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Interesting Article on the Roll Up of SaaS Companies

The general idea here is that SaaS companies have done well during the recession. Now with the recession's end seemingly in site the larger ISV's will acquire these "pesky" start ups and offer both models. The example given here is Intuit and Paycycle.

We shall see....

SaaS - Is it about the function of the buyer?

Two of the most successful SaaS companies are Salesforce.com and Digital River. By successfull I look at their topline revenue numbers and Y0Y growth. Salesforce.com obviously gets the lionshare of the attention. Digital River is what I call one of those "1.0" SaaS company's. They were SaaS before we even called it SaaS and they did SaaS because it was a core component to their value proposition. 

What strikes me when I look at these two companies is the audience they sell too. Typically it's the VP of Sales. To put it another way - the person who has the revenue number on their head. 

Why is that important? Well, firstly, there's a clear owner of the initiative which is important in any sale. Committee sales are notoriously harder and longer. Secondly the VP of Sales tends to have a few common elements to their profile if they're going to be successful. In turn, those tendencies bode very well for SaaS sales. 

A good sales person knows a real objection from just noise. In addition, when they see a real objection they look for a legitimate way around that objection. Unsuccessful sales people usually get stuck at legimate but overcomeable objections. A good salesperson enjoys the challenge and overcomes the obstacle. 

What's a sales leaders most important tool? Their SFA application. In the world of Siebel that was an expensive, complicated purchase and implementation mess. Envision the frustrated VP of Sales at the 18 month mark of a hobbled Siebel CRM implementation getting the call from some rep at this small online company called Salesforce.com. His initiative is bogged down with the VP of Marketing and VP of Support all arguing about which modules to buy and when. The CIO is complaining about an ever changing implementation road map based on the back and forth at the executive level. 

Along comes this completely web based so no VPN issues. Simple and clean web pages that offered mostly intuitive functions. Understandable pricing on a per seat basis. Perhaps best of all - no integration! No more dependency on IT resources. The VP of Sales saw (at that time) an unconventional way to achieve his goals and the company's. A relatively cheap and painless but effective SFA tool. To add to that, early on SF.com struggled to win in the more complex CRM scenarios. They weren't considered "serious enough" for a company to rely upon for CRM vs just SFA. My guess would be that the CRM initiative was "Cross Functional" and thus much more prone to long complicated implementations. 

Digital River involves e-commerce. A successful ecommerce implementation drives sales and a highly successful one drives significant incremental sales by effectively tying in astute online marketing. Again, the audience for their services tends to be the individual in charge of revenue. The alternative? Purchase an ecommerce on site tool or leverage a module attached to a larger ERP provider. What does that mean? Long lead times in terms of getting on an IT road map and secondly hiring or taking time to develop online ecommerce expertise in house. Not to mention incremental steps should you want to have a global store.  

When choosing to implement a SaaS offering I think more attention should be paid to the internal buying politics at your target account. Large committee sales that don't have strong ownership are more likely to fall victim to internal politics that will reduce the likelihood of experimenting with a SaaS model. Services that have a straight line of site to a definitive budget owner and can be implemented as a "stand alone" operation for an extended period of time will do much better. 

Does the "service" in SaaS do a disservice to SaaS?

I'm sure not too many of us think any more about the "service" in "Software as a Service" definition. Could it be that this concept hurts SaaS as much as it helps?

Think of the typical list of things companies procure as a service. Electricity, water, telephone services, facilities are all typically procured as a service vs purchased outright. It's not an exciting category to be lumped with - at least in my opinion.

Compare that to the traditional way software has been sold. As an "On Prem" or perpetual license type. If a SaaS company and On Prem company are competing for a sale here's the typical assumption the SaaS provider makes: "Our service has a lower point of entry. Our service is 'pay as you go' which is better for you. Our service allows you to start slowly and ramp overtime. This aligns your costs with your value return in terms of a timeline which is great - especially in these tough times"

That seems pretty compelling compared to the On Prem guy who has to get a big up front license fee. He or she can't discuss all the compelling benefits of paying over time - they need a big up front fee. So here's what they do. They don't discuss it at all. They're not selling a service. They're selling a vision. All they should do is focus on "Once you've paid for this - here's all the things you can do." I think that's a more exciting place to sell. Secondly, that "we align costs with your value" gets re-interpreted into "There'll be no hockey stick value return for your company with that SaaS provider - every time you add someone they'll up your bill!" Here's an interesting example of the sales positioning. Why this is unique to SaaS vs OnPrem I don't understand but you might.

My point is I think SaaS providers tend to view their business model with rose colored glasses. This worries me for two reasons:

• I believe it's a lower common denominator race and not good for the long term health of the software development business
• I think it focuses less on providing the optimum customer offering which is never good

My belief? That SaaS companies should be offering both options. I think it's critical for SaaS to shake off the perception that it's only for the SMB market and/or a defensive play (vs strategic push) by ISV's

"Real World" example of a company turning into a SaaS company

Here's an interesting article I read. While it almost leaves you with more questions than answers I thought it was interesting as it's very hard to find real world examples like this.

Is a recession bad for SaaS?

With the current/looming recession I've been reading a lot of articles about how this is a fundamentally good thing for SaaS. The assumptions include:

• Dramatic change in the macro economic environment will cause dramatic change within organizations purchasing tendencies
• Smaller up front payment requirements with SaaS will resonate well with organizations that are now watching every penny

I'm going to leave the first bullet point for now as I'm not convinced one way or the other. For those interested here is a good reference.

Let's say you're selling a SaaS based offering that helps medium to large businesses. Therefore, you are selling to medium and large businesses. In the name of simplification, we could break this group into two subgroups:

• A group that is being so negatively affected by the current economic recession that they really are facing significant long term survival challenges (the auto industry is the current poster child but there are others)
• Companies that have more than adequate cash reserves but are "hunkering down" for a "nuclear winter" type of scenario

As a SaaS provider you offer a "pay as you go" recurring revenue model. Your competition is an OnPrem traditional licensed type model.

Let's look at that in the context of our two groups:

• If Group A does ANY purchasing the "good news" is you'd likely win the business. But now you're "strong recurring" revenue stream is based upon a pretty questionable foundation
• Group B now faces a dilemma. Do they use more money than they'd like today or do they sign up for more ongoing costs for tomorrow?

You go to your CEO/CFO and say "Can we offer a model whereby a customer pays the majority up front and a smaller revenue stream as we go along?" Your executives are horrified. This is SaaS heresy and attacks the very foundation of why they built the company. Also, the risk is that because you're a SaaS company you're probably "new" and as a group have never managed your business through a down turn but that's another story.

However, let's say you have both in your backpocket. Your CFO might require that you use this new model for Group A and let you offer both options to Group B.

Now the CFO at the Group B companies isn't forced into a tough dilemma. Those that are worried about revenues tomorrow less than right now will be able to choose the pricing scheme that works for them. Those that want the financial burden spread out over time have that option.

To me it comes down to:

• Simply replacing one rigid type of pricing model (OnPrem licensed models) with another rigid type of pricing model (annual recuring fees) is not a significant advancement in choice from a purchasing perspective.

Try both models. Before you object here is another blog I wrote about this very topic.

Justin

SaaS offerings should be priced the same as On-Prem offerings

Why should SaaS offerings from traditional ISV's be priced differently to traditional perpetual licenses? At the very least, I think SaaS offerings should be priced via subscription and traditional "licensed" models. Let the customer decide what they'd rather do. To support my theory let me try and get in front of the objections I'd expect to hear.

• Subscription models are superior revenue models due to their recurring revenues

How many times have we heard this? Yet as Larry Ellison pointed out, “If you look at the leader, Salesforce.com, they don’t make very much money and they’ve been at it for almost 10 years” While many will want to object to anything Larry says he has got a point. NetSuite and others are just passing $100 million. Impressive, but hardly earth shattering.

• SaaS revenue models are more "recession proof"

Well I guess we're about to see now how true this is. The common thought process is "Licensed software is a big up front cost while SaaS is a smaller recurring cost" Let me ask you one question on that. If you think the economy is not great today but you're sure it's going to be worse tomorrow how excited are you to sign up for a recurring cost? A CFO is going to think (in this order) i) Don't spend any money right now, ii) Spend it now if it makes sense for us today, iii) create an ongoing recurring cost that might be 3% or revenues today but could balloon to 5% etc if revenues fall in a recession. You can go for a year without maintenance and support on licensed software in a pinch if you have to. Short of cutting back seats, and thus value, you can't do too much with SaaS revenue (and that's assuming the pricing model is something easy like seats vs say "site traffic")

Thus I'm not anywhere near as confident as most are on the recession proof element to the pricing model.

• With their steady predictable revenue streams SaaS companies are better positioned in the long run to grow and prosper

There's a general rule of thumb when procuring CFO's look at SaaS vs licensed offerings. It's called 3 years. Generally, Licensed fees + Support over 36 months will equal 3 years of the SaaS equivalent offering. Ie $1 million licensing fee + 2 years of 20% maintenance vs $500K per year for the SaaS equivalent. That's great, but that software company with the license fee has $1 million in the next 45 days while the SaaS vendor has (quarterly advance) $125K. It's hard to underestimate the power of having that much more (8x) money in your hands today vs 3 years to catch up and surpass. If we both did 10 deals at the end of the quarter I'd have $10 million in cash and you'd have $1 million. I can show up on your doorstep and offer you 6x revenues for your SaaS company and still have $250 000. You on the other hand are going to have a very difficult time acquiring me. 

To those that argue against my 3 year model along the lines of "Well, you're wrong. SaaS allows a customer to start at a much lower price point and scale over a greater period of time" I say "See Larry's point above"

• SaaS companies need to have subscription fees due to the ongoing costs associated with providing an OnDemand offering

Companies like Amazon and Google are driving cloud computing costs towards zero and thus undermining whatever truth there once was to this argument.The 20% maintenance fees that traditional licensed sales charge are probably fine to cover SaaS support and upgrade costs. (perhaps you could extract as much as 30% to reflect the increased business value of not managing these apps internally and thus earn solid margins on these revenues)

Lastly, what's one of the most commonly documented rationale's for "Old World ISV's reticence to adopt the SaaS model more aggressively? Concern with managing Wall Street's revenue expectations as well as managing sales compensation conflicts. Price them both the same way and *poof* no more problem.

My conclusion? For certain products it's more effective from a technology perspective to offer a SaaS model. However, if there is dogma in the financial model discussions it's not the traditional ISV's. It's the SaaS companies. Offer companies both and if you only offer one offer the traditional perpetual licensing model until you're well established.