Your Guide to Pricing Transformations in 2023
Welcome to the fourth edition of the Pricing Transformations series. This year we look back at 2022 and forward to 2023, measuring how our past predictions have stood up to another tumultuous year. We’ll also lay out what you can expect in 2023.
You can read the first three installments in this series here.
Let’s begin by looking back at the year 2022.
We predicted: Companies will push usage-based pricing even further.
How we did: 5/5.
Many companies layered in some form of usage-based pricing in 2022, and even more considered it. Hybrid pricing models that combine a subscription with usage-based pricing are more adaptive than models that support only one mode. According to OpenView survey data, three in five SaaS companies now have some form of usage-based pricing, up from 45% in 2021.
We predicted: Customer value management will supersede customer success.
How we did: 2/5.
Alas, most companies are still struggling to move from customer support to customer success. Customer success is still mired in metrics like customer satisfaction (CSAT) or net promoter score (NPS) that have not been able to demonstrate any diagnostic or predictive value. There are some hopeful early indicators, though. Customer experience platforms such as Pendo and Moengage are increasingly organized around user “paths” and it is a short hop from “path” to “value path.”
We predicted: Inflation will dominate conversations on pricing strategy and tactics.
How we did: 5/5.
If anything, we understated the importance of inflation in 2022 and the behaviors it would drive. Many SaaS companies were pushed by their investors to raise prices in response to inflation. At the same time, many companies were trying to reduce costs as their budgets were squeezed by inflation. The implied collision is a major theme for 2023.
We predicted: We’ll take the ‘SaaS’ out of ‘SaaS pricing.’
How we did: 4/5.
Last year, we predicted that software companies would diversify their revenue streams into new territories (pay-as-you-go, payments, FinTech, data services, professional services, marketplaces, lead generation, hardware, and more.) And in 2022 we found best-in-class companies were doing this. The companies that developed hybrid pricing models in 2022 will be better positioned to weather the recession and succeed in 2023.
We predicted: Pricing strategy will be about increasing company value and not just revenue or profits.
How we did: 4/5.
In 2022, investors became increasingly engaged with pricing. More VC firms followed OpenView’s lead and began to build expertise in pricing, either in-house or through partnerships. Private equity firms did the same thing, and began to conduct more formal assessments of pricing power and to ask how increasing pricing expertise could increase the value of a company.
Our predictions for 2023
From usage-based pricing trends to inflation and AI, here’s what we predict will be the top pricing transformations to look out for this year.
We see SaaS companies raise prices, sparking conversations around SaaS inflation—and pushback from buyers (Steven Forth)
Some SaaS companies are responding to inflation and higher interest rates by applying a generic price increase, communicated as a percent. Inflation is no excuse to start doing this. Broad-brush price increases will be a failed strategy and will provoke pushback from buyers.
We already see this with recent criticisms of SaaS inflation. The buyer sentiment is: SaaS companies are trying to take advantage of general inflation to jack up prices.
Pricing response to inflation and higher interest rates should be based on how inflation, higher interest rates, and a recession will:
- impact your customers (i.e if they are raising their own prices).
- change how you create value and who you create value for.
Is it fair to criticize SaaS inflation?
Not generally. SaaS solutions evolve, and that is part of their whole value proposition. SaaS providers implicitly, and often explicitly, promise to roll out new functionality every month or quarter. That new functionality is meant to deliver more value.
Take design software, a category that SaaS purchasing platform Vertice has called out as an egregious example of SaaS inflation. Prices are up some 60% over the past five years. That sounds like inflation—price gouging even. But is it? I don’t think so.
Design software, such as Figma, Siter, or InVision has exploded from a fringe category to an essential tool for any organization that uses software to create user experiences. The functionality of these applications has transformed over the past five years. The value they provide to individuals, design teams, and organizations has grown by much more than 60%. This isn’t a case of SaaS inflation and it is misleading to refer to it as such.
We see the rise of pricing complexity (hybrid pricing) with companies supporting multiple go-to-market motions, monetization streams, and pricing models (Kyle Poyar)
Last year I shouted from the rooftops that companies would push usage-based pricing even further. What makes usage-based pricing so attractive? Usage models correspond with faster net expansion and continued growth at scale.
While I’m still bullish on usage-based pricing, what we’re actually seeing is the rise of hybrid pricing or more complex pricing models. Two examples of hybrid pricing:
- Autodesk’s ‘Flex’ licenses. Autodesk introduced one-day “Flex” licenses, allowing customers to try out new Autodesk products without committing to a full subscription. “Flex” licenses don’t replace traditional subscriptions; they complement the subscription model and allow Autodesk to facilitate multi-product expansion with their customers.
- Github’s predetermined usage for additional products. GitHub still charges on a per-user subscription basis, but each plan includes a predetermined amount of usage for products like Codespaces, GitHub Actions, GitHub Packages. Customers will likely exceed the predetermined usage limits and then pay extra based on their actual consumption (GitHub even has a handy calculator for customers to estimate their costs).
Almost half of all SaaS companies have already gone hybrid
New data from OpenView’s State of Usage-Based Pricing survey indicates that hybrid models—such as usage-based subscription models or traditional SaaS companies who are testing usage-based pricing—are now adopted by 46% of SaaS companies. I expect to see this figure increase even further in 2023. Here are a few reasons why:
- Buyers want it. In a challenging economic climate where buyers have more and more power, SaaS vendors will need to adapt to customer requirements. This will mean greater variety and flexibility in pricing as opposed to a one-size-fits-all approach.
- Increasing go-to-market (GTM) and product complexity. SaaS monetization will need to keep up with an increasingly complex set of products and go-to-market motions. As software companies monetize beyond software (payments, FinTech, marketplaces, etc.) and support hybrid go-to-market motions (PLG, sales-led models, partnerships, third party marketplaces, etc.), pricing will need to adapt accordingly. Don’t expect it to look like (relatively) simple, one-size-fits-all subscription pricing.
- New software is making pricing reform easier. SaaS companies’ hands have been tied by clunky and outdated pricing software. With the rise of a modern pricing tech stack (more on that later), SaaS companies will be able to configure and support more complex pricing models with ease.
Hybrid pricing models will require a modern tech stack to optimize and manage pricing and value (Kyle Poyar)
The demand for more flexible and hybrid pricing models is clear. But companies have historically been held back from supporting these types of models because of their outdated systems and technology.
In an exciting trend, we’re seeing more and more innovation in the world of pricing technology. There are at least a half dozen new entrants who focus on usage-based metering and pricing (see: m3ter, Metronome, Amberflow, and many more). This is only the tip of the iceberg. We’re now seeing the rise of exciting technology to modernize quote-to-cash, pricing optimization, finance & planning and churn & payments. Plus, products like Stigg are focused on the developer experience of pricing—providing an API-first approach to pricing & packaging.
While these product categories are still nascent, I hope to see the modern pricing tech stack start to become mainstream in 2023.
AIs will become mainstream and we will need to learn how to price them (Steven Forth)
We predict that virtually all B2B SaaS companies will leverage some form of AI in the coming year, or at least announce that they are going to do so. This will lead to massive investment in the field, as evidenced by the more than $1 billion invested in Open.ai.) With this investment means an expectation of returns, raising key questions for 2023 such as:
- How will AI deliver differentiated value to customers?
- Which AI products will be sustaining, which disruptive, and what new categories will be created?
- How will the new value created by AI be priced?
One of the most important areas to track will be the pricing models imposed by the major AI infrastructure providers: Google Vertex AI, Microsoft Azure Machine Learning Studio, AWS Machine Learning Services, IBM Watson, Salesforce, and others. These pricing models will become reference points for buyers and the costs will be part of the investment required to develop and operate an AI solution. To date, pricing in this area has been mundane and predictable. However, this could change and it will be important to study and compare these models.
In the long term, AI will lead to a revolution in pricing and shift B2B SaaS towards pricing outcomes. There have been whole books written about this concept, such as The Ends Game: How Smart Companies Stop Selling Products and Start Delivering Value. AI will help to address current objections to outcome-based pricing, such as the challenges of identifying too many causes contributing to any significant outcome and the unpredictability of outcomes.
We predict that outcomes-based pricing will be called out as a trend in this annual review at some point before the end of the decade.
Pricing transparency and traceability
In 2023, pricing actions are going to become more transparent and trackable. Everyone from boards and investors to buyers and users will want to understand what pricing changes are being made, why, and how this will affect their own interests.
Will we be right? What did we miss? Let us know and we’ll see you back here in January 2024 to recap how we did.