Looking Ahead: Balancing Profitability and Growth in 2025

While the last five years could likely be described as tumultuous for many businesses, few industries can claim a more dynamic upheaval than the technology space. With continuous shifts in the valuation equation, the emergence of consumption-based pricing models, the pandemic bubble followed by marked declines in demand, and most importantly, the dawn of the AI era, tech companies must continue evolving to survive. With this evolution, companies must identify new strategies and solutions to drive growth.

For the last two years, many tech companies have focused on increasing profitability. But now the pendulum is shifting back to focus on growth, as growth becomes a more important factor in tech company valuations. This doesn’t mean companies will be permitted to chase growth at any cost. Instead, tech companies must strive for profitable growth in 2025.

Thus, Alexander Group anticipates striking a delicate balance between profitability and growth will be key to long-term success. To achieve this goal, many companies are leveraging artificial intelligence and advanced data analytics, exploring the potential of online platform offerings and considering new offerings like consumption-based pricing models.

These efforts are likely to dominate the year ahead as companies seek new ways to drive efficiencies that will contribute to their desired growth. In addition, many organizations are facing downward pressures on tech spending as an increasing number of companies begin looking to reign in SaaS proliferation. This means that growth initiatives need to be more targeted to achieve desired results.

Platform Integration and AI

A significant focus in 2025 will be the increased development of platform offerings. Through platforms that integrate multiple products to become best-in-breed solutions, companies can create more cross-sell opportunities. Companies that offer a single product generally have low annual recurring revenue for each sales rep because there are only upsell opportunities. With a platform offering, companies can improve the net recurring revenue and retain customers for longer, especially if it offers good functionality.

So how can companies develop their platforms? Typical strategies include:

Research and Development

To identify and develop new products that can be integrated into a platform, some tech companies have internal R&D business units to design and build these new solutions into existing products.

Mergers and Acquisitions

Through M&A activity, companies can expand their product and integrate new capabilities into a platform that can generate greater value for a customer and provide cross-sell opportunities that don’t exist with a single product. In the year ahead, Alexander Group anticipates that M&A activity will continue to increase, alongside investments from private equity firms, especially into platform investments.

Partnerships

Another option is to form opportunistic alliances with other companies. For example, companies may offer their products through marketplaces established by larger service providers like Amazon, Microsoft Azure, Google or other hyperscalers. Not only can these companies be contracted to manage software, but it makes it easier for customers to purchase new software that seamlessly integrates with existing products they use. With marketplace providers here to stay, this channel will continue to grow and has the potential to displace traditional value-added resellers. Thus, companies should seek ways to effectively partner with marketplace providers for growth.

Regardless of how they are developed, platforms should make it easier for the customer to find solutions for their business needs. AI will play a major role in this area, as it will enable companies to leverage advanced data intelligence to better target existing customers with cross-sell options. Leveraging AI can provide companies with valuable insight into platform use trends with analytics on user behavior within the platform. Machine learning and AI of tech end-markets will help identify business needs that might not be supported by existing solutions that could become valuable opportunities for product development. In addition, AI is a powerful tool for targeting new customers and identifying at-risk customers early.

Transitioning to Consumption-Based Pricing

Over the last decade, companies have transitioned from perpetual licensing to subscriptions. Now, more companies are beginning to introduce consumption-based pricing as well. This construct incentivizes vendors to prioritize customer success from day one, ensuring continuous engagement and reducing churn. Beyond this, it is often easier to close a sale since customers are only billed based on their usage of a product or service. Unlike subscriptions that have mostly replaced perpetual licenses, in some instances, consumption-based contracts are being offered as an additional offering. Moving forward, a significant challenge for companies will be to determine the right portfolio mix of consumption-based contracts and traditional subscriptions.

Since companies that offer consumption-based pricing are forced to focus on steady consumption, ideally leading to better customer experience, they may often enjoy more consistent recurring revenue. For this reason, companies are re-evaluating how they will retain existing customers, expand within their current customer bases and acquire new ones to drive desired growth. To hit these goals, businesses are increasingly adopting focused strategies like the “hunter-farmer” model, which separates roles for acquiring new clients and nurturing existing relationships. This approach ensures a targeted and effective allocation of resources.

Navigating the Technology Industry in 2025

In the year ahead, technology companies will inevitably navigate changing dynamics within the technology industry. Alexander Group anticipates that the primary focus for tech companies will be to strike the right balance between growth and profitability. Profitable growth will ultimately be driven by leveraging AI technologies, employing new coverage models and placing an increased focus on platform development and integration.