether these expensive subscriptions are truly indispensable or if more cost-effective alternatives are available. Even for the indispensable vendors, net-dollar retention is down; customers are, with relative ease, negotiating prices back into their favor.
Product-Led Growth
A newer wave of enterprise SaaS companies is shifting the market dynamics. These companies are focusing on user experience and seamless onboarding, adopting a product-led growth strategy. Unlike the traditional sales-led approach, product-led growth allows users to try software without significant upfront commitments. Companies like Attio are meaningfully challenging giants like Salesforce by offering intuitive, user-friendly solutions that don't require extensive sales pitches or long-term contracts. And at a fraction of the price, to boot. This democratizes software access, enabling enterprises to test and decide based on actual usage rather than sales promises.
Artificial Intelligence
AI — in particular the advent of the Large Language Model — is throwing another wrench in the gears. Historically, enterprise SaaS companies enjoyed predictably high margins. This was due to relatively low incremental costs after initial R&D and infrastructure investments. However, AI introduces unit costs previously unimaginable in the SaaS space.
While enterprises are eager to leverage LLMs, pricing these capabilities within the existing SaaS model is challenging. Some companies are significantly raising per-user prices for AI features, but resistance is growing. After all, if net dollar retention is already a problem, how is charging significantly more per seat the solution? This friction indicates that the market is ripe for a pricing model overhaul.
Enter lower-risk and outcome-based alternatives
Many enterprise SaaS companies are already experimenting with alternative pricing models. For example, 37signals, known for their pioneering SaaS products like Basecamp, have recently introduced a one-time payment model after 20 years of subscriptions. This has been met with a tremendous amount of enthusiasm. Meanwhile, transactional pricing models are gaining steam outside of the traditional FinTech use case. For example, Intercom, a leading customer service solution, has an AI-driven add-on named Fin, which they charge for based on the number of customer questions resolvedrather than a flat per-seat fee. This performance-based pricing aligns costs more closely with usage and value delivered, offering a more transparent and fair approach.
Everything in perspective…
Sales-led SaaS companies are not inherently trying to disadvantage their customers. On the contrary, their model has been extremely successful, creating mutually beneficial outcomes for vendors and customers for years. However, as the power balance has tilted slowly over time, customers have become more dissatisfied. Now, combined with more recent shifts in the broader economic and technical ecosystem, it’s clear the winds of change are blowing. I believe they’ll take us to a place that holds a more balanced blend of product-led growth strategies, performance-based pricing, and innovative transaction models that better align with customer needs and technological advancements.