so the SAS pricing model is fundamentally in trouble but it's not the way most of the critics say and we need to talk about it I'm going to start by explaining how SAS is typically priced for people who don't understand software as a service is priced like chicken that's the joke is that software as a service tastes like chicken to private Equity firms because it's all the same and it's super consistent Revenue just like good white chicken meat and the reason why that matters is because you want predictable revenue streams to build business valuations and the reason why so much of tech pivoted to B2B SAS in the 2010s is because fundamentally if you have valuations that sticky because they're built on highly predictable business Revenue it's really easy to exit it's a lowrisk play it's easy to build a business revolve it turn it around and sell it and VCS love the low risk and so they're happy to finance that all day because they see that exit to private Equity I've been in B2B SAS companies that had exit to private Equity I've seen it play out it really is a heyy this tastes like chicken let's roll it up we have the same revops we have the same building model we have similar pricing and packaging structures we have internal operations we can make consistent and we can just make this an extremely efficient machine that churns out high quality business Revenue that was the 2010s that was the dream into the early 2020s call it 2021 no longer the case as clearly few factors changing that we've talked about on this channel number one AI is changing the pricing power Dynamic AI is giving companies that want to shift more pricing power to argue Clara publicly embarrassed sales force by moving off the Salesforce stack and building their own thing internally with AI now clar is going public and you know what they're calling out that they are now profitable to the tune of $180 million instead of like $43 million loss last year and part of that is that they cleaned up their software stack and they're paying less in SAS this is what is enabling them to go for an IPO in very uncertain macroeconomic situation like we have right now I other companies are going to pay attention to that other companies are going to notice that and so that's that's piece one is that like fundamentally SAS is under pressure from AI but piece two is that even if you have great distribution even if you have great brand arguably Salesforce has both of those things even if you lean aggressively into AI again Salesforce is also doing that Salesforce the original SAS so it's like a nice comp here um you are still in a situation where companies are going to change their expectations of you so even if you keep the relationship you're going to expect more custom work so part of what's going on is that AI is enabling everyone to do more and everyone to expect more and so when you're in a vendor relationship you know internally that your teams are more efficient with AI and you can push and expect more yeses from software vendor you're purchasing from who will then use their teams to use AI to build customization that wouldn't have been profitable to build without AI 10 years ago and if they don't do it you're going to go down the street to an AI native company and they'll do it for you and so we have this pressure for Mass customization which leads to a it's workable but it leads to a less efficient footprint for SAS businesses so that pressures their margins the last thing I'll call out is that pricing and packaging is fundamentally changing so SAS has been priced per seat per unit for a long time or you buy it you have a setup fee it's so much per seat you price that out annually you lock them into a three-year contract or a two-year contract and off you go and the margin on that is great because you're stamping out consistent software well if your margins are under threat because the software is more custom so you have to spend more maintaining it even if you can do it because of AI if you have more options to build it internally so you have a lower cost of switching and if the per seat pricing isn't attractive to you you'll just walk and so per seat pricing is something that's going to shift especially if companies are going to start to launch AI native features as an attempt to keep customers which everybody's doing come to us we're AI native come to us we have an AI feature every time I turn around and hit a web browser I see an AI native feature for a B2B SAS company and that's great but what it really means is that at the end of the day I have to think about how you're pricing for me if you're pricing AI native features and you have ai agents are you going to charge per seat for AI agents are you going to charge per outcome the way intercom does how are you going to charge and and the B2B SAS companies don't have good options here because if you look at it you go back to taste like chicken everybody loves the annual contracts for software because they can be valued so efficiently but if you're doing custom work which we talked about that's a service that's not software can't value that as efficiently it's not worth as much from a revenue perspective and that's increasing in the mix if you are pricing out agents and you're pricing per outcome that's also not software it's not as high a quality Revenue source and if you are trying to do neither of those things and you're trying to just price flat you can but then You're vulnerable to people who are undercutting you which has always been the case but it's especially the case now with AI and so SAS companies sort of have a hard they're in a hard spot like they they probably need to adjust pricing because AI is putting downward pressure on margins they probably need to make press pricing more outcom driven because if they don't someone else in their sector will but if you make it more outcome driven you decrease the quality of that revenue from a valuation perspective and now SAS doesn't taste like chicken anymore now SAS is different it's hard to Value there's distinct Revenue models there's different pric pricing strategies it's not as attractive for exits and if it's not as attractive for exits the entire value chain for SAS starts to get cracks in it the value of funding assess is less now not necessarily because the individual company can't be successful not even because it can't be profitable but because at the end of the day the whole model for how software as a service works is not as consistent and the industry loves consistency Finance guys love consistency and it's just not as consistent anymore and we're going to see great SAS companies we're going to see disruptive amazing SAS companies in this cycle but they are going to be Innovative across a wider range of Dimensions than we're used to including pricing and if they do that successfully even if they do very very well they're going to find that the purchase and exit pattern is different than the standard SAS exit the valuation is going to be different than the standard SAS exit and that is a new thing that is not something that we've seen before we have not yet seen a model of a SAS exit to IPO for an aid driven company and we probably won't for a few years in fact one of the things that's interesting is that AI is enabling companies to get profitable and stay private for longer and so as much as we talk about Clara using AI to go public we might find that that is a little bit of an edge case and that more companies are going to look like stripe where stripe has gone through the alphabet soup of fun funding rounds and are publicly saying that there's a real chance that they never ever ever go public and they just provide liquidity in the secondaries to uh their employees and they run a massive private Corporation and why go public well in in a sense stripe has sort of broken the model there like if you're processing over a trillion dollars in payments the the the world expects you to be a public company and so the fact that AI might enable such an efficient team and an efficient profitability model for an individual company that like if they do a great job if they get the pricing right if they figure out like outcome pricing and a mix of agent pricing and per seat pricing and everything works out uh and by the way I know stripe is not a sass but in this case it's a great Counterpoint to Clara that's why I brought it in but if you figure all that out and you end up being very profitable what's your incentive to go public we now have a beaten path with stripe and others of just staying private and that in and that in turn is not encouraging VCS to fund either and so part of what I'm calling out with all of this is that you need to understand that when something as fundamental as B2B SAS shows cracks in the revenue model and shows cracks in the pricing model and shows cracks in ultimately the value chain it doesn't matter if individual companies can Thrive they will it doesn't matter if companies can adapt they will the fact that the standard is changing means that there is less opportunity on the table because there is less commoditization in the software space disruption is happening and that's AI driven disruption so that goes for SAS it goes for pricing it goes for packaging we're all living through it I don't have a silver bullet answer for how you price correctly um there's problems with per seat because there's pressure on agents there's problem with outcome pricing because how do you determine outcomes and how do you get it right um it sounds attractive but it probably has lower margins and it's less valuable there's problems with custom software and like customization and service Revenue there's not an easy answer here and I have confidence that great businesses are going to figure this out but it's going to be really interesting to see how they do so there you go SAS is changing and that is changing everything along with it