Hope is not a strategy: Many companies have already launched towards an unsustainable business model with Generative AI
In the rush towards AI, we are seeing many of the same monetization mistakes that businesses in Silicon Valley have made in the past. In this technological evolution, the consequences will come much faster. Traditional thinking will tell you to be the first to market, but the spoils will go to the ones that thought about monetization from the start. Designing the product around the price is more relevant than ever.
In Simon-Kucher’s recent Global Software Study, 92% of B2B Software as a Service (SaaS) leaders reported that they expect to have new products and features using Generative AI and Large Language Models (LLMs) within the next 18 months. 75% expect these to drive significant incremental revenue. However, there seems to be underlying skepticism on customer value: the majority of leaders expect that less than half of their customers will adopt these new products and features.
This expectation of incremental revenue without the conviction of value is a worrying dichotomy. We already know that 72% of innovations fail – and many never make it to market. For those products that do, many are at risk of not driving incremental revenue: research suggests that 20% of what companies build dictates 80% of customers’ willingness to pay. Furthermore, a key challenge with AI is that efficiencies provided by the addition of Generative AI products can actually erode the current revenue model. We are especially seeing this in companies that employ a per-user pricing model – as the software becomes more efficient, customers need fewer user licenses, which decreases revenue.
What to do? We have identified three key areas of consideration to help you become part of the few that successfully monetize AI.
1. Understand the role of AI to your company: Where do you fit in the AI space?
We see three key categories of AI companies developing: AI-first, AI as a module, and AI as an existential threat. The approach to monetization will be different for each. First, let’s breakdown what these categories are and what it means for a business.
AI-first: This is a business where AI technology serves as the key foundational element of the product. Without AI, there is no product.
AI as a module: AI as a module refers to the integration of AI capabilities into existing products or applications as a self-contained or additive component.
AI as an existential threat: These are businesses operating under the perspective of AI as more than a tool for optimization or innovation but as a force capable of disrupting their industry. In this case companies that fail to adapt and build AI into their products may find themselves at a significant disadvantage compared to their competitors.
Carefully consider where your company and product fit in. Don’t rush it: again, 20% of what companies build dictates 80% of what customers are willing to pay. Prioritize features and upgrades that drive material value and avoid trying to do too many things. This will help to avoid feature shock, or development of features that customers either don’t see value in, or do not have a willingness to pay for. Take the time to talk to your customers and understand what they see value in, and what they do not.
2. Establish Value: Free will be your biggest enemy
In an attempt to drive visibility and adoption, many SaaS companies are putting AI in free versions of products. While this has its uses, it is a slippery slope between driving adoption and conditioning customers early on that these products should be free. The value perception of AI products and features is still being developed in customers’ minds. Establish the value and train your customers by having clear guardrails between what (or how much) is free, what is paid, and what is premium, too. A race to the bottom with free AI services is not sustainable in the long term.
3. Carefully consider your revenue model: It’s time for a change
A large portion of SaaS companies still primarily monetize per seat. AI has put this model on the endangered species list. Those who do not have another means of monetization are already experiencing contraction due to macroeconomic conditions. This will only intensify as efficiencies driven by AI combine with tight budgets to further drive the number of seats down. Begin establishing other monetization metrics (such as usage-based, transaction-based, or revenue-based) now, to train your customers on how to think of the value your product delivers in a different way and shift the conversation away from seats.
There is no doubt that the AI world is moving fast and it’s right to not want to be left behind. However, now is the time to remember the fundamentals of smart monetization and set your business up for sustainable growth in an AI-world.
There is no cookie-cutter template for monetizing AI – every business has a unique opportunity to leverage artificial intelligence, but establishing a thoughtful monetization approach will be the key to sustainable growth. If you are ready to monetize and leverage AI, contact our experts today.
