MC Explainer: Why outcome-based pricing model is the new SaaS flavour

SaaS

The Software-as-a-Service (SaaS) landscape is undergoing a seismic transformation. From Freshworks CEO Dennis Woodside to Snowflake CEO Sridhar Ramaswamy, tech leaders across the globe are championing a major shift in pricing models—from traditional subscription-based models to outcome-based pricing. This emerging model aligns payments with the measurable value that software delivers to customers.

As advancements in Artificial Intelligence (AI) and analytics make it easier to quantify tangible outcomes like cost savings, revenue growth, or improved efficiency, SaaS companies are rewriting the rules of monetisation.

“It's potentially the combination of these AI-driven applications and a consumption model that can turn out to be a larger threat for the SaaS model as a whole," Sridhar Ramaswamy told Moneycontrol during his India visit.

Freshworks’ Dennis Woodside, in an interview with Moneycontrol last year, said that SaaS products that Freshworks offers still have a lot of demand and the only change will be on pricing models.

“I feel pretty positive that we will continue to have a role. The licence model might change. We have elements of our licensing today that are consumption-based and some are seat-based. There may be some changes here but otherwise SaaS will remain relevant,” Woodside said.

Apart from just the AI advancements, the SaaS industry is also navigating significant shifts as it contends with a challenging macroeconomic environment, marked by rising interest rates, tightened venture capital funding, and increasing customer scrutiny over spending.

These pressures are forcing SaaS companies to prioritise profitability and operational efficiency over the traditional growth-at-all-costs mindset and customise pricing models.

“We will also see pricing models evolve, moving away from the traditional subscription model to value-based pricing that focuses on outcomes and efficiency. Plus, we will see the emergence of AI-native SaaS platforms, built with AI at their very core,” said Arvind Parthiban, founder of SaaS firm SuperOps.

Here’s an explainer on the trend, its implications, and its challenges for Indian SaaS companies.

What is outcome-based pricing?

Traditionally, SaaS companies have relied on subscription pricing, charging customers a fixed fee monthly or annually for access to their software. While this model offers predictable revenue streams, it doesn't account for the varying value that different customers might derive from the same product.

Outcome-based pricing, on the other hand, ties fees to specific, measurable business outcomes that the software enables. For example, a customer relationship management (CRM) tool might charge based on the increase in sales revenue. Or An AI-driven HR tool could bill based on reducing employee attrition rates.

This approach directly aligns the vendor’s success with the customer’s success, fostering stronger partnerships and ensuring that companies only pay for tangible results.

Why the shift now?

Several factors, like the advancements in AI and analytics, are converging to make this shift possible and attractive.

Modern AI-powered tools can now track and measure complex metrics with unprecedented accuracy. These technologies allow SaaS providers to demonstrate clear links between their solutions and business outcomes, paving the way for outcome-based pricing.

“Expect more SaaS companies to shift to flexible, usage-based pricing that aligns with the value delivered, moving beyond traditional seat or user-based subscription models,” said Vijay Rayapati, cofounder of Atomicwork.

With tighter budgets and increased scrutiny on IT spending, businesses are prioritising investments that offer a clear return on investment (RoI). Outcome-based pricing offers a compelling way to align software costs with delivered value.

“We interacted with so many customers, both at the mid-level and enterprise level. Today, everyone is demanding outcome-based pricing model. Given the tough macro environment and the impact of AI, we will see many SaaS firms shifting to this,” said a cofounder of a large US-based SaaS firm requesting anonymity.

According to him, outcome-based pricing reflects a broader shift towards customer-centricity, as businesses strive to move beyond transactional relationships and become strategic partners.

"Subscription fatigue is real, and customers want pricing models that reflect their business realities," said Khadim Batti, cofounder of Whatfix. "Usage-based and outcome-oriented pricing push SaaS companies to demonstrate their tangible impact, fostering deeper client relationships," he added during Moneycontrol’s Global AI Conclave held in November 2024.

Challenges in adopting outcome-based pricing

While the model is promising, adopting outcome-based pricing is not without its hurdles.

Not all outcomes are easy to measure. For example, while cost savings or revenue increases might be quantifiable, softer metrics like customer satisfaction or brand value can be harder to pin down. SaaS companies need robust frameworks to define and measure these outcomes effectively.

Outcome-based pricing shifts some of the risks from the customer to the SaaS provider. If the promised outcomes aren’t achieved, the provider may not get paid as expected. This requires a high degree of confidence in the product’s capabilities.

“While evaluating the outcome-based pricing model, we realised that while it’s a big win for customers, SaaS companies will have to have a lot of precision in their products. Else, this model might not be sustainable for mid-sized firms,” said an industry source.

Transitioning from a subscription model to an outcome-based one involves significant operational and contractual adjustments. For instance, providers need to set up systems to track customer-specific metrics in real time, which can be resource-intensive.

Meanwhile, analysts caution that the model is not a panacea. While the idea of tying pricing to outcomes is appealing, it’s crucial for SaaS vendors to balance innovation with practicality. Many businesses still value the predictability of subscriptions.

Also Read: From AI agents to pricing models: What’s coming for the SaaS industry in 2025