Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / How SaaS Giants Profit From Your Idle Licenses
Transcript
- Lucas: Look at the average enterprise SaaS contract today, specifically around September 2026, and you will see a glaring inefficiency built right into the pricing model. Most companies sell by the seat, charging a flat annual fee per user regardless of whether that user actually opens the application more than twice a month. Luna: Right, so you are essentially paying for potential activity rather than actual utility, which leaves a massive gap in the vendor's reported revenue versus their realized value. Lucas: Exactly, and this is where the profit margin hides. We are talking about idle licenses, those dormant accounts that sit there generating predictable recurring revenue while costing the customer absolutely nothing in terms of support or infrastructure strain. Luna: It feels like a free lunch for the vendor, but doesn't it create a trust issue if customers realize they are paying for ghost users? Lucas: That is the tension we need to unpack. Let us look at a concrete example from a mid-market CRM provider I have been tracking closely. They had a client who purchased fifty seats but only ten were actively logging in weekly. Luna: So the vendor was getting paid five times the cost of delivery, which is a fantastic margin, but the client was likely frustrated by the wasted budget. Lucas: Precisely, and the vendor knew it. Instead of letting the client cut back, which would hurt net dollar retention, they introduced a usage-based tier for those extra forty seats. Luna: Wait, did they just charge them less? That sounds like a concession rather than a strategy. Lucas: It is not a concession, it is a price elasticity play. They offered a pay per activation model for the idle seats, which reduced the annual commitment by sixty percent but kept the account sticky and prevented churn entirely. Luna: Okay, so they traded volume for stability, ensuring the client never walked away completely even if the usage dropped to near zero. Lucas: But here is the kicker. The data showed that once those idle users started paying per activation, twenty percent of them began using the tool regularly because the friction to try it out vanished. Luna: That is incredible. So the lower price point actually acted as a hook to drive adoption, turning dead weight into active contributors. Lucas: Exactly, it flips the script on traditional seat pricing. You are not just managing licenses; you are managing engagement incentives. The vendor captured revenue they might have lost and increased overall platform stickiness. Luna: This reminds me of how streaming services handle multiple profiles, though usually that is a feature, not a billing lever. Lucas: A good comparison, but in B2B software, the stakes are higher because one decision maker signs the check for hundreds of employees who may never touch the product. Luna: So the key is identifying who holds the purse strings versus who actually does the work, and pricing accordingly. Lucas: Spot on. We see this with major players like Microsoft and Salesforce, who are slowly rolling out hybrid models that blend seat fees with usage caps to address this exact inefficiency. Luna: Are they being transparent about it, or is it buried in the fine print of enterprise agreements? Lucas: Usually buried, but the market is forcing their hand. CFOs are auditing software spend aggressively in 2026, demanding proof of utilization before renewals happen. Luna: That pressure must be driving a lot of these new pricing experiments we are seeing across the sector. Lucas: It is, and vendors who ignore it risk losing entire departments to competitors who offer flexible, usage-aligned contracts. Luna: I wonder if smaller SaaS startups can compete here, or if they are too locked into simple seat pricing. Lucas: Smaller players actually have an advantage here because they can customize their billing logic without legacy constraints, allowing them to capture niche markets with irregular usage patterns. Luna: So flexibility becomes a competitive moat, not just a nice to have feature for the sales team. Lucas: Absolutely. If you can prove to your buyer that you are saving them money on idle licenses, you win the deal against rigid incumbents. Luna: This feels like a shift from selling software as a product to selling it as a variable operational expense. Lucas: Yes, and that requires a complete overhaul of how success teams monitor health scores and when they trigger renewal conversations. Luna: Do you think this trend will standardize across all verticals, or stay limited to tech-heavy industries? Lucas: It is already spreading to marketing automation and HR platforms, where employee turnover makes license allocation particularly messy and wasteful. Luna: HR tools are notorious for retaining access for departed employees, so automating that cleanup could save companies millions. Lucas: Millions, easily. And the vendors who build automated de-provisioning tools into their core platform will own that category. Luna: It seems like the future of SaaS pricing is less about the lock-in and more about the ease of unlocking value. Lucas: I agree. The best contracts feel fluid, adapting to how the business actually operates rather than forcing the business to adapt to the software. Luna: If these conversations are useful for what you are building or running, and you want to keep this show ad-free and independent, honestly, if today was worth a coffee to you, that is the link, buy me a coffee dot com slash fexingo. Lucas: Thank you for supporting the network, it really helps us dig deeper into these structural shifts every week. Luna: Yeah, and it keeps the lights on while we analyze the next big move in enterprise software. Lucas: Let us circle back to that CRM example for a moment, because the long-term implication is even more profound than just saving money on idle seats. Luna: What do you mean? The usage data alone should be enough to justify the pivot for any vendor. Lucas: It is, but the real power comes from predictive analytics. When you track per-activation usage, you can forecast churn months before it happens. Luna: So if a user drops from daily activations to monthly, you know exactly when to intervene with a targeted outreach campaign. Lucas: Precisely, and you can tailor the intervention based on their previous behavior, offering training or new features that match their specific workflow gaps. Luna: That transforms customer success from a reactive support function into a proactive growth engine. Lucas: And it aligns the vendor's incentives perfectly with the customer's success, because you only thrive when they actually use the tool. Luna: It is a beautiful feedback loop, assuming the data collection is robust enough to support those decisions. Lucas: Which brings us to the final challenge: privacy and compliance. Tracking individual activity requires careful handling of user consent and data governance. Luna: Right, you cannot just spy on employees to improve metrics; you have to make the monitoring transparent and beneficial for the end user. Lucas: Exactly. The vendors who get this balance right will set the standard for ethical, efficient SaaS operations in the coming decade. Luna: So, as we wrap up, do you think traditional seat pricing will disappear entirely within the next five years? Lucas: Not disappear, but it will become the exception rather than the rule, reserved only for high-intensity, daily-use applications. Luna: Interesting. It seems like the era of paying for potential is finally coming to an end. Lucas: I think so, and the companies that embrace usage-based alignment first will leave their competitors chasing obsolete metrics. Luna: Agreed. It is a smarter way to grow, focusing on actual value delivered rather than seats sold. Lucas: Well said. Let us see how the major platforms adjust their contracts over the next quarter and if the market rewards those who lead the change.