Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / How SaaS Vendors Profit From Your Unused Software
Transcript
- Lucas: There is a ghost in every SaaS balance sheet. It isn't a hidden liability or a complex derivative contract. It is simply a license key that no one has logged into for ninety days. Today we are talking about the economics of shelfware—the money enterprises spend on software they never actually use. Luna: It feels counterintuitive. If you are paying for recurring revenue, surely the vendor wants active users? But I have seen procurement teams hoard seats like emergency rations. Lucas: Exactly. And that is the core tension. For the last few episodes, we have focused on how vendors drive expansion—upselling features, adding modules, getting customers to do more. But there is a whole other layer of profit built on the fact that customers buy way more than they need, and rarely take it back. Luna: So this is less about product value and more about organizational fear? Lucas: Precisely. Let me give you a concrete example from a logistics company I advised recently. They had five thousand employees. They bought ten thousand seats of their primary collaboration platform because they were terrified of losing access during peak season. Six months later, only three thousand two hundred people were active daily. The other six thousand eight hundred seats were just sitting there, costing them roughly four million dollars a year in wasted capital. Luna: That is staggering. Four million dollars just for digital air conditioning. Why didn't they stop paying? Lucas: Because of the friction of renewal. Most enterprise contracts are annual. You cannot easily cancel half your seats in July if you realized you overbought in January. The penalty structure usually locks you in. So the finance team accepts the waste as the cost of operational security. Luna: But isn't the vendor aware? If I am a sales rep selling these licenses, don't I know who is using them? Lucas: They do know. And this is where the dynamic gets interesting. The vendor's customer success team tracks usage. When they see a client buying five thousand seats but only activating three thousand, they don't necessarily call to say, 'Hey, you can cancel.' They often do the opposite. Luna: They let the waste happen? Lucas: They monetize it. Some platforms even build features designed to make this easier. Imagine a dashboard that says, 'You have two thousand inactive users. Do you want to archive their data and free up those seats?' Most times, the answer is no, because IT managers are too afraid to touch anything that might break tomorrow's workflow. Luna: So the status quo wins. The software stays installed, the license stays paid, and nothing breaks. Lucas: Right. It is a classic example of why markets fail to self-correct. The buyer feels safe having excess capacity. The seller feels justified charging for it. Neither side admits the inefficiency out loud. But recently, a shift has started happening in the enterprise world. Luna: What triggered the shift? Lucas: The interest rate environment. When capital was cheap, hoarding resources made sense. You could afford the slack. Now, with borrowing costs higher and public market pressure on margins, CFOs are looking at their software spend with fresh eyes. They are demanding audits. Luna: And so the vendors are forced to adapt? Lucas: Not just forced. Many are volunteering. Look at how major collaboration tools have changed their billing models. They are moving toward true named-user licensing with stricter enforcement. If you don't log in for thirty days, you get a warning. If you don't log in for sixty, your seat is reassigned. This creates a tighter, more efficient market. Luna: It sounds like a feature, not a bug. Efficiency drives adoption. Lucas: It does. And here is the twist. When companies start cleaning up their shelfware, they don't just save money. They often find that the tools they thought they needed weren't actually helping anyone. By removing the noise, the signal becomes clearer. Productivity goes up, not down. Luna: I remember working at a firm where we had access to twelve different project management apps. Only two were used. Cutting the rest forced us to standardize our process. Lucas: That is the hidden benefit. Shadow IT thrives on excess licenses. When you force alignment, you reduce complexity. Complexity is expensive. It takes time to learn new interfaces, it breaks integrations, and it confuses users. Streamlining the stack reduces cognitive load across the entire organization. Luna: But what about the vendors? If everyone stops buying extra seats, doesn't ARR drop? Lucas: Short term, yes. Churn spikes when companies realize how much they are wasting. But long term, the stickier accounts are the ones that actually use the product deeply. A company using fifty seats effectively is worth more than a company using five thousand seats poorly. The latter is a ticking time bomb for churn anyway. Luna: So the vendors are betting on quality over quantity. Lucas: They have to. The era of bloated procurement is ending. Buyers are smarter. They have tools now that track usage automatically. You can plug an API into your ERP system and get a weekly report on every login across your entire tech stack. No more guessing. Luna: It reminds me of the subscription box trend. People kept boxes they never opened. Here it is corporate scale. Lucas: It is exactly that. But with higher stakes. In consumer goods, wasted boxes are annoying. In enterprise software, wasted licenses can delay digital transformation initiatives because the budget is tied up in zombie subscriptions. Luna: Are there specific metrics CFOs should look for right now? Lucas: Yes. Look at your active to licensed ratio. If it is below seventy percent, you have a problem. Also, check your renewal terms. Are you locked into multi-year commitments without usage caps? If so, renegotiate immediately. Demand flexibility clauses that allow you to adjust headcount quarterly. Luna: Flexibility clauses. That sounds like a win-win if implemented correctly. Lucas: It is. The vendor keeps the relationship. The buyer keeps the cash flow. And both sides stop pretending that more is always better. Sometimes, less is actually more profitable. Luna: I think that applies to more than just software. Lucas: Definitely. But in the SaaS world, it is quantifiable. Every unused seat is a line item you can eliminate tomorrow. It is the easiest margin improvement most companies will ever make. Luna: Before we wrap up, I want to mention something important about how we keep this show running. Lucas: If you find these deep dives useful for your own operations, consider supporting the network directly. Visit buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Your support helps us produce independent analysis without ads. Luna: It ensures we can keep digging into these niche economic shifts without compromising our editorial voice. Thanks for listening. Lucas: Back to the topic. One final thought on this efficiency trend. As vendors tighten their belts alongside buyers, expect to see more 'consumption-based' pricing models emerge. Instead of buying seats, you pay for actual API calls or data processed. It eliminates the shelfware problem entirely. Luna: Pay for what you use, exactly when you use it. Lucas: Exactly. It aligns incentives perfectly. The vendor only gets paid when value is delivered. The buyer never pays for idle time. It is a cleaner, fairer model for the future of software. Luna: Will traditional seat-based licensing disappear completely? Lucas: Probably not overnight. Enterprise inertia is powerful. But the gap between seat-based and consumption-based is closing fast. Companies that cling to old models will find themselves losing bids to competitors offering true pay as you go flexibility. Luna: A race to the bottom, or a race to efficiency? Lucas: A race to efficiency. Because in the end, businesses survive on margins, not on empty licenses. And that is where the real value lives.