Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / SaaS Companies Are Killing Per-Seat Pricing
Transcript
- Lucas: If these conversations are useful for what you're building or running, know that this show stays ad-free thanks to listener support. If today was actually useful to you, the way we keep these deep dives going is through your help — buy me a coffee dot com slash fexingo. Luna: Yeah, I appreciate that transparency. It lets us get into the weeds without worrying about sponsor constraints. Lucas: Exactly. And speaking of getting into the weeds, let's talk about the biggest shift in SaaS pricing over the last three years. We've seen a massive migration away from flat per-seat licensing toward consumption-based models. This isn't just a minor tweak to the invoice; it's a fundamental restructuring of how software companies predict their own future cash flow. Luna: I think most listeners assume that's because customers want flexibility, but isn't it really about the providers chasing higher margins? Lucas: It's both, but the margin argument is the driver. Take a company like Snowflake. When they went public, they were already pushing hard on usage-based billing. They realized that if you charge per seat, you cap your upside. But if you charge per byte processed or per credit consumed, your revenue scales directly with the customer's success and data volume. That creates a much more powerful compounding effect for the vendor. Luna: So instead of selling them a license for ten users, you're selling them the compute power those users need to run queries. Makes sense from a scaling perspective. Lucas: Right. And look at Datadog. They moved from strict per-host pricing to a more flexible consumption model that includes logs, traces, and synthetic monitoring. The key here is that they bundled these different telemetry sources into a unified credit system. It simplifies the bill for the buyer but allows Datadog to upsell across multiple product lines without needing separate sales cycles for each one. Luna: That sounds like a great way to increase wallet share without annoying the procurement team with new contracts every time they add a feature. Lucas: Precisely. But there's a catch. For the customer, consumption-based pricing introduces volatility. In Q3 of 2024, when we saw some of the earlier adopters of this model report earnings, several CFOs flagged 'unpredictable spend' as a major budgeting headache. You can't easily forecast next year's IT costs when your bill depends on how much data your engineering team decides to ingest. Luna: That must create friction during annual budget reviews. Procurement teams love fixed costs. Variable costs are a nightmare for forecasting. Lucas: It is. And that's why we're seeing a hybrid approach emerge. Companies aren't abandoning seats entirely; they're adding a consumption layer on top. Think of it as a base subscription for access, plus variable fees for heavy usage. This gives the customer some predictability while still allowing the vendor to capture value from power users who might otherwise churn because the seat price was too high for their actual needs. Luna: So it's less about killing the seat model and more about making it modular. Is this happening in smaller SaaS companies too, or is this mostly enterprise-grade tooling? Lucas: It's trickling down. Even marketing automation platforms are experimenting with email send volumes or contact tier upgrades rather than just user counts. The reason is simple: in a tight capital market, investors prefer recurring revenue that correlates with usage. If a customer is using your product heavily, they're likely getting value, which means lower churn. It's a better leading indicator than just having a named user on the roster. Luna: But doesn't that put pressure on the customer to optimize their own usage? They might start cutting back on data collection just to save money. Lucas: That's the dark side of this trend. We're seeing cases where customers actively reduce their data retention periods or purge old logs to keep their bills flat. It creates an adversarial relationship where the vendor wants more usage and the customer wants less. The best SaaS companies are solving this by offering automated optimization tools. Show the customer how to clean up their data so they can afford to keep it, turning a cost center into a managed service. Luna: That’s a smart pivot. Instead of just charging for the mess, you help them tidy it up. It builds trust and keeps the revenue flowing. Lucas: Exactly. And let's look at the numbers. In our review of mid-market SaaS firms, those that adopted hybrid consumption models saw a twelve percent increase in net revenue retention compared to pure seat-based peers. The growth wasn't just from upsells; it was from reduced churn among heavy users who felt the pricing was fair relative to the value delivered. Luna: Fairness seems to be the keyword here. If the price goes up because the product helped them grow, they accept it. If it goes up because they accidentally clicked something, they panic. Lucas: Right. Transparency is critical. Vendors that provide real-time dashboards showing exactly what drives the bill see higher engagement. Those that hide usage metrics behind a monthly PDF invoice see more disputes and faster exits. In September 2026, we're seeing a standard set of api driven usage reports becoming a baseline expectation for any serious B2B software deal. Luna: So if you're building a SaaS product right now, should you even consider starting with pure consumption? Or is the hybrid route safer for early-stage companies? Lucas: For early stage, I'd lean toward hybrid. Pure consumption can lead to 'bill shock' which kills word of mouth referrals. If a small team gets a huge invoice because of a buggy script, they leave and tell everyone. A seat-based or hybrid model gives you a floor of predictable revenue to build against, while the consumption part captures the upside when they scale. Luna: It feels like the consumerization of enterprise software is driving this. Users want simplicity, but admins want control. Consumption hits both if done right. Lucas: Agreed. And don't forget the impact on sales cycles. Consumption-based pricing often shortens the initial deal size because the entry barrier is lower. You don't need a six-figure contract to start testing the platform. You can start with a few credits and scale up. This accelerates the pipeline for SDRs who are used to chasing big logo deals. Luna: Lower friction at the top of the funnel. That makes sense for growth-stage companies trying to gain traction quickly. Lucas: It does. But it requires a different kind of customer success team. Seat-based CSMs manage renewals and licenses. Consumption-based CSMs manage budgets and usage patterns. They have to act more like consultants, helping clients understand their data flows and optimize their spend. It's a higher-touch role, but it leads to deeper stickiness. Luna: So the job description changes completely. You're not just checking in on login rates; you're analyzing query performance and storage efficiency. Lucas: Spot on. And that specialization is becoming a competitive moat. As the market matures, the vendors who can prove they help you save money on your infrastructure stack will win over those who just charge for access. It shifts the narrative from 'cost of doing business' to 'investment in efficiency.' Luna: That’s a powerful reframe. If I can show my CFO that switching to a consumption model saved us twenty percent on our cloud bill, that's an easy sell internally. Lucas: Exactly. And that internal champion becomes your strongest advocate for expansion. They'll bring in other departments, generate more usage, and lock you into the ecosystem. It's a virtuous cycle that seat-based pricing struggles to replicate. Luna: Unless you bundle enough features to make the seat price worth it regardless of usage. But that feels like the old way of thinking. Lucas: It is. The old way capped your potential. The new way aligns your incentives with the customer's growth. As we move through the rest of 2026, expect to see more acquisitions driven by this logic. Large platforms will buy niche analytics tools not for their code, but for their usage-based data layers that integrate into broader ecosystems. Luna: So the data itself becomes the asset, not just the software interface. That changes how we value these companies fundamentally. Lucas: It does. Valuation multiples are shifting toward recurring revenue quality rather than just gross growth rates. Investors are rewarding predictability, and well-managed consumption models offer that through long-term contracts tied to specific usage tiers. Luna: Interesting. So the risk isn't gone, it's just transferred from the buyer's budget anxiety to the seller's capacity planning. Lucas: Precisely. Sellers have to ensure they have the infrastructure to handle spikes without degrading performance. It's a complex balancing act between scalability and cost efficiency. But for now, the trend is clear: flexibility wins. Luna: Do you think we'll ever see a return to flat pricing for certain categories? Or is consumption here to stay? Lucas: Flat pricing will survive in commoditized tools. If you're buying a basic project management app, nobody wants to pay per task created. But for anything involving compute, storage, or AI inference, consumption is the default. The question is how you layer the two. Luna: Layering seems to be the key word. Modularity over monoliths. That applies to pricing just as much as it does to architecture. Lucas: It absolutely does. And for operators listening, the takeaway is to audit your current pricing model. Are you leaving money on the table with rigid seats? Or are you scaring off good customers with unpredictable bills? The middle ground is where the growth lives. Luna: A practical audit. That’s something every founder can do before the next board meeting. Start looking at usage heat maps alongside renewal rates. Lucas: Yes. And see if your heavy users are happy or stressed. If they're stressed, you have a pricing problem. If they're happy, you might be undercharging. It's all about finding that equilibrium point where value and cost align perfectly. Luna: Equilibrium. That’s the goal. Thanks for breaking this down, Lucas. It’s a nuanced topic that affects every software buyer out there. Lucas: Happy to dive in. Let's see if your team adopts any of these hybrid models in the coming quarter. I suspect many will find the flexibility pays off.