SaaS Vendors Push Consumption-Based Licensing for AI Offerings: What Customers Need to Know

The SaaS landscape is undergoing a significant transformation as leading SaaS vendors, like Salesforce and ServiceNow, pivot from traditional per-user, headcount-based licensing to consumption-based pricing models for their AI offerings like Agentforce and Now Assist. This shift, driven by investor demands and changing customer needs, has major implications for businesses evaluating their AI investments beyond the impacts we are already seeing in regard to data protection and value received.

In this blog, we will cover why vendors are moving towards consumption-based models, how customers should approach their negotiations given this, and why we believe this change will eventually impact non-AI products.

The Rise of Consumption-Based Licensing for AI Offerings

Major SaaS providers have begun moving towards consumption-based licensing models for AI offerings. Rather than charging customers based on headcount, vendors now tie costs directly to usage or consumption of a particular metric. For example, Salesforce’s Agentforce offering is billed per “conversation” while ServiceNow’s Now Assist is billed based on headcount (i.e., a per unit price to upgrade to Pro Plus). With Now Assist, there is a limited number of “assists” that come with it, and once those assists are used up, you owe ServiceNow more money.

This shift aligns with a lot of the plans the vendors’ have communicated to the investment community. These plans include accelerating revenue, meeting investor expectations and the overarching goal of ensuring revenue can grow independently of enterprise headcount fluctuations or organizations’ ability, or hesitation, to meet headcount requirements overall.

Consumption-based pricing also comes with the sought-after and often talked about “Flywheel” effect. Once usage starts and the wheel starts spinning, there is a high probability that the wheel will start spinning faster through usage growing and accelerating, and the associated revenue, or Annual Contract Value, starts growing along with it.

Key Considerations for SaaS Customers

As organizations navigate SaaS vendors’ push to consumption-based licensing, several factors must be considered to ensure the proper transparency, deal construct, pricing certainty and fees are in place:

1. Upfront Discounts and Incentives – SaaS vendors often offer attractive discounts to encourage adoption of their AI offerings. These vendors need to grab market share to show the market their R&D dollars have been well spent and that they want the flywheel to start spinning. Organizations need to make sure they not only have the right discounting tied to their AI offerings but should also use this point in negotiations to ensure they have the right pricing and discounting in place across all products in their portfolio.
2. ROI Commitments – AI products come with a promise of increased productivity and efficiency, but it is highly likely that the pitched level of productivity and efficiency will be realized, at least during the initial term. Organizations should push the SaaS vendors to “put their money where their mouth is.” What will the SaaS vendor do if their AI product doesn’t deliver as expected? Will they issue a credit or give the ability to drop in-term without impact to other product pricing?  Will the SaaS vendor provide investment dollars or funding to help with the roll out and adoption? If yes, how much? Get answers to these questions before you commit to helping your vendors achieve their goals.
3. Usage Definitions – This is critically important. The definition of a “conversation” or an “assist,” or whatever usage metrics your AI products use, must be clearly defined and also understood within the organization. Any ambiguity will be to the benefit of the SaaS vendor and trust me, they know that and will take advantage of you for it.
4. Additional Volume Pricing – Many definitions of usage speak to a volume that is being made available to users and that additional fees will be required should that volume be surpassed. But too often, the definition stops there and doesn’t provide clarity as to what the fee will be. This must be addressed and there must be a clear call out as to what the fees will be should any volume be surpassed.
5. Volume Discount Structures – With consumption-based pricing, it is not good enough to have in-term price protections in place. Organizations must push for proper and relevant volume-discount structures. Customers should demand tiered volume discounts that scale with their growth and have tiers that make sense, ensuring sustainable and appropriate pricing long-term.
6. Renewal Price Protections – Without clear renewal pricing protections in place, organizations are at risk of unpredictable cost spikes when it comes time to renew. This is always an issue when it comes to SaaS products and subscriptions but given the flywheel effect and the significant level of “stickiness” that comes with it, this becomes an even more important area to ensure you negotiate appropriately. Proper price caps and the elimination of limiting conditions are important to have established from the jump.
7. Flexibility in Licensing Agreements – Organizations need to ensure that all the consumption-based products are part of the pool of products covered by any established swap or exchange rights. For those customers that don’t have swap or exchange rights, now is the time to negotiate them into your deals.

The Future of AI and SaaS Pricing

The move to consumption-based pricing is already here and there is no question it is not going away.

And this is really just the tip of the iceberg. I fully expect more SaaS vendors to start pricing their AI offerings under a consumption-based licensing model, and I also fully expect more traditional, non-AI products will be pushed towards consumption-based licensing. This makes it even more important for organizations to get ahead of things and ensure they have the right constructs and commitments in place with their various SaaS vendors.

While fundamental negotiation strategies and tactics will still apply, it is important that you refine your negotiation strategy and ultimate execution to better tackle the SaaS vendors’ goals. Understanding definitions for “use,” expected usage patterns, and securing volume discounting structures should be key focus areas, even if they have not been in the past.

Looking for expert guidance on navigating SaaS and AI negotiations? UpperEdge provides strategic advisory services to help businesses secure optimal pricing, constructs, commitments, contract flexibility, and long-term value from their SaaS investments. Contact us today to learn more about how we can support your enterprise software negotiations.