Do you know how to monetize and price your AI solution?

AI is here to stay, and Generative AI has changed the landscape for many independent software vendors (ISVs). In my previous blog post, I mentioned how the OpenView Partners 2023 SaaS Benchmark Report shows that software organizations are releasing solutions based on GenAI, and only a fraction of these organizations have a monetization impact. This could easily lead to failure among these organizations.

Solutions are infused with Generative AI, LLMs, or custom AI/ML models. The C-suite is asking: "How should we price and package our solution, and is the pricing mechanism different from what we are used to"? The reality is that Generative AI has the potential to revolutionize industries, and many incumbent organizations should be worried, really worried. We at TELLUS International have delivered software pricing/packaging workshops for organizations transitioning to SaaS and start-ups building MVPs and everything in between.

There are multiple different potential business models for vendors to monetize generative AI, and on a high level, they can be as follows:

⭐Licensing and selling generative AI models

⭐Charging for access to generative AI services

⭐Selling generative AI-powered products and services

⭐Generating revenue from generative AI data

⭐Using generative AI to improve the efficiency of existing businesses

Passion to study AI

I spent most of 2023 studying AI, and one of the key interest areas that I had was to study what kind of impact Generative AI will have on business models. I did a deep dive into academic literature and found several interesting write-ups and studies. One of them was Kanbach et al. (2023) article "The genie is out of the bottle: generative artificial intelligence from a business model innovation perspective." I will write up what I learned in a later post. Now, let's go back to the pricing/packaging of AI solutions.

I have been fortunate enough to facilitate software pricing/packaging workshops as part of TELLUS International business consultancy. I have witnessed different software pricing initiatives such as PaaS platform pricing with an API consumable offering, pricing of a platform managing industry automation, and many others. We have developed a process that takes the stakeholders step-by-step to define the potential value/price metrics and the potential pricing model. We want to follow a value-based pricing model if only possible.

Applying GenAI will change the business model

Applying Generative AI to the solution will change the business model in many cases where there is a "hit" on both the business model and the potential pricing model. The good news is that there are already some examples from the industry of how AI monetization and pricing have been implemented, whereby some parallels can be drawn.

The challenge is that each organization will be deploying AI in different ways, and especially if, for example, OpenAI services are embedded in the solution offering, the solution provider will have associated costs when delivering the service to the customer. This typically means the organization must move towards metered pricing and build a consumption-based pricing model. The challenge is how to avoid a cost overrun for the customer, especially in environments with potentially thousands of users. Interestingly, organizations such as Microsoft are basing, for example, Copilot for Microsoft 365 as a fixed price per user, whereby we believe that Microsoft must have estimated an average usage per user to even the heavy users from the light users.

Opportunities with GenAI are endless

There are many opportunities within the Generative AI space, but it is still very new for many organizations. Whether you are an organization that wants to provide a consumable API for others or an organization that wants to embed Generative AI into your solution, there are steps that you need to take. The mistake I have seen many times with organizations is that the development team builds a solution and initiates the pricing discussion after having it developed pretty far. Pricing/packaging should be part of the initial discussions, and that is why we at TELLUS have seen the impact when the product management/development team members are part of the discussion when defining the upcoming business model.

If you'd like to know more about our approach to AI monetization and pricing/packaging, please reach out to discuss.

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Yours,

Dr. Petri I. Salonen

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