Profitability: Subscription Fatigue in the SaaS Productivity Space

Question

Our client is a project management software (similar to Asana/Monday). In 2024, they've seen a sharp increase in 'seat contraction'—existing customers reducing their number of licenses during renewals.

1. What external and internal factors could be driving this?
2. If the client increases price by 20% but loses 10% of their seats, what is the impact on revenue?
3. How can the client pivot to a 'Value-Based' pricing model?

Accepted Answer

Drivers of Contraction:
- External: Economic downturn leading to layoffs at client firms; SaaS consolidation (companies moving to all-in-one suites like Microsoft 365).
- Internal: Product bloat (users finding the tool too complex); poor 'Customer Success' engagement.

Revenue Calculation:
- Current Revenue = 100 seats * $100 = $10,000.
- New Revenue = 90 seats * $120 = $10,800.
- Result: A 20% price hike with a 10% volume loss results in an 8% increase in total revenue. This suggests the product is relatively price-inelastic, but the client must be careful not to trigger a 'death spiral' of churn.

Value-Based Pricing Pivot:
Instead of charging per 'seat' (which incentivizes firms to limit access), the client could move to:
1. Feature-based tiers: Charging for advanced AI automation or security features.
2. Usage-based: Charging based on the number of projects completed or tasks automated.
3. Outcome-based: (Harder to implement) Charging based on time saved or ROI metrics.
Recommendation: Move to a 'Core + Add-on' model where basic seats are cheaper, but high-value AI features are metered.

Profitability: Subscription Fatigue in the SaaS Productivity Space

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