Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / Why SaaS Companies Are Killing Per-Seat Pricing
Transcript
- Lucas: The old playbook for software sales was simple enough: count the seats, multiply by the price, and watch annual recurring revenue climb. For fifteen years, per-seat pricing was the undisputed king of SaaS monetization because it aligned perfectly with how enterprises bought software — you hired more people, so you needed more licenses. Luna: But now we are seeing a massive wave of companies abandoning that model in favor of usage-based pricing, which feels like a complete reversal of everything we learned about predictable revenue. Lucas: It is not just a reversal; it is a structural response to two converging forces: the rise of ai driven workloads where cost scales with computation rather than heads, and a macro environment where CFOs are refusing to buy empty licenses they do not use. If you look at the aggregate data from the last twelve months, usage-based models have grown twice as fast as traditional tiered subscriptions among high-growth firms. Luna: So the argument is that usage aligns value with cost better, but doesn't that introduce massive volatility into your monthly revenue forecasts? Lucas: That is the exact trade-off, and it is why most leadership teams hesitate to make the switch. With per-seat pricing, you get linear predictability: if I add ten users, I know exactly what my revenue will be next quarter. Usage-based pricing introduces variance, meaning your top-line numbers can swing wildly depending on how much API traffic or storage volume your customers generate. Luna: Yet despite that volatility, adoption is accelerating. What is the concrete mechanism driving customers toward this unpredictable model? Lucas: It comes down to frictionless expansion. When a company uses a seat-based model, every time a user wants to upgrade their access, someone has to call sales, negotiate a contract amendment, and update the billing system. With usage-based pricing, that expansion happens automatically in the background. The customer stays within their budget bucket, and the vendor captures more revenue without any manual intervention. Luna: I see. So it effectively removes the sales team from the renewal equation, which sounds efficient but risky if usage drops. Lucas: Exactly. You lose the human touchpoint that often prevents churn. But here is the thing nobody talks about enough: usage-based pricing actually reduces early-stage churn because it lowers the barrier to entry. A startup can sign up for a free tier or a low minimum spend, ramp up as they find product-market fit, and never have to worry about hitting a hard cap that forces them to pause and renegotiate. Luna: That makes sense for the bottom of the funnel, but does it scale well when you hit enterprise clients who demand fixed budgets? Lucas: This is where the hybrid model comes in, and it is becoming the standard for serious platforms. Instead of pure pay as you go, they set a baseline commitment — say, one hundred thousand dollars annually — and then charge overages on top of that. This gives the enterprise client budget certainty while still allowing the vendor to capture upside if the client grows faster than expected. Luna: Is that really working in practice, or are those overage clauses just getting ignored during tough negotiations? Lucas: They are holding firm. We saw several major database providers defend their overage clauses against pushback from large financial institutions. The reason is simple: compute costs have gone up. If you are running heavy analytics workloads, your infrastructure bill spikes, and passing that variable cost through to the customer is the only way to maintain healthy gross margins. Luna: So it is partly defensive. You cannot absorb the cost of increased AI inference requests anymore without killing your profitability. Lucas: Precisely. In previous quarters, many vendors subsidized these compute costs to win market share. Now that the capital markets have tightened, that subsidy model is dead. Vendors are forced to pass those marginal costs directly to the end user, which naturally pushes the conversation toward usage-based billing. Luna: What about the operational nightmare of tracking granular usage data? That seems like a huge implementation burden for smaller SaaS firms. Lucas: It is a valid concern, but modern billing infrastructure has largely solved this problem. Platforms like Stripe Billing and Paddle now handle real-time metering, proration, and tax calculations automatically. The technical debt used to be the biggest blocker, but today, integrating usage tracking takes weeks rather than months, making it accessible even for Series B startups. Luna: Does this mean the sales team's role is changing fundamentally? They used to sell licenses, now they seem to be selling volume caps. Lucas: Their role is shifting from gatekeeper to advisor. Salespeople are no longer protecting a scarce resource like a license seat; they are helping customers optimize their consumption to stay within budget while maximizing value. It requires a different skill set, focusing on consultative conversations about efficiency rather than transactional negotiations about headcount. Luna: That feels like a much harder job. How do you incentivize a rep to help a customer save money instead of squeezing them for more? Lucas: You tie compensation to net revenue retention, not just initial contract value. If the rep helps the customer reduce waste, they might lose some immediate overage revenue, but they secure a longer relationship and higher lifetime value. It aligns the incentive structure with long-term health rather than short-term extraction. Luna: Are there any industries where this transition is moving faster than others? Lucas: Developer tools and data infrastructure are leading the pack. If you look at companies providing APIs, cloud storage, or machine learning endpoints, usage is the only logical metric. You cannot put a per-seat price tag on an API call, so the entire ecosystem has already standardized on consumption-based billing. Luna: And traditional vertical software? Like ERP or HR systems? Are they following suit? Lucas: They are lagging significantly. Legacy ERP systems rely heavily on customization and professional services, which makes usage difficult to track accurately. However, we are seeing newer entrants in the HR tech space start to experiment with hybrid models, charging a base fee for the platform and then a per-action fee for payroll processing or benefits enrollment. Luna: That per-action fee is interesting. It essentially turns every transaction into a micro-revenue event. Lucas: It does. And it creates a flywheel effect. As the customer processes more transactions, the vendor earns more revenue, which funds better features, which attracts more customers. It is a self-reinforcing loop that seat-based pricing simply cannot replicate. Luna: But doesn't that also mean the vendor bears more risk if the customer's business slows down? If transactions drop, revenue drops instantly. Lucas: It absolutely does. That is why smart operators build buffers into their contracts. They might include a minimum monthly spend or offer discounted rates for annual prepayments. These mechanisms stabilize cash flow without completely negating the benefits of usage-based flexibility. Luna: So the key is finding that balance between flexibility for the buyer and stability for the seller. Lucas: Exactly. And for founders listening, the takeaway is clear: stop thinking about your product as a static box of features. Start thinking about it as a dynamic engine that generates value proportional to how much it is used. Your pricing should reflect that reality, not an outdated notion of scarcity. Luna: If you are running a business where this kind of insight helps you avoid costly mistakes, supporting us directly keeps these conversations ad-free and consistent — buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does. And it helps us keep digging into these structural shifts so you don't have to figure them out alone. Thanks for keeping the show going. Luna: It is a small gesture that makes a big difference for independent journalism like this. Lucas: Back to the data, though. There is one final trap operators fall into when switching to usage-based models: they forget to monitor unit economics closely enough. Because revenue looks smoother at the top line, it is easy to ignore the fact that serving additional users might be costing more than you initially projected. Luna: Right. You have to watch the marginal cost of acquisition versus the marginal revenue generated per unit of usage. Lucas: Precisely. If your gross margin erodes as you scale, you are not building a sustainable business; you are just burning cash to grow vanity metrics. Keep a close eye on those margins, especially as you move from seed stage to series A. Luna: So the ultimate test is whether the model supports healthy margins at scale, not just rapid growth at the start. Lucas: Absolutely. Growth without profitability is just a hobby. Make sure your pricing architecture supports the kind of profit you want to deliver to your stakeholders. Luna: It is a subtle shift in mindset, but it changes everything about how you design your product and talk to your customers. Lucas: It does. And for anyone wondering where to start, the answer is usually simpler than you think: look at where your customers derive the most value, and charge them for that activity, not for the person sitting behind the keyboard. Luna: A powerful reminder that alignment between value and cost is the only pricing model that lasts.