A Practical Guide to Transition your Business into the Cloud – Pt.2
Martin Moran, Executive VP Global Selling Services, ServiceSource
In part one of our series we looked at the challenge of cloud transformation, and asked the question of whether traditional technology companies are ready to become successful SaaS enterprises. Here we explore what a successful SaaS company looks like in our new cloud economy.
New business models and changing mindsets
The cloud throws a sizable monkey wrench into an entrenched business model – and culture – that’s comfortably thrived for over two decades. In a premise-world, customers buy hardware or software and receive ongoing support from the IT vendor through yearly payments – based upon typically 18-20 percent of the list price of their total spend.
In today’s pay-as-you-go, cloud, or subscription economy, companies focus less on selling discrete “things” and more on gaining longstanding customers and recurring revenue. IT vendors aren’t the only industries and companies affected by this shift. Companies such as Netflix, Spotify and Zipcar are redefining how entertainment, music and rental cars are consumed.
Realigning and reorienting to a new business model creates significant ripple effect across a company. As seen in Figure 1, the business drivers for a subscription or cloud model are markedly different than traditional premise-based hardware and software.
Figure 1: Renewals vs. Subscription business challenges
Upon initial sale of a solution, premise-based software /hardware vendors move to the “next big opportunity” and rely upon their renewal revenue stream – which is typically the lifeblood of the earnings model. This model is characterised by consistency, high profit margins and aligned with key customer satisfaction metrics. Vendors will offer varying levels of service associated with upgrades, bug fixes and support in return for a yearly annuity payment from the customer. Typically, IT vendors make 40 percent of their revenues and 40 – 50 percent of their profits from hardware and software renewals.
In a cloud/subscription model, preventing churn – not new product sales or renewals – drives the business. Since companies can easily swap vendors in the cloud, SaaS providers are always at risk of imminent replacement. As such, subscription models must demonstrate value – early and often – and drive increased adoption. End-users that derive real utility and value from the cloud service become engaged customers and open to additional functionality provided by upgrade modules.
Even across SaaS companies, differences managing churn exist (see figure 2). For example, enterprise SaaS companies providing ERP and CRM capabilities, the primary challenge is managing eventual churn over an extended period of time, requiring deeper discovery into adoption and utilisation rates. For the utility SaaS vendors providing lightweight services such as collaboration, immediate churn is the primary focus.
As such, the utility SaaS vendors require immediate utilisation and segmentation analytics combined with more frequent customer touch points. To maximise recurring revenue with a focus on preventing churn, SaaS vendors are now faced with a host of unique challenges not typically seen within a premise-based world.
- Responding to a more demanding customer base: Premise-based customers have invested a lot in time and money in their hardware, and software deployments – swapping out vendors also takes significant time and expense. Contrast this scenario with the lower switching costs and reduced time associated with a SaaS deployment. As a result, SaaS providers must demonstrate continuous innovation and rapidly respond to customer needs.
- Focusing exclusively on adoption: For a SaaS company, closing the sale is only half of the battle. To protect the recurring revenue stream associated with any new sale, the SaaS vendor must now ensure frequent utilisation and value-recognition from the customer.
- Gaining more insight from the customer base, more often: SaaS applications allow vendors to capture more data on end user. This day-to-day data becomes a strategic component to manage the customer relationship and associated recurring revenue streams.
- Using data to be able to predict churn before it happens: Using customer data, SaaS vendors need predictive analytics and insight. With an accurate picture of the customer base – including “early warning” systems when customers are unhappy – SaaS vendors can better prevent churn and attrition while maximising recurring revenue.
In our final blog we will look at how to successfully transform, compete, and succeed in the Cloud – from fostering a new culture, proper data management and best practices.