Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / Why SaaS Pricing Models Are Breaking Down
Transcript
- Lucas: Let’s talk about the quiet revolution happening in SaaS pricing right now. For years, the industry standard was simple: charge per seat, per month. It was predictable, it was scalable, and it made financial modeling straightforward for both vendors and buyers. Luna: Right, because you knew exactly what each new hire would cost you. It was linear and easy to budget for. Lucas: Exactly. But starting around two thousand twenty four, we’ve seen a massive pivot toward usage-based pricing. Companies like Adobe and Dropbox have moved away from strict per-seat models to tiered structures that reward actual consumption or activity levels. Luna: I noticed that with Dropbox too. They pushed hard on storage and active usage rather than just headcount. Lucas: And that shift isn’t just cosmetic. It fundamentally changes how these companies forecast their annual recurring revenue. When you move to usage, your revenue becomes tied directly to customer engagement, which can be great for expansion but terrifying for predictability. Luna: So if a customer stops using the tool, even if they’re still paying, does that hurt your valuation metrics? Lucas: It hurts your net revenue retention numbers significantly. Let’s look at Adobe. They transitioned most of their Creative Cloud suite to a more flexible, albeit complex, pricing structure that includes tiers based on features and usage intensity. The result? Higher initial conversion rates, but also more volatility in monthly churn. Luna: That makes sense. If I’m only using it occasionally, I might cancel during a slow quarter without feeling guilty. Lucas: Precisely. And that’s the trap. Usage-based pricing attracts lighter users who are price-sensitive. In Q3 2026, several mid-market SaaS firms reported that while their total customer count went up, their average revenue per user actually dipped because so many people were staying on the lower, usage-heavy tiers. Luna: So you get more customers, but they’re worth less individually. That’s a classic volume over value problem. Lucas: It is. And here’s the thing about the current market environment in October 2026. Investors are tired of the 'growth at all costs' narrative. They want to see efficient scale. Usage-based models can look inefficient if the infrastructure costs scale faster than the revenue. Luna: Because computing costs go up when usage goes up, right? So your margins get squeezed exactly when you think you’re growing. Lucas: Spot on. Think about an ai driven analytics platform. Every query costs money in compute. If you price based on queries, you’re essentially passing through variable costs. But if you don’t manage those costs tightly, your gross margin collapses. We saw a few startups in the developer tools space struggle with this last year. Luna: Did any of them successfully navigate that squeeze, or did they just revert to flat fees? Lucas: The survivors hybridized. They introduced a base subscription fee plus usage caps. This gives them a predictable floor for revenue while still allowing for upside. It’s a compromise, but it stabilizes the balance sheet. Luna: So it’s not either-or anymore. It’s a blended model. Lucas: For now. But let’s pause here for a second. If you find these deep dives into business mechanics useful, consider supporting the show directly. It helps us keep the content independent and ad-free. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps us dig into these specific cases instead of just skimming the surface. Lucas: Thanks for considering that. Back to the pricing issue. The other major driver for this shift is the enterprise sales cycle. Procurement teams are getting smarter. They’re pushing back against rigid per-seat contracts because they hate paying for idle licenses. Luna: We talked about idle licenses before, but usage-based feels like the ultimate solution to that waste. Lucas: It solves the waste problem, but it creates a negotiation nightmare. Now, every time a customer wants to scale, they have to justify the usage spike. It adds friction to the expansion phase, which is where SaaS companies make their real profit. Luna: So you’re making money on day one, but struggling to grow the account over time because of the administrative burden. Lucas: Exactly. And this is particularly true in the B2B sector. A marketing team might start with ten seats, but if they switch to usage-based, they might spread that cost across fifty people, none of whom use it heavily. The vendor loses the ability to upsell individual seats effectively. Luna: That sounds like a risk management issue for the vendor. How do they protect themselves? Lucas: They implement minimum spend thresholds. You’ll see more contracts requiring a baseline monthly commitment regardless of actual usage. It’s a way to ensure that the account stays profitable even if the customer is being conservative. Luna: So the contract gets thicker again. Less simple, more protective. Lucas: Much thicker. And it’s interesting to watch how smaller competitors react. They often stick to pure usage-based models to appear more attractive to agile startups. But as those startups mature, they realize they need the stability of the hybrid approach. Luna: Do you think we’ll see a backlash against usage-based pricing in the next earnings season? Lucas: Probably not a full backlash, but a correction. We’re already seeing some large enterprises renegotiating terms to cap usage spikes. They’re treating software like utilities—wanting predictable bills rather than fluctuating meter readings. Luna: So the pendulum swings back toward predictability, just wrapped in a different package. Lucas: Wrapped, yes. But the underlying tension remains. Vendors want to capture value; buyers want to minimize risk. Usage-based pricing tries to align those incentives, but it rarely works perfectly. Luna: It feels like a game of musical chairs. Whoever finds the best model wins, but the rules keep changing. Lucas: That’s a good way to put it. And the winners right now are the ones who can offer transparency. If you can show your customer exactly how their usage translates to value, they’ll tolerate the complexity. Luna: Transparency builds trust. Even if the math is harder. Lucas: Absolutely. Look at Figma. They’ve managed to keep a fairly simple model despite scaling massively. Their secret is that the value proposition is so clear that users don’t feel like they’re being nickel and dimed. Luna: Because the tool is essential to their workflow, not just an optional add-on. Lucas: Right. It’s embedded. When software is embedded, pricing friction disappears. When it’s peripheral, every dollar spent is scrutinized. That’s the real takeaway here. Luna: Embedded equals sticky. Sticky equals simpler pricing. Lucas: Simplest form of it. But as we move into Q4 2026, we’ll likely see more experiments. Maybe even dynamic pricing based on real-time demand. Luna: That sounds risky. Customers hate surprise bills. Lucas: They do. But if done with guardrails, it could be the next evolution. Or it could be a disaster. Only time will tell which path the market takes. Luna: I’ll be watching the next earnings reports closely to see who gets it right. Lucas: Same here. It’s a fascinating experiment in how we value digital labor and assets. Luna: And whether we’re willing to pay for the convenience of flexibility. Lucas: Or if we’ll just go back to the old ways when the novelty wears off. Luna: History suggests we try something new, break it, then settle for something boringly reliable. Lucas: Probably. But until then, the data is there for anyone willing to read between the lines of the quarterly reports. Luna: Looking forward to seeing how these models evolve over the next twelve months. Lucas: Me too. It’s going to be a pivotal year for SaaS economics.