Latest / SaaS Business with Fexingo: Software-as-a-Service Companies, ARR, and Recurring Revenue / The SaaS Pricing Trap That Drains Margins
Transcript
- Lucas: If these conversations are useful for what you're building or running, know that listener support is genuinely what keeps this network independent and ad-free. A couple of dollars a month helps cover the production costs so we can keep digging into the hard stuff without corporate sponsors calling the shots. Luna: Exactly, and if you want to help us out directly, you can find us at buy me a coffee dot com slash fexingo. Lucas: Right, thanks for keeping the lights on. Let's get back to it because there is a specific structural flaw in SaaS pricing that I think is getting worse right now as we move through the third quarter of twenty twenty six. Luna: You mean the old standby, per seat licensing? Lucas: That is exactly what I mean. We have spent years talking about moving away from it toward usage or outcome based models, but the inertia is real. The data from last week shows that nearly sixty percent of mid-market software companies still rely heavily on per-seat billing, and it is creating a silent drain on their net revenue retention. Luna: I have seen this firsthand. Sales teams sell ten licenses because it hits their quota, but only three people actually use the platform. Lucas: And that gap between sold seats and active users is where the margin dies. It is not just about wasted inventory; it is about the psychological contract with the customer. When a company pays for ten seats and only uses three, they feel like they are overpaying for something they do not need. Luna: So they start looking for cheaper alternatives or they cut the unused licenses next year, which tanks your renewal rate. Lucas: Precisely. And here is the thing that is often overlooked: the sales rep has no incentive to fix this. Their commission is tied to the initial expansion, not the long-term utilization. So they push for more seats to secure a bigger bonus today, even if it guarantees a churn event two years later. Luna: It is a classic principal agent problem. The seller wins now, the buyer loses later, and the product team gets blamed for high churn. Lucas: Right. And the irony is that the customer thinks they are being smart by negotiating for more seats than they need. They think they are getting a deal. But they are actually locking themselves into a rigid cost structure that does not scale with their actual productivity. Luna: Which brings us to the core issue. Is it really about the pricing model itself, or is it about how we measure value? Lucas: It is both, but let's drill into the measurement side first. Most companies track average revenue per user based on billed seats, not active users. That metric looks healthy until you run a cohort analysis on who is actually logging in. Luna: So you have a disconnect between your top-line ARR and your bottom-line engagement. Lucas: Exactly. And in this market, where capital is expensive, that disconnect is fatal. Investors are not just looking at growth anymore; they are looking at efficiency. If you have thirty percent of your paid seats sitting idle, your unit economics are broken. Luna: But fixing it feels risky. If you tell a customer they need to consolidate their licenses, aren't you inviting them to leave? Lucas: Only if you frame it as a penalty. The shift needs to be framed as optimization. Instead of saying you are cutting licenses, you are helping them align costs with outcomes. It requires a different conversation, one that product-led growth enables. Luna: So you let the data speak for itself. You show them the dashboards where the inactive seats light up red, and the active ones drive the value. Lucas: Yes. And this is where the technology aspect comes in. Modern platforms can now detect usage patterns in real time. If a user hasn't logged in for ninety days, the system should flag it automatically before the renewal date. Luna: That changes the dynamic entirely. It moves the conversation from negotiation to collaboration. Lucas: It does. And it protects your margin. Because when you remove the waste, you don't have to raise prices to maintain growth. You just grow efficiently. That is the kind of story investors love right now. Luna: I wonder though, how many legacy enterprises are actually willing to change their procurement processes to allow for this level of transparency? Lucas: That is the hard part. Procurement loves predictability. Per-seat pricing is predictable. Usage-based pricing is messy. But the tide is turning. With inflation stabilizing but wages rising, companies are scrutinizing every dollar of operational expense. Luna: They are cutting fat, not muscle. And license hoarding is definitely fat. Lucas: Exactly. So the question for founders and operators is whether you are going to cling to the easy sale of today or build the resilient foundation for tomorrow. Luna: Because clinging to the easy sale usually means paying for it in churn tomorrow. Lucas: Let's talk about the mechanics of that transition. How do you actually move a large enterprise client from a static seat count to a dynamic usage model without losing the account? Luna: Do you offer a hybrid model? Like a base fee plus usage? Lucas: Hybrid is common, but it often becomes a worst of both worlds scenario. You get the rigidity of seats without the flexibility of usage. A cleaner approach is to anchor on a minimum commitment that covers your baseline server costs, then let everything above that scale with value. Luna: So the floor is fixed, but the ceiling is open. That aligns risk better. Lucas: It does. And it gives the customer permission to experiment. If they want to roll out the software to five hundred new employees, they don't have to wait for a procurement cycle to approve five hundred licenses. They can just start using it. Luna: That removes the friction at the point of adoption. Which is usually where things die anyway. Lucas: Right. Friction kills growth. Rigid pricing creates friction. So by making the pricing fluid, you make the product sticky. Luna: But you have to be careful not to price yourself out of the market for small teams. Lucas: True. This works best when you have tiered bundles. Small teams stay on simple per-seat plans because the volume is low. Mid-market and enterprise move to usage or hybrid because the complexity demands it. Luna: Segmentation is key. You don't force everyone into the same box. Lucas: Correct. And this brings us back to the data. If you are not tracking feature-level adoption, you are flying blind. You need to know which features drive retention and which ones are just noise. Luna: So you can bundle those high-value features into the higher tiers naturally. Lucas: Exactly. It stops feeling arbitrary. The pricing starts reflecting the actual value delivered. That is how you build trust. Luna: Trust is the currency in this space. Without it, you are just selling access. Lucas: Agreed. And as we look ahead to the rest of twenty twenty six, I think we will see more companies publicly admit that their old pricing models were broken. It will be a brave move, but a necessary one. Luna: Brave moves usually separate the leaders from the laggards. Lucas: Definitely. The question is whether you are ready to have that uncomfortable conversation with your largest clients before they have it with you. Luna: Better to lead the dance than follow the music. Lucas: That is a good way to put it. Ultimately, sustainable growth comes from alignment, not extraction. Luna: When the customer wins, the revenue follows. It seems obvious, but it is hard to execute. Lucas: It is. And that is why the operators who master this nuance will win the decade. Luna: Here is to building businesses that actually scale with their customers. Lucas: To that. And let's see if the market rewards the pragmatists in the coming quarters.