Many years ago, I worked for a "SaaS" company. That stint gave me a good insight into potential of a SaaS business model, to our customers and some of our internal challenges to deliver it. At best, I would describe my experience as a hybrid or an early version of SaaS model. During my stay at GlobalLogic, I had the chance of providing R&D services to some (~20) companies who claimed (some true) to be SaaS a company. I tried to gather some learning from these engagements and have summarized them in the article below. Like many others, I also believe that SaaS model breaks most of the assumptions and metrics used by traditional (non-saas) s/w companies. What I argue below is that how you sell, market, define, engineer, implement, and support a SaaS product is very different. The following are top 10 questions I ask companies to help identify a real SaaS from a fake SaaS. The questions cover most of the functions within a company. These are my preliminary set of question and so welcome your comments.
1. What is the Life Time value of the customer? (FINANCIALS)
I believe understanding this is the most important question; the rest of the business plan can be derived from there. The following set of questions help both define the LTV as well helps identify where the money is coming from.
What is revenue growth from existing accounts? What is growth in your user base? What is the contract duration? Do you have other products or services that you can upsell to the user base? What % of the revenue comes from Professional Services (in my opinion lower PS as a % is better)?
The folks from Bessemer argue for that Committed Monthly Recurring Revenue (CMRR) is a good metric. I like the concept, but I have not played around with this metric much.
2. What is your Customer acquisition cost? (SALES)
Customer acquisition cost, is how much money a company makes in profit for every dollar of sales cost. For the purpose of this analysis I used the formula as
CAC = Gross margin/ Cost of Sales
Graph is based on publicly available data. However, the graph compares companies of different sizes, different stages of maturity, assumes the same cost of capital, has slightly different fiscal periods, some are single product vs. some are multiple product companies…
In my opinion there are some interesting insights albeit they are not very inconclusive.
In the long term CAC > 1 is a must have. Greater the number, better the results...
Other metrics worth comparing would be: Average sales cycle times, conversion ratios, but it is harder to get these numbers from any publicly available numbers.
3. How do your customers discover your product? Or. How do you find your customers? (MARKETING)
In my opinion traditional marketing tools like Marcom, whitepapers, tradeshows, golf retreats have lower ROI for a SaaS model. That is because many of the decisions for SaaS product purchases are driven at a business unit level rather than the CIO/ IT level. Because the decision makers might be closer to the users, online marketing tools like web meetings, webinars, … also seem to work better. That is because business users can take 45 min join a webinar, learn about the capabilities of the product, and get a few user licenses before committing to rolling it out the entire organization.
For a SaaS product, one of the big differentiators and the best marketing tool is your product. It is already live! A live product is the differentiator between you and your license s/w competitor. Can a user do a quick "try before you buy" for your product? Can you give them a 2 month trial license?
Compare that to a minimum 6 week wait after you buy before you can do anything with licensed s/w. That is powerful. Leverage it.
Some other relevant analysis is also available at http://saasmarketingstrategy.blogspot.com/2009/05/marketing-spend-how-much-is-enough.html
4. How much of the sales come thru direct sale and how much comes thru Indirect (channel sales)? (ALLIANCES)
SalesForce popularized the idea that SaaS does not require you to purchase software using great marketing (see no software logo above). However it has one other significant implication. SaaS implementations cycles are shorter. Because of the shorter implementation cycles, SaaS companies are not very attractive to traditional implementation partners such as WIPRO, Accenture,… Traditionally for products like SAP and Oracle…, SI were very actively involved in selling them (indirect channel). Unfortunately, this channel is not available for many SaaS companies. So each SaaS company has to visit a different ecosystem of service providers who might be more motivated to promoting the SaaS solution. LinkedIn uses recruitment process outsourced (RPO) providers to champion their products, because it makes RPO more efficient in delivering the value of their service. Similarly every SaaS company has to find channel partners who will be willing to take their product into the market.
5. Cost & Time to onboard a customer? (PROFESSIONAL SERVICES)
For License s/w, implementation cost is 2-5 times first year revenue. It could take between a 6 weeks to 3 months to before product can be made available to the end user. What is the PS cost and time for your product? Higher PS cost indicates poor configurability and the need to customize for each implementation. With each release is the time and cost of implementation going down or up? How much customization and integration is required? Does it require data cleansing and data mapping and do you have tools to provide that? What is the effort required to upgrade a customer from v(x) to v(x+1)? Have your engineering team focus on activities that help reduce the time and cost of onboarding.
6. What are the renewal rates and renewal effort in the installed base? (ACCOUNT MANGEMENT)
I argued in point #1 the importance of LTV of the customer. Traditionally account managers have been held accountable for this number. What are your customer churn/ retention/ attrition? How much time and effort is required to do a renewal? May 2010 Gartner research show 95% renewal rates for SaaS companies. THINKstrategies and Cutter Consortium survey shows 90%+ renewal rates. Compare this number to any industry metrics, the numbers are very impressive. How do you measure to this benchmark?
7. What % of your revenue is R&D spend? (ENGINEERING)
Defined as R&D spend/ Revenue in a Q.
Because you have fewer versions of the products, SaaS products have a lower R&D cost. If the R&D cost is higher some of the questions worth asking would be …How many versions of products do they have running? How many code trees? Do you do Agile development? What is your new release frequency? What is your response to a customer who is looking for on-premise deployment? The last question is important, because you can fall into the trap of mixing apples and oranges, two very different metrics within the company.
8. How do you plan and prioritize product features (PRODUCT MANAGEMENT)
The users of SaaS products are employees/ business users. Tools like Gmail have forever changed the mindset of these users who believe a two day training is a thing of the past. Usability drives adoption which directly impacts renewal rates and revenue. So focus on usability.
Also SaaS products allow product managers to monitor actual usage across your customer base. This data gives you a sense of what are the capabilities in the product that people are using and which areas are not being used. This data should be used as input into the release planning and feature prioritization. Traditionally product managers don't have those insights. They rely on archaic focus groups and user groups that meet once a year. The SaaS product manager should have this information at his/ her fingertips.
9. Do you give uptime or other performance guarantees? Are their penalties? (OPERATIONS)
Do you give SLA guarantees? How often is the SLA not met? Make sure the technology platform is stable and they are not bleeding $ in the backend. This is also a customer satisfaction issue. You don't want to give the customer an excuse for not renewing because your service is not reliable.
10. How does the Ops & Support team scale with additional customers? (SUPPORT)
Since your business is dependent on generating recurring revenue based on usage, support becomes a very important big element of your offering. However, the big question is how does your support organization scale when you sign new customers and bring new revenue? Plot the cost of support as a function of revenue. If support costs are growing faster than the revenue growth, focus on that. Reduce the support cost, without sacrificing customer satisfaction. This is impacting your bottom line and will limit your ability to grow. Fix it.
