How AI Companies Actually Make Money: ServiceNow's Playbook Explained

2026-01-04 15:55:24

The AI Monetization Problem

Here’s the uncomfortable truth: most software companies have no idea how to turn artificial intelligence into real revenue. They slap an AI label onto products, call themselves an “AI company,” and hope investors bite. Growth? Often it’s slowing down instead.

But there’s one notable exception—ServiceNow (NOW). While competitors are still figuring out their AI strategy, ServiceNow has quietly become the textbook example of how AI companies can actually make money at scale.

ServiceNow: From IT Automation to AI Leader

Founded in 2003, ServiceNow started as a cloud platform for automating IT processes (IPO in 2012). For years, the business model was straightforward: subscription software fees, mostly from IT service management. The company generated about 97% of its revenue through subscription sales, with human resources and customer service tools as add-ons.

The real difference? ServiceNow didn’t rush into AI. Instead, the company played the long game.

In 2015, ServiceNow launched a venture fund that invested in over 45 tech companies. In 2020, it acquired Element AI for $500 million—a deliberate move to bring deep expertise in applying AI to text, language, chat, and image recognition. This wasn’t a marketing stunt. It was infrastructure building.

The AI Revenue Machine Kicks In

Then came the payoff. In the latest quarter, ServiceNow’s generative AI product—“Now Assist”—became the fastest-growing product in company history. The numbers tell the story:

Net new annual contract value doubled quarter-over-quarter
Management closed 11 deals worth $1M+, with two exceeding $5M each
ServiceNow’s AI products command a 30% price premium
Deal sizes are 3x larger than previous product adoption cycles

What does this AI product actually do? It includes predictive analytics to flag IT incidents before they happen, AI chatbots handling support tickets and HR inquiries, and “low-code” development tools so businesses can build custom applications without engineers. In other words—real productivity gains, not vaporware.

The Business Gets Stronger Too

Here’s where it gets interesting: the AI push didn’t canibalize existing revenue. The core subscription business is firing on all cylinders:

Subscription revenue: $2.5 billion (up 23% year-on-year)
Current remaining performance obligations (CRPO): $8.8 billion (up 22.5%)
Full-year subscription guidance raised to $10.6 billion (~22% growth expected)
Operating margin hit 27%, beating guidance by 250 basis points

Management now expects 25% average selling price increases driven by the new AI-powered Pro Plus tier. RBC Capital analysts predict organic subscription growth could exceed 20% next year.

Strategic Partnerships Scale the Play

ServiceNow isn’t going all-in alone. The company partnered with Microsoft (MSFT) in 2024 to integrate OpenAI’s ChatGPT-powered language models. In 2023, it partnered with Nvidia (NVDA) to co-develop enterprise-grade generative AI tools focused on “intelligent workflow automation.”

These partnerships serve dual purposes: expanding NOW’s AI capabilities while helping partners (like Nvidia) streamline their own operations.

Why This Matters for AI Company Economics

ServiceNow’s trajectory answers the central question of how AI companies make money: you don’t just add AI features. You build deep expertise over years, integrate it into core workflows that solve real business problems, charge premium prices for the enhanced value, and expand margins while maintaining growth.

The valuation isn’t cheap—58x forward P/E, down to 39x by 2026. But for a company with 80% gross margins, consistent 20%+ growth, and now accelerating earnings, it’s defensible. On a price-to-free-cash-flow basis, 2026 looks even more reasonable at roughly 33x.

What separates ServiceNow from struggling peers? While competitors saw growth slow, ServiceNow’s is accelerating. While others shipped half-baked AI features, ServiceNow turned AI into a margin expansion engine and customer acquisition tool.

That’s how AI companies should make money.

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