Pricing Pressure Will Crush You
The ceiling is falling, the middle is tightening, and the floor is disappearing
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Pricing Pressure Will Crush You
AI is lowering the ceiling, squeezing the middle, and pulling out the floor. This is one of the biggest threats to company valuations. And it has completely changed how I am approaching new vendor contracts and renewals.
I am the signer on all our material vendor contracts so I am not only seeing this threat with our customers, but I AM the threat on the vendor side…
The ROI companies get from Claude (and other AI tools) is creating a new pricing anchor that everyone is subconsciously referencing. The effect? It feels like I am overpaying for basically every single other tool.
I hate feeling like I am overpaying…
There are three pricing reference points I think about:
Ceiling: Perceived value by the customer
Middle: Vendor alternatives
Floor: Building internally
The Ceiling is Falling
AI feels a lot like magic today. The perceived value is through the roof because these AI tools deliver much stronger outcomes than what was possible just a few months ago.
And because of this, vendors can price aggressively.
With our AI tool you can 10x productivity. Just think of all the headcount savings you will achieve by leveraging our tool. Based on our discussions, we believe it can save you two FTEs. At an average cost of $140K per FTE ($280K headcount savings), you will be saving $130K because our tool is only $150K!!
And it’s true. The labor market is huge…AI has barely started to make a dent in the theoretical TAM of knowledge work.
The Carlyle Group released some data this week on where companies are finding budget for AI. And guess where it is coming from? Most of the budget offset is coming from internal headcount. AI isn’t trying to replace your SaaS tools. It is trying to replace your people.
CFOs are increasingly finding the budget through hiring freezes (no backfills) and layoffs.
But eventually the AI magic wears off. Not that AI isn’t amazing. Of course it is. But our expectations are also increasing really fast. Human replacement cost is the current anchor price, but that won’t last long.
As mentioned in my tweet above, my new anchor price/ROI is Claude. And as AI adoption in the corporate environment grows, everyone’s expectations will also rise. Many employees have really just started to understand what’s possible with AI over the last few months, and that may be bad news for many vendors…
While the savings from two fewer employees may seem amazing today, tomorrow it will just be the expectation that more work can get done with a lot less.
Our willingness to pay near the human replacement cost will diminish (the ceiling falls) as we start to ask more about alternatives and the possibility of building some things internally.
The Middle is Tightening
AI productivity gains mean:
More competition. Anyone can build software today (and many are). More competition = more pricing pressure.
Existing vendors are going multi-product a lot faster with a lot more products. A multi-product company can price more aggressively because the incremental product is much cheaper to build, sell, and maintain.
Renewals have often been pretty automatic. Send the renewal to me and as long as you don’t increase prices too much then I will sign it. But I am increasingly pushing an evaluation at renewal for the larger vendors. The price difference for essentially the same functionality has shocked us at least a few times already.
The Floor is Disappearing
Historically, I have viewed the pricing floor as vendor alternatives, but building internally is increasingly becoming a real threat. No one really wants to build internally, but the threat has a lot more teeth today.
Everyone is doing it to some degree. It may not be a full vendor replacement (although that is definitely happening), but building smaller features internally is becoming increasingly common. A lot of downgrades are coming…
Example: I downgraded a large vendor's AI feature
During a recent low 6-figure vendor renewal, I negotiated a 45% decrease in spend. We added their AI features last year, but I churned them on the renewal. It was incredibly valuable when we bought it. Saved a bunch of time.
But…since then my company fully rolled out Claude. And we quickly discovered that we could do 95% of what their AI tool could do for us with some Claude integrations. And the Claude token costs were ~15% of what the vendor was charging us. Plus it was more customizable.
Easy decision to churn that feature.
In Summary…
This post is a little bit doom and gloom, but the very best companies will still maintain real pricing power. However, the gap between the best companies and everyone else will continue to widen. Pretty good doesn’t cut it anymore. Expectations are too high.
My recurring message stands: accelerate or die. Seriously. If you don’t, the pricing pressure will squeeze the life out of you.
Footnotes:
Check out these offshoring costs by country (both salary and employer burden) so you can decide where to focus global expansion.
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📚 This Week’s Interesting Things:
Contract Term Length:
This is from me, but it’s related to this post so I am going to share it :)
I have expressed a lot of opinions about multi-year contracts in the past, so you won’t be surprised to hear that I still hate them. At least for 99% of vendors. AI just makes multi-year contracts even less sensible.
“Anthropic, please don’t enter our category 🙏”
Alex summed up exactly how every single software/AI CEO feels in 2026.
Claude Comes for Business Intelligence Companies
Even if it’s not perfect, if it does ~80% of the job (and at a fraction of the price) then it is probably good enough for most companies. And pricing pressure increases…
Anthropic is currently unprofitable and in a "Land Grab" phase. Why wouldn't they raise prices at some point? Ultimately, AI users will bear the cost of these massive investments in data centers and energy consumption. Are Nvidia chips getting cheaper, and what is their typical lifespan? I understand the AI hype, but sometimes the economics seem to defy logic.