ServiceNow took the plunge as it pivots its business model to a hybrid approach with seats, subscriptions and consumption blended together.
The move, outlined on ServiceNow’s fourth quarter earnings call, isn't surprising given agentic AI needs to be priced into plans somehow, but enterprises need budget predictability. ServiceNow isn't the first mover here, but is likely to trigger a rush to a hybrid software model. Salesforce has also been noting a move to a consumption-based business model with Agentforce and Microsoft launched pay-as-you-go agents.
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For enterprises, the big question is whether this hybrid business model is going to be a win. At the very least, enterprises will have to manage their agentic AI consumption to keep costs in line. Like the move to cloud computing, enterprises can plan on getting hit with a few zingers. SaaS providers will need to add more transparency into consumption just like hyperscale cloud providers do.
Speaking on ServiceNow's earnings conference call, CEO Bill McDermott portrayed the seat-subscription-consumption model as a Goldilocks scenario for the vendor and customers.
McDermott said:
"Our goal is to combine both subscription and consumption pricing. Customers can start with a base subscription, which they like. They want that flag in the ground, so they can predict their spend and their current ROI schemes. But then, they obviously want to take advantage of agentic AI and yet at the same time, the industry is early in its formation. We're actually innovating faster than they have deployed it. So they want to scale with us in harmony and in partnership.
With our Pro Plus version, they'll get access to our agentic AI agents and will give them a meter based pricing methodology where they will take out the soul crushing business process work that is tedious and complex that people actually don't even want to do. Agentic AI agents will do that for them. They will see a very nice ROI on that. And by definition, if the meter is running up, that means they're using it and deriving financial gain from it, and they're happy to pay and share with us the profits.
It's the Goldilocks model where you get it both ways."
Amit Zavery, ServiceNow's product chief, elaborated on the consumption model. "It's not completely like pay as you go per meet per individual assist. It's really packs of assist in a way. It's subscription pricing and we are giving them some flexibility and the ability for customers to see value instantly," he said.
The AI agent pack approach rhymes with how Adobe prices Firefly. You get tiers of credits. Salesforce has floated the idea of $2 per resolved conversation, but it's unclear whether that's a trial balloon or not. If you buy that an AI agent is a human replacement $2 per resolved issue makes sense. Over time, it's likely that agentic AI is more of a feature and process automation than human replacement.
Salesforce President and Chief Operating Officer Brian Millham outlined the consumption model in December at a Barclays investor conference. He said:
"As we think about the consumption world, it's very different than going out and selling a customer 500 licenses of Sales Cloud or Service Cloud. We're convincing them that Agentforce is the future. They're buying Agentforce from us, but we'll monetize it through a consumption model going forward.
New capabilities that we have on pay as you go, giving people insights into how they're using the product, term commits like AWS where they make a commitment to usage over time, but you've got to burn through that during the term of the agreement. We think this is additive to a model that we've had forever, which is name license plus this consumption model will really drive some growth going forward."
For ServiceNow, and any SaaS vendor, the trick will be getting agentic AI adoption, use cases and value that can be shared. ServiceNow isn't forgoing subscription revenue with a hard pivot to consumption, but it will take time to build up the additional revenue stream.
A few observations:
- This hybrid approach makes sense for the vendor and the buyer, but it will be an adjustment. Enterprises will want more visibility and transparency and SaaS vendor deals have become murky.
- Enterprises won't be totally new to consumption models since AWS, Google Cloud and Microsoft Azure have trained enterprises on consumption models. Databricks and Snowflake are also consumption based.
- The consumption bookkeeping will be challenging if a company takes a multi-vendor approach to AI agents.
- There will be tension with customers since SaaS vendors have already gobbled up too much of the operating expense budget.
- To track this consumption, it's likely that SaaS vendor deals will be procured through cloud marketplaces. For instance, enterprises may choose to monitor consumption through one dashboard via AWS or another hyperscaler.
- This model won't be Goldilocks for every enterprise, but it's the approach that'll become the norm for the foreseeable future.
- It's unclear what the agentic AI value equation turns out to be. I'm not sure the digital labor argument will hold up especially if consumption surges to the point where AI agents are comparable to human-per-hour costs.
