Smart SaaS

At Montclare I work with many different types and sizes of software firms that are jumping into the SaaS business model for the first time.   Here are a few tips that I would tell a new client who is looking to get into the SaaS business in 2012.

Think “Whole Product”

A SaaS offering is more than just software, it is also the services to get the product up and running, training, support, the infrastructure and security.

For most SaaS firms, they really view their platform as synonymous with their company’s overall brand, which includes more than just the technology.This brand promise is a product experience that is smooth and consistent.It also takes into account issues like business continuity and being able to quickly restore systems and data after an outage.This also means that SaaS offerings must understand and how to properly manage security and compliance concerns for large, complex customers.  In some cases this promise needs to do a high level of monitoring and even anticipate and correct problems before they occur.

When considering the professional service component of a SaaS offering, there should be extra focus on efficient provisioning and on-boarding of new customers.It is important to make this initial experience quick and easy in order to improve the customer’s overall time-to-value.By combining many customer-facing functions like support, training and service into a Customer Success team is also another popular way of trying to deliver a positive ‘whole’ product experience.

Focus on Adoption and Consumption

The economics of SaaS requires both a high rate of new customer sales combined with a better than 90% renewal rate for the financial model to work.The trick that the really fast growing SaaS firms have discovered is that up-selling additional capacity and cross-selling new products not only increases top line revenues but also improves overall Customer Acquisition Costs (CAC) and business margins.

The objective in any software company should always be to build a satisfied customer-base, but in the SaaS model you can’t stop there, it is important get customers to actively use and adoption the product.When a product is easy-to-use, intuitive, being used every day, and built on a solid platform, then it can become viral.Viral products like DropBox, Yammer and Salesforce.com’s Chatter can throw off high marginal add-on sales, that can boost a SaaS company’s revenues very quickly.This type of product consumption is important for all SaaS company’s even if the use of their product may never go viral.

It’s All About Growth

Many new SaaS firms spend a lot of time and capital building out their products, which makes sense. Often they underestimate the amount of effort and focus required to build a high growth sales and marketing machine.Because it is hard initially to jump start the recurring revenue model, it is important to develop a highly productive sales methodology, usually based on a ‘land and expand’ approach. For the most successful SaaS companies (SuccessFactors, Salesforce.com, Workday), an aggressive Compound Annual Growth Rate (CAGR) is imperative to building a profitable company.  Many of these firms, even though they are large, are still growing at 30-50% per year.

In order to build this sales and marketing engine, it requires a meaningful investment in lead generation, a sales organization that separates hunters from farmers and has a set of metrics that are tracked at least weekly.For ISV’s that are moving to a SaaS model, don’t co-mingle the SaaS and non-SaaS sales teams.Each sales team should be very focused on selling a single type of product or a single function.For example, having a SaaS team that focuses on selling only new SaaS deals, another is only doing renewals or up-selling.

Because products and markets are different, it is important to constantly be testing lead generation, pricing, packaging and sales processes in order to find the best one that works for your business.If something doesn’t work, stop doing it, and pivot to another idea.The best SaaS companies are always testing and trying to improve their revenue generation processes.

Optimize Cost of Goods Sold

Most SaaS executives are focused on their COGS and how best to optimize them.This is why many early SaaS firms use free open source software and Infrastructure-as-a-Service providers to build out their platforms, or outsource components of their business to partners to save money.The best way to optimize COGS is to reduce the number of people required to on-board, provision and operate your SaaS platform.It is better to automate as many of your processes as possible, which not only saves precious capital, but also can often improve the overall scalability of the business.

One the best examples of this type of automation is with the popular commercial SaaS storage solution DropBox [Check out this video].They have built a service that is easy to use, self-provisioning and needs no human intervention.This is why they were able to on-board 40 million new customers during the last 12 months with a net increase of only 7 people across their entire company! This is where SaaS companies can become very profitable and grow very quickly.

Another area that can really impact COGS is related to the 30-day trials associated with most SaaS software.Without a scalable platform that has a sufficient level of automation, the launching, management, tear down and re-provisioning of resources will all be done by an ever growing team of professional services or IT professionals.Best practice is to leverage a multi-tenant platform and automate everything possible.

Strive for Independence

For ISV’s who are either transitioning to or launching a new SaaS offering, it is important to seriously consider keeping the new SaaS organization separate from the main business.I have seen many ‘shared service’ models where different groups share sales, operations, demand generation, services and even support and they experience a lot of challenges.The SaaS business model in many ways is unique and conflicts with most traditional software business practices.

For example, professional services in most software companies is a revenue-center and they are always looking for ways to generate additional projects and revenue.At a SaaS company, the professional services team is doing the opposite.  A SaaS services team is trying to minimize their level of involvement with the customer, and the less services involved in setting up a SaaS product, the better.This would be a difficult group to manage if you have both a revenue quota and are also trying to minimize revenue associated with SaaS accounts.

The other reason I often recommend creating an independent group for transitioning ISV’s is that the overall rate and pace of SaaS companies is quite different than traditional software firms.SaaS firms develop products more quickly, sales processes are faster, deployments are more rapid and this mismatch in speed creates a lot of stress when traditional ISVs try to adopt this rate and pace.

It is also important to continue the care and feeding of the core business and realize that is also a critical success factor.By allowing this type of co-existence you can move at the right rate and pace, while continuing to build and run your core business.

There are many other tips and tricks to starting your SaaS business.  Feel free to email me at kevin@montclairadvisors.com and I have some other materials that can be helpful for those who are new to the SaaS model.