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 latest earnings reports from the major enterprise software players in late September twenty twenty-six. You see a strange divergence. On one hand, new logo acquisition is slowing across the board as IT budgets tighten. On the other hand, average revenue per user is climbing steadily, often outpacing headcount growth. Luna: Right, and it isn't just price hikes. It's what they're doing with the existing customer base. I've been digging into the quarterly disclosures from Adobe and Salesforce, and the data on dormant licenses is striking. Lucas: Exactly. For years, the SaaS playbook was simple: sell more seats. If you had ten thousand employees, you sold ten thousand licenses. But now, vendors are realizing that a significant chunk of those seats are sitting idle. The market has shifted from pure expansion to extracting value from the inventory you already own. This is what we call license harvesting. Luna: So instead of trying to win new customers, they're monetizing the ghosts in the machine? That sounds efficient, but also risky if customers notice. Lucas: It is efficient because it bypasses the friction of new sales cycles. When a company buys a fifty-thousand-seat contract for a tool like Creative Cloud or Slack, they rarely use all fifty thousand seats simultaneously. Maybe only thirty thousand are active daily. The vendor keeps those unused seats on the books as potential future revenue, but increasingly, they are restructuring contracts to charge for access rather than just allocation. Luna: Wait, so they are charging for seats that aren't being used? How does that not trigger immediate churn? Lucas: That is the crux of the strategy. They don't frame it as a penalty for unused seats. They frame it as a shift toward usage-based components within the annual recurring revenue model. So a portion of the fee becomes variable, tied to actual logins or API calls, while the base fee covers the reserved capacity. It feels like a optimization to the buyer, not a tax. Luna: Okay, so it's about aligning cost with value. But let's talk about the mechanics. How do they track which seats are actually dormant versus just temporarily inactive? Lucas: They use behavioral telemetry. In September twenty twenty-six, most mid-to-large SaaS providers have dashboards that show login frequency, feature adoption, and time-in-product. If a user hasn't logged in for ninety days, the system flags them as dormant. The sales team then receives alerts to either re-engage that user or, more commonly, to remove the seat from the active billable count during renewal negotiations in exchange for a slight discount elsewhere. Luna: I see. So they are using data to prune the dead weight before the contract even comes up for renewal. That prevents the awkward conversation later. Lucas: Precisely. And here is where it gets interesting for margins. When a vendor proactively removes unused seats, the customer feels heard. They feel like their account manager is helping them save money. But the vendor retains the relationship and the switch costs remain high. Meanwhile, the vendor has reduced their support load for those inactive users, which lowers operating expenses. Luna: So it's a win-win on paper. But I worry about the long-term trust factor. If a company realizes they were paying for fifty thousand seats when only thirty thousand were ever touched, won't they feel tricked? Lucas: That risk exists, which is why transparency is key. The leading firms are not hiding this. They are providing self-service portals where buyers can see their own utilization rates. But there is a subtle pivot happening here. They are starting to bundle these unused seats into higher-tier tiers that include advanced AI features or priority support. So the idle seat becomes the subsidy for the premium functionality. Luna: Ah, cross-subsidization. Using the waste to fund the innovation. That is clever. But does this work for smaller SaaS companies too, or is this mostly an enterprise play? Lucas: It works best in enterprise because the volume creates the margin. A small startup selling project management tools doesn't have enough scale to harvest licenses effectively. But for the giants, it is a structural advantage. It stabilizes cash flow. Even if new business stalls, the harvested revenue from existing bases keeps the top line moving. Luna: This reminds me of how telecom companies handle overage charges. You pay for a bucket of minutes, and if you don't use them, you lose them. Except here, the vendor is managing the bucket for you. Lucas: A great analogy. And it highlights the power dynamic. In telecom, you are stuck with your bucket. In SaaS, the vendor is offering to manage it. But look at the financials. Companies that successfully implement license harvesting see their net dollar retention rates improve by two to four percentage points annually, purely from efficiency gains. Luna: Two to four percent might sound small, but on a billion-dollar ARR base, that is massive. It changes the valuation multiple significantly. Lucas: It absolutely does. Investors are rewarding predictability right now in this quarter. License harvesting provides predictable revenue because it is tied to existing contracts, not speculative new deals. It de-risks the forecast. Luna: But what about the implementation cost? Setting up those telemetry systems and training sales teams to handle these nuanced renewals must be expensive upfront. Lucas: True. There is a heavy initial lift. You need robust CRM integration, automated health scoring, and sales enablement tools. But once the engine is running, the marginal cost of managing each additional dormant seat drops near zero. It becomes a scalable operation. Luna: I wonder if this will lead to more standardized reporting requirements. Like, will we start seeing utilization metrics mandated in public filings? Lucas: Probably not mandated, but definitely encouraged. Forward-thinking CFOs are already including customer utilization scores in their investor presentations. It shows operational maturity. It proves they aren't just bloating their user base with zombie accounts. Luna: Zombie accounts. I like that term. It paints a vivid picture of the problem they are solving. Lucas: It does. And it forces buyers to be more disciplined. If you know your vendor is watching your login rates, you stop issuing licenses to everyone on a whim. You enforce governance. You make sure every seat has a purpose. Luna: So it disciplines the buyer as much as it profits the seller. That's a double-edged sword for procurement teams. Lucas: Exactly. Procurement teams are fighting back by demanding true usage-based pricing, not hybrid models. They want to pay only for what is consumed. But the vendors are resisting full consumption-only models because it introduces volatility into their revenue streams. Luna: Volatility is the enemy of stability. I get why they resist. But if the usage is truly variable, how do they forecast? Lucas: They use historical baselines. They treat the fixed component as the floor and the variable component as the ceiling. It smooths out the peaks and valleys. It is a compromise between the buyer's desire for flexibility and the seller's need for certainty. Luna: And that compromise is becoming the standard for enterprise software in twenty twenty-six. Lucas: It is. And for listeners running software businesses, the takeaway is clear. Stop treating unused seats as lost opportunities. Start treating them as data assets. Analyze them, segment them, and leverage them to drive deeper engagement. Luna: Or if you are buying software, audit your licenses ruthlessly. Don't let your vendor carry the burden of your inefficiency. Lucas: Well said. It turns a passive cost center into an active strategic lever. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, we appreciate any help keeping the lights on and the research sharp. Now, back to the numbers. Luna: Let's dig into the specific case of Salesforce again. Their recent move to integrate Tableau usage into the core platform license fees seems like a textbook example of this harvesting strategy. Lucas: Right. They didn't just add Tableau as an add-on. They bundled it in a way that forced enterprises to evaluate their actual analytics needs. Many companies realized they were paying for Tableau seats they never used, so they consolidated to fewer, heavier users. That consolidation increased the average revenue per remaining user, even though total seat count dropped slightly. Luna: So they traded volume for density. That is a healthier business model anyway, because high-density users are stickier. Lucas: Absolutely. Dense users build workflows around the product. They are harder to displace. Shallow users, who only log in occasionally, are easy to churn. By pruning the shallow users, you are left with a more resilient base. Luna: It's basically quality over quantity. But in a way that boosts the bottom line directly. Lucas: Precisely. And it shifts the focus from acquisition to activation. Activation drives retention, and retention drives profitability. Luna: I think a lot of founders ignore activation until it's too late. They focus so hard on the top of the funnel. Lucas: They do. But in a mature market like SaaS, the bottom of the funnel is where the real value is created. Optimizing the exit ramp, so to speak, ensures you keep the value you've already generated. Luna: An exit ramp that keeps you on the highway. I'll have to remember that metaphor. Lucas: Use it wisely. The next time you review your SaaS stack, ask yourself: are we harvesting our licenses, or are we letting them rot? Luna: Good question. I hope most of us are harvesting. Lucas: Let's hope so. Because the companies that don't, will find themselves competing for scraps in a stagnant market.