The Secrets of SaaS

Software as a Service is a driving force for disruption – a way to innovate at the speed which customers and the market demands. So how can companies with a traditional software go-to-market motion make the switch, and capitalize on all that SaaS has to offer? What’s the secret to succeeding in a SaaS world?

As the CEO of a 100% percent SaaS-driven, born-in-the-cloud company that was bought by a global technology leader who is constantly evolving and optimizing their business, I could preach the benefits of SaaS ad nauseam. Here is a quick list:

• Velocity. If you decided to set up a new office today, with a new team, it may well take more time to assemble the chairs than it will to provide the IT. With an internet connection and a credit card, an entire business can be given access to cloud-based productivity, CRM, finance and storage tools before lunch.
• Agility. Adding new tools becomes frictionless. There’s the opportunity to test alternatives and find the best fit for each task and integration with the overall business. If a specialist tool doesn’t work as well as imagined, then swapping it out for something different is easy: organisations are far less likely to be locked in to particular vendors, having paid a large up-front license fee.
• Freedom to innovate. There’s an old technology maxim, “Fail fast, scale rapidly.” With SaaS, the business can concentrate on what it actually does. Buying, provisioning, running and maintaining heavy infrastructure can be left to specialists in their data centres. User support also becomes simplified since everyone’s running the newest version of the same systems. IT becomes a strategic asset for growing the business, as opposed to a cost-centre.
• Cost. Businesses very frequently prefer to face operating expenses over capital expenses. The expense of on-premises data centres and up-front license commitments are difficult to swallow if you aren’t very certain of your organisation’s profitability over the time those arrangements are expected to serve the business. Monthly fees, in contrast, allow a business to scale their provision up or down in response to the commercial realities of the moment.
• Collaboration. In order to scale at pace, cross functional interlock becomes a must. SaaS both enables collaboration and makes it critical to the success of your business. The benefit is that you get a company without siloes, in which every department is high context and high performing.

Everyone’s a winner?

The software market has embraced SaaS irrevocably. Companies reliant on large, up-front license sales are sitting on the wrong side of history – or have a niche that cannot effectively be replicated through cloud services. Applications that require zero latency, have intensive local hardware demands or have very specific compliance directives attached to them might remain on-site licensees for the time, for example. In other cases, if it’s not SaaS already, then it either has a hybrid model or soon will be.

This customer acceptance of SaaS is, of course, the largest advantage for vendors themselves embracing the model. It is easier to overcome resistance to a £30 monthly fee than it is to a £1080 three-year license, so sales are likely to be more frequent and sales cycles, unless you’re in a very crowded sector, are likely to be shorter.

These smaller sums of money also provide multiple opportunities for expansion. The lower cost of entry means customers with small budgets, who might have considered your product out of their price-range, will be tempted to dip their toes in the water. Then, if your customer is successful using your tools, then they may want extra seats soon. Perhaps there are additional, complementary services to offer, or an enhanced support package? Offered in terms of micropayments, the acceptance rate again becomes higher.

Next, possibly a counter-intuitive point – the levels of attrition for SaaS products is not nearly so high as you might imagine. Humans are hard-wired to being averse to losing things they already have. Studies show that losing something that made you happy hurts about twice as much as the increase in happiness gained from the same thing in the first place. So long as your service has some utility, people won’t want to lose it. The ability to walk away from a SaaS offering is a good reason to get started, but the actual likelihood of people doing so is much lower than they think. This inertia isn’t something to depend upon, though, which brings us to our next point.

Metrics at Your Fingertips

While we’ve stressed the commercial advantages of a SaaS business model so far, doing this well and creating a long-term business isn’t just about selling subscriptions and waiting for the money to roll in each month. It’s about using those advantages to direct investment into the service, driving up loyalty, and turning users into fans.

Creating and maintaining a SaaS product produces the opportunity for a very different relationship with customers than traditional markets. Historically, developers created a product, shipped it and moved on. If they were aware of how their customers used their products, it was often in a very piecemeal way, or through a piece of very deliberate research.

SaaS demands customer intimacy. Part of that comes from easy access to key information: on a daily basis, here are some of the KPIs I check: customer acquisition cost (CAC) ratio, direct customer MRR (monthly recurring revenue), channel partner MRR, MRR by region, annual gross churn, year over year quarterly ARR growth, cost per lead, and Days Sale Outstanding (DSO) – which I then compare to the SaaS average, 76 days. Across the industry, the annual SaaS survey by KBCM Technologies (formerly Pacific Crest) is the gold standard for benchmarking and provides a valuable yardstick by which SaaS companies can metric their own performance.

Having this data at my fingertips is invaluable. It embodies the agility which all businesses crave, and which is a primary driver for SaaS transformation and growth. Any good business puts their customer first…if you have a company culture code, I’m willing to bet “customer focus” is one of your core tenets. But SaaS transformation takes this a step further. It requires customer intimacy: knowing what your customers bought, why they bought it, and why they renewed (or didn’t) so that you can constantly provide them with even better value.

Just think about how well Netflix knows you. It sometimes knows what you want to watch before you do! Now consider how much convenience this adds to your daily life.

Conclusion

The ‘service’ part of SaaS can sometimes be misinterpreted as another word for ‘product’: in such a case, you’re giving customers the same thing, but charging a monthly fee instead of an up-front license. To do so would be to willingly be blinded to the greatest advantage of SaaS for vendors – the opportunity to give your customers exactly what they want.