This report draws from insights of 10 software pricing experts from diverse backgrounds, including SaaS founders, pricing leaders, startup advisors, and VC investors. Their collective knowledge ensures data-backed predictions for software pricing in 2024.
2023 was a year of contradictions in software. Some predicted a recession and slashed costs across the board. Others were more optimistic and continue to be bullish long-term. Growth rates in general slowed down and fundraising successes were harder to come by. At the same time, the rapid growth of Generative AI since the launch of ChatGPT in late 2022 drove industry-wide product innovation, both with existing providers and AI-native new entrants, who bucked the negative growth trends that were dragging others down.
And amidst all of this was the never-ending debate: What should software companies do about pricing? As the focus shifts toward efficiency and away from growth at any cost, it’s becoming clearer that pricing is a key lever not all companies are taking full advantage of, that pricing innovation still has a long way to go, and that it will continue to be a growing priority for 2024.
With this context in mind, m3ter brings you our second annual software pricing predictions report. We interviewed ten experts in software pricing to hear their predictions and advice for B2B software companies in 2024.
One of the hottest topics in software this year was the pricing spectrum, with pricing designs ranging from traditional subscriptions to pure usage-based pricing (UBP). Most of our experts agreed that the middle of that range, typically called hybrid pricing, is where most companies are headed.
James Wood, product and pricing strategy lead at m3ter, believes that in 2024 and the years to come, most usage-based companies – across go-to-market motions – will probably end up with:
Hybrid was a hot topic last year, as well – and most interviewees think that will continue.
The complexity that arises from a hybrid pricing strategy, or from doing any sort of pricing and packaging redesign, will require companies to be more intentional in 2024. According to Christian Owens, founder and executive director of Paddle, there’s been quite a divide between how companies have adopted usage-based pricing elements. They've seen an avalanche of companies trying to adopt it with, in his words, mixed success. While some take a considered approach, others are moving to UBP reactively – often with "horrible" results.
The economic landscape has an impact, too. Chargebee’s Director of Pricing Strategy Ariela Bitran points out that a flourishing economy and established product-market fit can make it really tough to choose which pricing strategy to focus on – because all your strategies are winning. The last two – rocky – years have, she says, "allowed companies to uncover what’s working and generate repeatability.”
Inside that environment, there are different mentalities companies could have, says SaaS Advisors Managing Director Todd Gardner. As he puts it, businesses could "keep pricing super simple so it doesn’t slow down the new sales process, or they could make pricing more sophisticated to boost growth over time.” Either way, pricing will be in the context of that slower growth environment in 2024.
This also means the discussions around these topics are starting earlier in the life cycle of a company, according to Melissa Donohoe, Investor at Notion Capital. Historically, pricing and billing infrastructure topics were deemed more relevant to Series B stage companies and beyond. Now, she says, “it's a topic almost from the start. It's in the discussion as much as hiring and Go To Market.”
It’s one thing to design pricing in an Excel sheet or vote on it in a pricing committee meeting, but pricing success comes down to whether you can operationalize. This is the one prediction for 2024 that every single contributor brought up.
Andreas Panayiotou, director of pricing and monetization at Notion Capital, notes that more people are becoming aware of how difficult it is to execute on pricing, largely due to their current tech stack not being able to keep up with the complexity. Going into 2024, he’s seeing more people looking for solutions and, at the same time, “more companies realizing they don't have to build it internally and that spending engineering time on their internal billing systems is a waste of time and money.”
Companies with usage-based elements in their pricing can’t do it well without the right tech stack, asserts Christian Owens, founder and executive director of Paddle. In the current economic climate, he has been witnessing too many companies “haphazardly” implementing UBP by “deprioritizing the implementation of an appropriate tech stack for pricing and pricing visibility” – all because they underestimate the amount of work required to do it well. The companies who are more mature around pricing, he says, made sure that the tech stack was on the priority list.
It’s not a one-time issue, either. Sure, a company can build billing infrastructure for a particular pricing model, but what happens when you change the pricing? These situations – when you want to continue making pricing changes easily and billing painlessly – is when the need for the tech stack really shows, according to Griffin Parry, CEO and Co-founder of m3ter.
This 2024 prediction was consistent with last year:
According to OpenView’s 2023 SaaS benchmarks report, 46% of SaaS companies launched AI features over the last year and another 31% are actively building or testing AI features. And since no one can put the proverbial AI genie back in the bottle, our contributors agree that the impact will only increase in the coming year – and that software pricing will evolve alongside it as companies look to monetize new AI features and maintain control over margins. More than 3 in 4 SaaS companies have had or currently have AI R&D initiatives (Source: OpenView)
1) AI will drive UBP adoption due to increased variable costs.
Before the 2022 AI surge, James Wood, from m3ter, says, cloud infrastructure was the only segment commonly associated with gross margin challenges that arose due to usage-driven variable costs. But now that problem is becoming widespread and front-of-mind as companies integrate AI-driven features to their products. Going forward, he asserts that more companies will have to think about how to cover those costs in their pricing strategy. Because of this, Tanya Bragin, VP Product, ClickHouse believes AI will be “a catalyst” for companies that haven’t yet adopted UBP elements.
2) AI-native companies will drive pricing innovation industry-wide.
Kyle Poyar points out how disruptive it is for companies with an installed base to transition their customers to new pricing, so he’s optimistic about some of the AI-native new entrants; they’re the ones who, he says, “can try something totally new and get creative.”
3) AI will enable companies to identify opportunities to optimize pricing.
The first two predictions focus on the cost protection and monetization strategies for AI. But what about the impact of AI on the actual pricing function? Christian doesn’t think we’ve seen a lot yet from customers using AI in a sophisticated way to help them determine pricing. He believes that is a “natural evolution” that will start to happen as they focus more on value. Griffin believes AI will be used to identify optimal pricing at a customer or segment level. He notes that it’s “a natural next step for data science to help with pricing challenges.”
💡Term to know:
“AI washing” – Saying software is powered by AI to promote it or price it higher, even without AI integration at the core. According to Christian, while companies with AI at their core have been bucking negative growth trends in 2023, AI washing negatively correlates with growth.
All the contributors agreed that most software companies are struggling to win new business right now, which will likely continue into 2024. Amidst that environment, sales teams will want to utilize custom pricing to win new logos wherever possible.
According to Andreas, commitments around spend are a popular reason for custom pricing. Eli Potter, VP of Sales and CS at Insight Partners, says sales teams are willing to be more flexible if there can be a mutual benefit, like if they're talking to a very large logo and they can “use the tailwind of working with that brand as a case study.” The smaller and the more unknown you are as a business, she says, the less flexibility there is.
Griffin says his 2023 prediction about custom pricing still feels relevant. For 2024, he adds that well-run companies will put limits on this strategy. If you’re trying to optimize for every single customer, he notes, it’s probably a “sign of ill-discipline.” He suggests applying an 80/20 rule – focusing custom pricing on the key customers.
Chargebee's Ariela Bitran agrees. The answer to uncertainty or decreased growth from 2020 and 2021, she says, is not necessarily to reduce pricing. When Sales teams are itchy and not closing as many deals, everybody gets nervous. She notes how easy it can be, especially in a sales-led organization, to blame that on “pricing yourselves out of the market.” She suggests that smart companies will exercise caution before jumping to decrease pricing or give too many discounts, instead thinking about pricing as “a lever to respond to other gaps in the organization.”
Anecdotally, we all know there were software price increases in 2023; most people probably received a carefully worded email from at least a few providers. According to data from Vertice, nearly three-quarters (73%) of software vendors increased their prices in 2023. Data from others like Paddle and OpenView show more broadly how many companies made any pricing or packaging changes during the year.
In 2024, Christian Owens from Paddle sees this trend continuing, as companies realized that changing their pricing “wasn't as scary as they thought.” This was especially true for younger businesses for whom this may have been the first big update: “Now they have a playbook for future price changes.”
Companies with differentiated AI in their products can ask for higher pricing, too, according to Eli Potter from Insight Partners. She reckons they still have the “first-mover advantage,” probably with a one-to-two year head start.
According to James Wood from m3ter, the companies with pricing power – very inelastic demand and a lot of entrenchment – were comfortably able to raise prices to match or even beatabove the rate of inflation. However, he notes that the majority of companies, especially point solutions or those who aren’t mission-critical, are either comfortable enough only to go up to the rate of inflation or not to increase prices at all, “because there’s so many economic headwinds to closing deals in general.”
One of the 2023 predictions had been an increased focus on profitability, with pricing as a key lever. Eight out of ten contributors this year expect there to be an even larger focus on profitability in 2024, while two thought it would remain about the same.
For companies without the pricing power James Wood discussed above, or for those who are not confident that they have pricing power, that drive for profitability or efficiency will have to be achieved internally. Rather than reaching profitability through raising prices, Tanya says, companies will be thinking about it more through internal cost cutting.
The unpredictability of the economy means companies are erring on the side of larger cuts, according to Eli Potter from Insight Patterns. Companies will, as she puts it, “continue divesting to reinvest” and trying to ensure their spending is creating a strategic competitive advantage.
Melissa also believes we’ll see a number of groups pulling back on costs, including those who target a smaller ICP, those with point solutions that aren’t in the critical stack, and venture-backed companies for whom efficiency is becoming very relevant to their investors.
Last year, a big focus of our report was how pricing would be leveraged to mitigate churn. And while churn is still a big concern for software companies going into 2024, Todd believes that expansion – the other factor that impacts NRR – will be the focus for next year.
Christian agrees. In his words, companies have fewer “shots on goal” to sell right now, meaning they will be trying to monetize existing customers better. In his work at Paddle, he’s seeing a sharp increase in companies introducing paid add-ons or adding functionality for their customers. Existing buyers, he says, may not be willing to spend more for the same product, such as through pricing changes, but they might be willing to pay more for new functionality.
According to Eli Potter, sales cycles are getting longer, especially in the enterprise space. Any deal that's over $500K used to take three to six months, she says, but now it's taking six to nine months to sell anything new.
Christian Owens is witnessing something similar. There was a period of a few years where the trend was ‘When in doubt, offer a free trial.’ He believes that is starting to melt away, especially in B2B, where companies are optimizing for, in his words, “a more robust sales process that takes a bit longer and might have proof of concept baked in, rather than a low-touch process.”
What does that mean for PLG? It’s not going away, according to Christian, but companies are realizing that if they want to do a PLG motion well, it requires a lot of effort and needs to be “an area of excellence.”
“Usually the order goes acquire, monetize, engage. With PLG, it’s acquire, engage, monetize,” Ariela adds. But she notes that even if parts of a company’s offering can be product-led, a large customer organization is complex and will require a lot of touches and commitment.
If we see growth in strategies like PLG, Melissa Donohoe says, it will increase focus on the tech stack, as it adds complexity to the pricing model just like hybrid. PLG is often credit-based or consumption-based by nature, and, she points out, the number of customers you’re billing grows massively. “What’s the point of a PLG model if you don’t have the infrastructure to analyze a customer’s usage and encourage them to move up?” Without the proper tech stack, she says companies aren’t maximizing the value of a PLG strategy, which can otherwise be “quite expensive.”
With all these predictions in mind, we asked the contributors to offer some advice for software companies navigating the 2024 pricing landscape: