Major tech companies in the industry are utilizing AI technology to eliminate price reductions and enhance customer loyalty through stronger lock-in strategies.
In a recent study, Forrester Research has warned tech buyers that the era of experimentation is over, and the era of monetization has begun. This shift is particularly evident in the world of enterprise application vendors, who are moving away from traditional discounting and towards high-margin AI products.
The trend is not limited to one or two vendors. Companies such as Oracle, SAP, Workday, Microsoft, ServiceNow, and Salesforce are all observed to be adopting this strategy. This shift dramatically increases vendor lock-in and the strategic risk of your choice, as your next major software decision is a bet on a single vendor's security posture, pricing model, and innovation capacity for the next decade.
Changing Pricing Models
This shift has significantly changed the pricing and negotiation of software contracts. Vendors now commonly use usage-based pricing, charging customers based on consumption metrics like data processed, model calls, or GPU hours. This is a departure from the old per-user seat model, particularly ill-suited for AI agents automating tasks rather than humans accessing software.
In addition, some enterprise AI contracts incorporate outcome-based fees, tying vendor revenue to measurable business benefits such as cost savings or increased efficiency. This aligns vendor incentives with client goals but introduces negotiation complexity due to difficulty in defining and measuring precise outcomes.
Many contracts blend subscription fees with usage or performance-based components. For example, a base subscription might be supplemented by fees per model call or success fees tied to savings or ROI metrics. Vendors also impose minimum seat counts or volume commitments, especially in high-value sectors like legal tech.
Higher Margins and Premium Pricing
Vendors targeting industries like legal or procurement charge premium per-seat or per-user fees, justified by the high ROI these applications deliver to deep-pocketed clients. This has made negotiations tougher as buyers scrutinize value versus cost at these high price points.
Negotiation Dynamics
AI adoption has altered negotiation strategies with AI-powered procurement tools increasingly used on both sides, enhancing pricing transparency but also pushing vendors to justify complex pricing components. Successful negotiation now often requires a deeper understanding of AI consumption patterns and business metrics.
In conclusion, software contracts for AI products are more complex, usage- and outcome-sensitive, and commanded at higher price points. This reflects the high margins vendors pursue and the strategic value enterprises place on AI capabilities. Negotiations increasingly focus on aligning pricing mechanisms with AI-driven outcomes and usage, departing from simple per-seat licenses.
[1] Forrester Research. (2021). The Forrester Wave™: AI-Powered Procurement Suites, Q3 2021. [2] Gartner. (2021). Magic Quadrant for Procurement Service Providers, Worldwide. [3] IDC. (2021). Worldwide Artificial Intelligence Software Platforms Market Shares, 2020: AI Software Platforms Market Poised for Growth Amidst COVID-19 Challenges. [4] McKinsey & Company. (2021). The rise of AI in procurement: A new era for automation and efficiency. [5] Deloitte. (2021). The future of AI in procurement: Embracing the transformative power of cognitive technologies.
- The era of monetization has begun in the technology industry, particularly in enterprise application vendors, who are moving towards high-margin AI products instead of traditional discounting.
- This shift has influenced the negotiation of software contracts, with vendors now using usage-based pricing that charges customers based on metrics like data processed or GPU hours.
- In addition, some enterprise AI contracts include outcome-based fees, tying vendor revenue to business benefits such as cost savings or increased efficiency, which aligns vendor incentives with client goals but introduces negotiation complexity.
- AI adoption has altered negotiation strategies, with AI-powered procurement tools increasingly used on both sides, enhancing pricing transparency but also pushing vendors to justify complex pricing components.
- Software contracts for AI products are more complex, usage- and outcome-sensitive, and commanded at higher price points, which reflects the high margins vendors pursue and the strategic value enterprises place on AI capabilities.
