Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / SaaS Profit Pools and the Usage Economy
Transcript
- Lucas: The way software companies make money has fundamentally shifted under our feet. For a decade, the holy grail was predictable, recurring revenue tied to headcount — you pay per seat, you get access. But right now, in October of twenty twenty-six, that model is being quietly dismantled by something far more volatile: usage. Luna: I mean, it makes sense. Why cap your revenue at the number of employees when you can charge for the actual work they do? Lucas: Exactly. And the leader in this shift isn't some obscure startup; it's Microsoft with its Azure platform. When you look at their latest earnings structures, the correlation between customer consumption and revenue expansion is undeniable. They aren't just selling licenses anymore; they are selling compute power. Luna: So customers who use more actually end up paying significantly more than those who barely log in? Lucas: Drastically. The data shows that heavy users drive disproportionate margins because the marginal cost of additional compute has dropped so sharply due to scale efficiencies. It turns out that the best customers are the ones running your software at peak capacity. Luna: That sounds great for the vendor but terrifying for the buyer's budget planning. Lucas: It is terrifying if you view it through the old lens. But let's look at the mechanics. In a traditional subscription, once you hit the price ceiling, the vendor stops incentivizing you to grow. In a usage model, every extra gigabyte processed is another dollar earned for the provider, aligning their success directly with your output. Luna: But doesn't that create unpredictability? If my AI model spikes in demand, my bill could double overnight. Lucas: It does, which is why we are seeing a rise in hybrid contracts. Companies like Salesforce have experimented with baselines plus overage fees. You pay a steady monthly fee for expected volume, but anything above that triggers the usage multiplier. It gives buyers a floor while keeping the upside open for sellers. Luna: Is this happening across all sectors or just big tech giants? Lucas: Mostly infrastructure-heavy players first. AWS, Google Cloud, and Microsoft. But now we are seeing vertical SaaS companies follow suit. Think about logistics software or medical imaging platforms where the value is literally in the processing speed and data volume. Luna: So the metric that matters most is no longer net retention but gross margin expansion on variable costs. Lucas: Precisely. Investors are starting to reward companies that can prove their unit economics improve as scale increases. If your cost to serve drops while your price per unit stays flat, your profit pool widens exponentially. Luna: That changes how I evaluate software stocks entirely. Lucas: It should. Because if you are still valuing them solely on subscriber growth, you are missing the real engine of profitability. Let's talk about how this impacts the average business user trying to control these costs. Luna: Right, because now procurement teams have to monitor usage dashboards instead of just license lists. Lucas: Exactly. We are seeing new roles emerge in finance departments dedicated solely to cloud cost optimization. These people are essentially arbitrageurs, moving workloads to cheaper times or regions to lower the per-unit cost. Luna: It feels like the vendor wins only if the customer becomes efficient enough to stop paying, which seems counterintuitive. Lucas: Actually, no. Efficiency often means higher throughput. If you process ten million records faster, you might use less total energy but still incur higher base fees for priority access. The volume remains high even if the efficiency improves. Luna: Okay, so the total spend goes up regardless of efficiency gains? Lucas: In many cases, yes. This is known as the Jevons paradox in technology. As resources become cheaper and easier to use, consumption increases rather than decreases. Luna: I remember reading about that principle applying to coal engines in the nineteenth century. Lucas: Same dynamic here. Cheaper cloud computing leads to more data storage, more complex algorithms, and larger datasets. The bill grows because the capability grows. Luna: This is getting pretty intense for mid-market companies who don't have huge IT budgets. Lucas: That is the friction point. Mid-market firms are getting squeezed because they lack the sophisticated governance tools that enterprises use to cap their usage. Luna: So there is an opportunity for tooling companies to help manage these bills? Lucas: Absolutely. Platforms like Datadog or New Relic are pivoting hard into cost management features. They are becoming the gatekeepers of the usage economy. Luna: Interesting. So the middle layer of the stack is gaining power. Lucas: They are becoming essential infrastructure. Without them, businesses would be flying blind regarding their true cost of goods sold. Luna: Let's take a quick pause here. If these conversations are useful for what you're building or running, consider supporting the show directly. Lucas: Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It helps keep these deep dives ad-free and allows us to dig into the structural shifts like this one without relying on sponsor scripts. Luna: Yeah, it really makes a difference in the quality of research we can bring to the table. Lucas: Thanks for considering it. Now, back to the pricing models. Luna: Where were we? Oh, right, the risk for the buyer. Lucas: The biggest risk is scope creep. A project starts small, but as the team discovers the software's potential, usage explodes. Suddenly, the initial budget is blown, and renegotiation happens at a weak position for the buyer. Luna: So negotiation leverage shifts away from the buyer over time? Lucas: Often. Once the workflow is embedded in daily operations, switching costs become prohibitive. The vendor holds all the cards because you cannot easily move petabytes of historical data elsewhere. Luna: That sounds like a hostage situation disguised as a partnership. Lucas: It is. Which is why forward-looking contracts with strict caps or guaranteed discounts for volume thresholds are becoming standard. Buyers are forcing vendors to commit to price stability. Luna: Do major vendors agree to that? It cuts into their upside. Lucas: They do, because churn is the enemy of the usage model too. If you overcharge, customers will leave. Microsoft and Amazon are willing to sacrifice short-term margin for long-term lock-in. Luna: So it's a game of patience. Who can afford to wait for the customer to realize the full value? Lucas: Exactly. The vendor who offers the best price per unit at scale wins the war, even if they lose the battle on the initial contract. Luna: This completely rewrites the ROI calculation for software purchases. Lucas: It does. And as we move further into twenty twenty-six, expect more volatility in quarterly reports as companies adjust to these new revenue streams. Luna: Will investors punish companies whose usage growth slows down? Lucas: Severely. Usage growth is currently the primary proxy for product-market fit in the cloud era. If that metric stalls, the valuation multiple collapses. Luna: So we are watching a massive transfer of wealth from predictable subscribers to variable consumers. Lucas: Or perhaps just a maturation of how we measure digital value. The question is whether that value is sustainable or if we are heading toward a correction. Luna: Hard to say yet, but the momentum is clearly pointing toward usage. Lucas: For now, yes. Until someone invents a better way to monetize attention itself.