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Business strategies: Can GenAI be monetized?

A model like this would charge a different amount per month for a user based on the usage level of that user.

Image: — © AFP/File Fred TANNEAU
Image: — © AFP/File Fred TANNEAU

One of the biggest debates in business-focused GenAI is how best to monetize it, and there is not a definitive answer.

Considering the future, McKinsey pricing guru James D. Wilton—one of the world’s leading experts on SaaS pricing. Wilton has dedicated more than 12 years to helping startups and fast-growing companies capture more of the value they create through pricing strategy transformations.

Wilton is currently the Managing Partner and Founder of Monevate, the premier pricing and monetization consulting firm for SaaS and tech companies.

Wilton has written a book titled Capturing Value, where he shares insights on emerging trends in GenAI pricing.

In the book, Wilton writes: “In the pricing space, we see many companies moving to a hybrid pricing model, which is partly traditional subscription and partly usage-based pricing. I would suggest that, for the front-end GenAI solutions at least, that’s where the answer resides.”

As to how business units and individuals should respond, Wilton recommends: “My hot take at this time is that a usage-tiered user model is a great path forward for the GenAI Front-End User Applications.”

How might this system work in practice? According to Wilton: “A model like this would charge a different amount per month for a user based on the usage level of that user. For example, a customer who uses a GenAI product below a certain usage threshold might be able to do so for free.”

After this point: “Once the user has exceeded that usage threshold, they may start paying a low monthly fee (e.g., $5 to $10). When they exceed another higher usage threshold, the monthly fee may increase to $20. And so on and so on. The number of tiers will be dependent on the number of different usage-based user personas.”

The book sets out several benefits of such a system. In summary, these are:

  1. Low barrier to entry.

According to Wilton: “Because you are scaling the price by usage, users with very low usage need not pay much, if anything. This means you can have a tier where a new user can build familiarity with the GenAI technology and understand the value without having to pay a lot. This would dramatically increase adoption of the technology, which should be a major goal.”

  1. Covers costs.

Wilton finds: “We don’t have to worry about the low-price entry tier putting us in a precarious position with our margins because price scales with usage. As soon as a low price/free user uses the product regularly enough to cross a usage threshold, they will be bumped into the next tier by the gating usage metric, and their subscription fee will rise to (I hope) cover the costs. The higher tiers can in turn cover the costs of high usage levels.”

  1. Better alignment to value.

Wilton pontificates: “While GenAI usage doesn’t scale well with value at a micro level (i.e., do customers really get more value for 32 queries than for 31?), it does at a macro level (they are sure they get more value for a hundred queries than they do for five). Users know they are not going to have to pay more unless their usage really increases by a step change. Individual queries are not monetized, and so they are not going to worry to the same extent about whether each individual query is valuable before submitting. And if they do increase their usage by such a step change, they will likely agree that the value has increased materially, and so they likely wouldn’t object to paying extra.”

Summing up the benefits, Wilton considers: “It really is a case of the ‘best of both worlds’ across user-based and usage-based pricing. We’re still early in our GenAI journey, and it will be interesting to see what models become the ‘go to’ as the market dynamics evolve. Until then, I’ll be championing usage-tiered user license models.”

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Written By

Dr. Tim Sandle is Digital Journal's Editor-at-Large for science news. Tim specializes in science, technology, environmental, business, and health journalism. He is additionally a practising microbiologist; and an author. He is also interested in history, politics and current affairs.

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