Framing AI as the next evolution of software dramatically underestimates its market size. AI's true TAM is the vast, multi-trillion-dollar labor economy it is augmenting and automating. This market is orders of magnitude larger than traditional SaaS, justifying massive valuations and investment.

Confusing credit-based AI pricing models will likely be replaced by a straightforward value proposition: selling AI agents at a fixed price equivalent to the cost of one human worker who can perform the work of ten. This simplifies budgeting and clearly communicates ROI to CFOs.

Companies like Sierra can't justify a 100x ARR valuation by targeting the existing software market (e.g., $8B Service Cloud). The bet is that they will capture a significant portion of the much larger human labor market ($200B+ for support agents). This represents a fundamental transition of spend from human capital to software.

AI platforms like Anthropic and OpenAI are seeing unprecedented revenue growth because they're augmenting and competing with human labor costs. This is a far larger market than traditional IT budgets, enabling multi-billion dollar revenue months.

Unlike Vertical SaaS which sells software licenses to IT departments, Vertical AI sells outcomes by replacing human labor. This allows it to tap directly into a company's much larger labor P&L, creating a significantly bigger total addressable market and enabling outcome-based pricing models.

Just as the shift from on-premise to SaaS created a major valuation rerating for software companies, the move to 'agentic AI' will do the same. Companies that successfully become 'agentic' will capture more economic rent, potentially leading to exit multiples higher than the 6-8x revenue seen today.

The next evolution in AI pricing will likely be a premium tier costing around $2,000/month. This price point positions advanced AI agents not as mere tools, but as a direct, cost-competitive alternative to a junior employee, fundamentally changing the calculus of hiring versus automation for businesses.

The business model for AI agents fundamentally shifts the value proposition from selling a tool (license) to selling an outcome (automated work). This allows vendors to tap into operational or labor budgets, not just IT budgets, unlocking a new price-for-value equation and exponentially larger contract sizes.

Elad Gil argues that the total addressable market for AI companies is not limited to traditional seat-based software pricing. Instead, it encompasses the multi-trillion dollar human labor market that AI can augment or automate.