Progress Software CEO Yogesh Gupta realizes that generative AI is going to change the way software is priced and his company is experimenting accordingly. One thing is clear: GenAI is going to upend current software pricing models especially those based on seats.
Speaking on Progress Software's second quarter earnings call, Gupta was asked how the company will drive revenue growth with genAI. Progress Software's second quarter revenue fell 2% from a year ago to $175 million, but the company raised its outlook for the year. Progress Software projected fiscal 2024 revenue of $725 million to $735 million with earnings of $1.98 a share to $2.10 a share.
Progress Software is seeing gains as enterprises leverage its data platform and tools for genAI. Gupta's answer was notable only because other software executives aren't as straightforward about it. Enterprise software companies have been talking about the delay in genAI profit euphoria in their most recent quarters. No enterprise is going to pay multiple vendors copilot taxes unless there are returns attached. Progress Software is using AI to add capabilities to its products, drive efficiencies for customers and improve its own processes and operations. Progress Software is using AI internally for technical and customer service, marketing content and customer contract analysis to drive value.
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Here's Gupta's answer in full for context:
"I think we in this industry are trying to figure out what is the best way to price our products for the value we are generating. In reality, software pricing has been done by some metric like data consumption, capacity, users, seats or servers. Pricing is based on a measurable quantity. The business value if it is meaningful and significant is often not related to those things.
We are experimenting is the best answer I can give you because I think that is the honest answer. Business models for genAI are going to evolve over the next year or two in our industry. For some products it's easy. Personal productivity is easy. You're Microsoft and you come out with Copilot for Office. Everybody who has Office, if you use copilot, is charged more on a per person basis. We are not like that. This is business value. You might have a fairly small number of users, and you might suddenly see hundreds of thousands or millions of dollars of benefit every year.
That model isn't on a per seat basis, and it isn't on data volume basis. It is truly on the value delivered to the end customer basis. How you tie that value together is really the key question. I wish I had a specific concrete answer for you. I don't other than the fact that we are experimenting as we speak. We are working with customers and others to basically figure out what is the best way to price these things so that they get the value and pay us for the return we're generating for them."
Hats off to Gupta for that answer, which identifies the software industry's biggest conundrum. Enterprise software vendors will need to show growth, but customers are pushing back on the upsell tactics and price increases when the value isn't there yet. Licensing models, subscriptions, pay-per-usage contracts don't account for genAI. That's why there's a rush to lock in customers now before the revenue models change.
For Progress Software, pricing models may be challenging since it has a mix of license, maintenance, subscription and services revenue. The company is a frequent acquirer and recently bought data platform MarkLogic. It also has digital experience, DevOps and infrastructure management software
Indeed, the move from licensing to subscriptions and consumption models typically meant meager growth for 12 to 18 months. This transition to genAI friendly pricing may have a similar time frame.
Meanwhile, enterprises are going to need some budget predictability. Software pricing models with genAI could be more dynamic, personalized and usage based as well as volatile. There may also be models where customers pay based on the value created instead of just access. Those value-based models will create a new set of winners and losers. Value audits will be the new licensing audit for enterprises.
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On the buy side of the equation, you can expect generative AI to act as an enterprise advocate by analyzing competition, pricing and bundling and unbundling opportunities.
Like Gupta, I'm not sure what software pricing models will emerge with genAI. The only certain thing is that the current models don't work. I could see a day where the vendor AI argues with the buyer AI at the negotiating table.
