Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / How SaaS Vendors Profit From Your Unused Software
Transcript
- Lucas: If you have ever looked at an enterprise software invoice and wondered why the company is paying for three thousand seats when only eight hundred people actually log in, you are looking at the single largest leak in modern IT budgets. We call it shelfware, but the reality is that for vendors like Microsoft or Adobe, those unused seats are not a bug, they are a feature. Luna: It feels counterintuitive, right? I always thought the goal was to get everyone using the tool, but it sounds like the money is actually made in the gap between purchase and usage. Lucas: Exactly. The math works because of how these contracts are structured. In November 2026, the standard enterprise deal is still heavily skewed toward upfront commitments with annual renewals. If a company buys five thousand licenses of a productivity suite at two hundred dollars each, that is one million dollars in immediate ARR, regardless of who opens the app. Luna: So the vendor gets paid for the potential, not the practice. That shifts the entire risk profile away from the seller. Lucas: Right, and it creates a perverse incentive structure inside the buyer organization too. The procurement team that secures the discount for buying in bulk gets the bonus, while the department heads who struggle to drive adoption get blamed later. Nobody wants to cancel the contract because that looks like a failure of the initial decision. Luna: Which means we end up with a massive inventory of digital goods that nobody touches, just sitting there on the balance sheet as an asset for the vendor. Lucas: Think about the specific case of Microsoft Copilot. When they rolled out their enterprise AI assistant, they pushed hard for seat-based licensing before many employees even knew what the tool did. They sold the promise of automation to CFOs, but the actual utilization rate has been lagging significantly behind the license count. Luna: I read some internal reports suggesting that half of the early adopters were just using it as a fancy autocomplete, not really changing their workflow. So they are paying premium prices for marginal utility. Lucas: That is the key word, marginal. The vendor knows that eventually, someone will need to use it for a specific project, or HR will mandate it for compliance training, or legal will require the audit trail. They bet on the slow creep of necessity rather than genuine enthusiasm. Luna: It reminds me of gym memberships. You pay upfront hoping you will go, but mostly you are just paying for the peace of mind that the option exists. Lucas: A perfect analogy, except the gym usually lets you quit. With enterprise SaaS, cancellation clauses are notoriously difficult. You often have to go through a formal process that involves multiple sign-offs, which gives the vendor time to offer retention discounts that look like savings but keep you locked in. Luna: So the friction isn't just technical, it is administrative. The cost of leaving becomes higher than the cost of staying idle. Lucas: Precisely. And this is why companies like Salesforce and Oracle have such high gross margins despite low net retention rates in some segments. They are not relying on every customer expanding their spend; they are relying on the fact that most customers will simply roll over their existing, underutilized contracts year after year. Luna: It’s a resilience strategy built on inertia. As long as the lights stay on and the emails send, the software is considered successful enough to justify the cost. Lucas: But here is where it gets interesting for us as investors. When the market corrects, and we see more scrutiny on IT spending, these vendors start shifting their messaging. They stop selling tools and start selling outcomes, trying to tie the price to actual usage metrics instead of flat seats. Luna: Like consumption-based pricing? Where you pay per API call or per active user? Lucas: Yes, but they do it very carefully. Look at how Adobe handles Creative Cloud. They still sell individual seats, but they also bundle them into teams where you can share resources. It blurs the line between fixed cost and variable cost, making it harder for you to audit exactly how much you are wasting. Luna: That sounds like a deliberate opacity. If I can't easily see which licenses are dormant, I can't easily cut them. Lucas: Exactly. And this is why the rise of third-party SaaS management platforms is happening. Companies are now hiring专门的 tools just to track who is logging in, so they can reclaim those licenses before renewal season. It has become a whole new industry of arbitrage. Luna: So we are building software to manage the waste caused by other software. That is a pretty ironic feedback loop. Lucas: It is, but it proves the scale of the problem. If you look at the average enterprise, they might have twenty percent of their software budget tied up in licenses that are either completely unused or severely underutilized. That is money that could be going into R&D or marketing. Luna: For a CFO, that is essentially dead capital. It sits there earning zero return while draining cash flow. Lucas: And the worst part is that the vendor doesn't even view it as a problem. They view it as a buffer. If a client has ten thousand licenses but only uses five thousand, the vendor sees a safety margin for growth. They know that if the business expands, those five thousand empty seats will fill up naturally. Luna: So they are banking on your future success to justify your current waste. It’s a confidence game. Lucas: It is, but in a tight market like the one we are seeing in late 2026, confidence is being tested. Buyers are asking for proof of value, not just promises of utility. We are seeing more requests for usage-based audits in new contracts. Luna: That must be forcing vendors to change their sales motions. Instead of just handing out keys, they have to show you how to turn the engine on. Lucas: They are trying, but the inertia is strong. Most sales reps are still compensated on total contract value, not on activation rates. So unless the compensation model changes, the pressure to oversell will remain. Luna: Unless the buyers start holding them accountable. But that requires a level of data literacy that many procurement teams still lack. Lucas: True. Which brings us back to the core tension. The vendor wants predictability, the buyer wants flexibility. The unused license is the compromise that satisfies the vendor's need for revenue while giving the buyer the illusion of control. Luna: An illusion that costs millions. It makes you wonder if any of this would change if software was sold more like utilities, metered by the second. Lucas: Maybe, but then you lose the scalability benefits of the seat model. The truth is, until we fix the incentive alignment, we are just going to keep paying for ghosts in the machine. Luna: Well, if you find those ghosts useful for your own work, consider supporting the show directly. Lucas: We deliberately don't run ads on these. If you want to support that choice, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Your support keeps this analysis independent and ad-free, so we can keep digging into these messy realities without corporate interference. Lucas: Back to the data. When you audit your own stack next quarter, look for the quiet users. The ones who haven't logged in for ninety days. That is where your real margin lives. Luna: Or at least where your wasted budget hides. A simple reclamation exercise might save more than a complex new strategy. Lucas: It is a small move, but in a market obsessed with efficiency, cutting the invisible costs is often the smartest play you can make. Luna: Do you think those unused licenses will ever truly disappear, or is there always going to be a buffer zone for growth? Lucas: There will always be a buffer. Humans are optimistic planners. We buy more than we think we need, hoping to be ready for tomorrow. Luna: So the challenge isn't eliminating the waste, it's managing the expectation of it. Lucas: Exactly. And learning to live with a little bit of inefficiency in exchange for the security of having options available when you need them. Luna: A pragmatic trade-off. Less about maximizing every dollar, more about ensuring the company doesn't freeze up when things get busy. Lucas: Right. Flexibility has a price tag, and sometimes that price tag is just a few hundred dormant licenses sitting quietly on a server. Luna: Is it worth paying for that insurance, or should companies be leaner even if it means risking a bottleneck during peak times? Lucas: That is the question every operator has to answer for themselves. Some industries can afford the bottleneck, others cannot. The software is just the tool, but the culture dictates the usage. Luna: So ultimately, the license count reflects the organization's appetite for risk as much as its need for technology. Lucas: It does. And understanding that cultural layer is what separates a good CTO from a great one. Luna: One last thing, do you see vendors becoming more honest about this? Like advertising the utilization rates openly? Lucas: Unlikely. Transparency hurts sales. But as buyers get smarter, they will demand the data anyway. The market will force the honesty eventually. Luna: Slowly, but surely. Until then, we keep watching the gaps between the purchase and the login. Lucas: Always watch the gap. That is where the real business happens.