SaaS is Capturing Too Much Value

In good business relationships, everyone wins. In order to know everyone is benefiting, both parties need to know the value they’re getting.

With SaaS, the value to the buyer is often unclear. Customers pay per-seat licenses without knowing exactly how much leverage those licenses bring to the business. Meanwhile, SaaS companies have a tremendous amount of visibility into their customers’ utility. They know exactly how often every feature of their product is touched by each user at each company, and how users and companies compare. This relative advantage, especially when the buyer is a smaller business, makes it inevitable that SaaS companies will end up capturing more value than their customers.

It’s more fair to have metered pricing. You pay for what you use, and both the customer and the provider understand this number. Gasoline and electricity costs are proportionate to usage, and these expenses can be reduced when needed by reducing consumption. In software, hyperscalers offer similar transactions. Many API products charge per unit of work. This is the future, because it’s more fair for the customer and it allows consumption to ebb and flow based on business need.

Per-seat pricing is not evil. It’s a reasonable way to arrive at a clearing price when the product is a bundle of thousands of actions a user can take in a given month. It’s a simple alternative to the false precision of trying to measure the utility of something that is simply too hard to measure.

But AI is going to change the playing field. Businesses will want to pay for results instead of paying for SaaS software that manages the human process which promises to deliver results.

Vertical software has been a way to roughly encode processes into digital machines, so that humans can introduce intelligence into those processes.

— Agents are a Generalized Technology

With agents, you’ll pay for outcomes.

This is just one force SaaS companies need to contend with. On top of that, software is becoming cheaper to make and easier to migrate across.

AI is eroding the last standing barriers of entry. Trivialization of app production will lead to diminishing returns, and upside will vanish.

— Hard is Back

What else is abundant and easy to substitute? Commodities. What are the gross margins of commodities? SaaS has 70%+ gross margins. Is this sustainable? Why?

SaaS has been capturing too much value. We live in a world where everyone has to pay SaaS taxes in order to operate their business. It’s a good time for software operators to carefully consider the nature of their transactions and make sure their customers are getting a good deal.