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Contrary to popular opinion, SaaS is not dead. Even during the industry’s post-pandemic reckoning, this notion felt misinformed and sensationalist. That doesn’t mean SaaS hasn’t picked up some bad habits, with the misunderstood subscription at the heart of it.
Subscriptions were supposed to simplify things, making the relationship between spend and value predictable. The math seemed alluringly simple: sign customers onto a plan—ideally annually—keep them long enough, and enjoy seemingly perpetual revenue. Playbooks were written on metrics like MRR, ARR, and LTV:CAC ratios, all defining what was “acceptable” in sales and marketing costs to drive growth.
But somewhere in the rush to grow recurring revenue, we thought of LTV as infinite, neglected churn, and lost track of common sense.
Revenue, Accruals, and Usage
ARR is a contractual promise; accrual is the assumption of delivery on that promise. Neither speaks to product usage. Take $10M in ARR. It’s tempting to think you’re making $10M a year, but that’s not quite right. Even if customers pay upfront, revenue can only be accrued monthly—about $830K in this case. In other words, legally you’ve delivered $830K of revenue that month. It speaks nothing if the customer believes they received $830K in product value or used it at all.
The Life Time Value Myth
Recurring revenue also assumes stable retention, which is rarely the case. No matter how great your product, churn exists, and it weighs down growth. Moreover, like lifetime warranty, life time value (LTV) is not infinite. Keeping customers might be cheaper than acquiring new ones, but it still requires work. It takes reinvesting in product, customer success, and marketing.
The Forgotten Subscription
The bigger problem is when “subscribe and save” for the customer becomes “subscribe and forget” for you. Customers can afford to forget their subscriptions—you can’t. That’s why it’s essential to monitor how your platform is actually being used.
For a typical CPaaS platform, that might mean watching the number of texts, emails, or voice calls being sent or received. Without tracking usage, you’re just a website that’s responsive but not functional.
That’s one of the reasons I’ve always liked usage-based pricing. It prevents the complacency that sets in when all you see is an auto-charged subscription payment. With usage-based models, it’s much easier to tell if a customer is happy or unhappy, as the numbers don’t lie.
This doesn’t mean subscriptions are bad, but they can’t be a stand-in for real engagement. Every SaaS business needs a leading metric that reflects value or usage.
Klaviyo, for example, uses Klaviyo Attributed Value (KAV) to tie its platform’s performance directly to customer success. A declining KAV that isn’t attributable to seasonality or other business-as-usual factors can serve as a red flag—a real-time signal that something is wrong with the customer relationship.
SaaS and the Short-Paid Invoice
In fact, SaaS as a model is naturally suited to spot and solve customer issues before they become relationship-saving fire drills.
In non-software, non-auto-recurring businesses, the short-paid invoice is a good indicator of customer satisfaction. If a customer pays less than the invoiced amount, it is usually due to one of three reasons: dissatisfaction with the product or service, a cash crunch, or broader economic challenges. Regardless, a vigilant leader in these companies watches for short-paid invoices as an early red flag to assess the health of the business.
In SaaS, thankfully, we don’t have to wait for a customer to downgrade, cancel, or withhold payment (typically through a credit card chargeback) to know if they’re dissatisfied. Their usage of the platform is available for us to monitor in real time.
Sidebar: On SaaS Product Usage
I’ve written at length about the simple ways to track product usage and, more importantly, the why of understanding customer retention:
- Using Gross Margin to Score Your Product’s Maturity – Insights on assessing your product’s market readiness.
- SaaS Contribution Margin: Discover Where Your Money Maker Lies – Identifying key profitability drivers
- What to Build and Why – Finding and Tracking the ‘wow’ effect
- Three Signup Mistakes SaaS Companies Make – Lessons from common onboarding pitfalls.
- When Hard Times Make Easy Growth Tough to Find – efficient go-to-market strategies
Finally
I had the opportunity to talk about subscriptions on Nitin Karthik’s Product Marketing Wisdom podcast. It’s a fantastic series that captures the tribal knowledge of product marketers globally, along with visits from generalists like me. During our conversation, I discussed the misunderstood subscription model and the bad behaviors it often encourages. While the two-minute pressure cooker format helped me get to the point quickly, I felt the topic deserved a deeper dive.
If there’s a TL;DR, it’s this: Don’t let the subscription lull you into thinking everything is fine. Track your product’s usage (see links above).
That said, I’d be remiss to not mention the inherent shortcoming of treating usage as a proxy of value. We could discuss seat-based, conversation-based, or outcome-based pricing, but that’s a different blog post. The main takeaway is that no matter the pricing model, SaaS companies can’t afford to get comfortable. Revenue might be recurring, but the work to sustain it never stops.