Towards 2023, the technology industry will experience a paradigm shift, with stakeholders no longer focusing solely on revenue growth, but instead considering revenue growth and profitability in conjunction. This is an echo of the not-so-distant past, when technology companies evolved from simply focusing on user acquisition to having to monetize users.
As the world braces for continued economic unpredictability this year, it's no wonder investors are hoping tech companies can chart a path to profitability sooner.
There are many factors that affect profitability, such as controlling costs, but growing your bottom line in the right way is critical. And to achieve that, you need the right pricing to provide a good value proposition to your customers and ensure good profit margins. Using pricing strategically and adapting as your product evolves is an essential but often overlooked tool.
for us 2024 Software Price Prediction Reportwe spoke to top industry experts and venture capitalists and conducted extensive research on what to expect in pricing over the next 12 months.
The main price trends from 2024 onwards are:
There is no “one size fits all” – pricing becomes more creative
Our research highlights that pricing is not a one-size-fits-all approach. The experts we spoke to believe that companies are moving away from traditional subscription pricing to more usage-based approaches, particularly through various hybrid models that combine subscription pricing with variable components based on product usage. Agreed to continue migrating.
Companies are also starting to adopt more thoughtful and creative pricing approaches earlier in company life. Historically, the topic of pricing and billing infrastructure was considered more relevant for companies at the Series B stage and beyond.
Melissa Donohoe, an investor at Notion Capital, points out that now: This is as much a topic of debate as adoption and market entry. ” This will help encourage companies to be more intentional with their pricing in her 2024.
AI companies will drive price innovation across industries
The rise of AI-native companies will be a key driver of the shift in thinking about pricing in the B2B software space. Kyle Poyal, operating partner at expansion-stage VC firm OpenView, said: “We're always looking to the creativity of emerging players, such as AI-native companies that don't have an installed base, to gain traction with more disruptive pricing models. “We are doing so.”
AI-native companies are also expected to be at the forefront of pricing innovation in 2024 due to survival necessity. Over the past year, we have seen AI businesses already begin to adapt to the variable costs associated with AI technology.
Going forward, integrating usage-based elements or subscriptions into pricing models will be critical to keeping these businesses operational. One example we've already seen is Stability AI attempting to “balance profitability and openness” by charging commercial customers a subscription fee.
An interesting second-order effect is that the customers of AI-native B2B software companies tend to be other B2B technology companies, who are more likely to learn from their experience as customers and apply some of that learning to their own pricing. That's it.
For example, companies that enjoy the experience of being able to flexibly adjust their usage and control costs accordingly will have greater confidence that the value they get from it is worth the cost, and will be more confident that their new pricing model You will be encouraged to explore. Unique products with smart usage-based elements.
Keeping up with price innovation requires a robust technology stack
One of the predictions for 2024 that all experts emphasized is that a robust technology stack will be needed to execute modern pricing strategies. One company I spoke to recently said: “Pricing is a process and a technology issue. But without the right technology, you can't even build a simple process.”
As Kyle Poyar of OpenView points out, “Many companies are facing the limitations of their existing technology stack and are unable to monetize their products as quickly as they would like.” “We would like to see more companies adopt modern pricing technology stacks to enable faster pricing iterations and price testing for both subscription and usage models,” he said. “Because these models will actually exist in parallel.”
Investor's perspective
Despite the downturn in the tech industry, there is still VC capital to be had, but the bar to get there has been raised significantly. Demonstrating that the value you deliver is aligned with your pricing is more important than ever to meet the scrutiny of VCs who want to know that their investments are being used efficiently and yielding returns. It will be.
Notion Capital's Melissa Donohoe says, “Especially for companies looking to raise capital, it's important to keep in mind how investors value different revenue streams and pricing models and develop tools to predict that. It's important to think smarter about how we can leverage it.”
Eli Potter, VP of Sales and CS at Insight Partners, also advises: “Many companies have a hard time articulating the customer value of their products, and while many companies like to talk about 30% increases in productivity and efficiency, it’s not interesting enough to have an impact at the top.” It's not about “line revenue” or growth rate. It is far more effective to focus on outcomes that drive recurring customer value and recurring revenue. ”
Pricing needs to evolve with your business
Pricing has always been critical to technology, but it has often been overlooked or undervalued as a driver of success. Only when it doesn't work, as we learned this year when Unity's CEO tried to change its pricing model too quickly and with little consultation, leading to a fierce backlash, how sensitive it is. People understand what is an influential lever. Get used to it.
But as the rise of AI-integrated products and services continues to disrupt the software space, and with it bring opportunities, businesses must ensure they embrace price innovation. With the continued shift from direct revenue generation to profitability, we expect companies to invest in methodologies and tools that enable a more intentional, thoughtful, and creative approach to pricing in the year ahead. Masu.
Lead image via m3ter.
