3
The buying habits of software buyers over the past couple of years has really shifted. The way software was sold in the recent past was by promoting its revenue-producing benefits or the Return On Investment (ROI). This changed when the Great Recession hit the broader software market and buyers started thinking less about ROI and more about reducing or controlling their overall operational costs.
Between 2008-2009 this was a natural reaction by most businesses because their revenues began to dry up and they needed to reduce costs, payrolls and other investments in order to survive. This was when SaaS all of sudden made a lot of sense to software buyers because:
- They could try the software before they bought it
- Pay for the software through a subscription, usually out of the company’s operating budget
- Only buy the software functionality they were going to use
- The SaaS provider paid for and managed all of the required infrastructure
- It was possible to get the software up and running very quickly
During this period of time most SaaS companies sold their products based solely on their Total Cost of Ownership or TCO benefits. It was possible to make a strong case around shifting the software buyer’s costs from their capital budgets to their operating budgets, and this was attractive since most businesses were focused on conserving their cash. This is why leading SaaS firms like Salesforce.com and SuccessFactors enjoyed very strong Compound Annual Growth Rates, usually in excess of 40%, even during the depths of the Great Recession.
A subtle benefit that buyers started realizing was that purchasing a software service was that all of the required software support and management costs like facilities, hardware, power and even staff, were no longer needed. So companies could take fixed costs associated with facilities, infrastructure and staff and make them a variable expense by purchasing SaaS. This is a powerful benefit because if the economy is bad then it is easy to dial down the costs and use less of the service and if things get better, then it is easy to add more capacity or functionality. This shifting of fixed expenses to variable expenses continues to be popular among software buyers even now, given the instability in the economy.
As more businesses continue to look for ways to streamline their costs and improve overall agility, SaaS products are a nature enabler but buyers are starting to become more skeptical of blanket TCO savings claims. Smart SaaS firms classify their product’s cost savings and business benefits in more of a tiered business justification framework that allow the software buyers to more easily build their own internal business cases. By structuring costs and benefits in this way they have been able to retain their credibility during the sales cycle.
Here is an example of a simplified tiered cost/benefit structure for a SaaS product purchase that we have used with several of our software clients. Costs are classified into hard costs, or as CFO’s refer to them as ‘real costs’ and then there are soft costs which are more productivity-based benefits. Then there are strategic benefits that are not necessarily cost-based but provide additional benefits at a higher level. Some of these may actually be revenue opportunities or ROI-based benefits.
Hard Cost Savings
- Headcount
- Facilities
- Hardware
- Power
Soft Cost Savings
- Improved user productivity
- Faster cycle times
- Better reporting
- Transactional accuracy
Strategic Benefits
- Move fixed costs to variable costs
- User adoption and engagement
- Improved collaboration
CFO’s at companies that are buying software often follow a similar type of internal justification framework for purchases even of SaaS products. The key is not to lead with an ROI-focused sales approach but more with a lower cost of operations and some additional benefits approach.
Remember that most companies are also looking for ways to free up capital that can be re-purposed towards innovation. In fact, the larger the buyer, they probably have a lot of fixed IT costs and they are looking for creative ways to move some of these frozen capital investments over into new revenue producing projects. As growth flattens out across the economy, all companies will need to come up with new products and services that will create a new demand stream that will increase growth rates. [Think iPad] Leveraging SaaS solutions is not only a great way of reduce existing operational costs, but this type of investment can also act as a catalyst for new innovation and growth opportunities. Is an attractive theme for C-Level buyers in today’s market.
In summary, most organizations buying software today are not very focused on the ROI-types of benefits that were commonly sold during the last ten years. Keep in mind that even a pure-TCO sales approach will be attractive to most buyers who continue to look for ways to lower or control operational costs. The real winning formula to position your SaaS solution in a way that combines the TCO-saving theme with the ability to free up new funds for innovation. This approach is even more potent when the SaaS product can actually be an innovation catalyst for creating new products and services. The good news is that SaaS solutions can be positioned just for cost control (TCO), improvements in operational efficiencies, even increasing revenues (ROI) as well as a catalyst for innovation.
As we enter 2009, I am hoping that the economic environment will begin to improve for technology firms. I realize that very few analysts feel positive about the economy but one thing I agree with them is that companies will have dramatically less capital to spend on technology in 2009. Forrester states that IT spending growth will only be a pathetic 1.6% and Gartner’s Peter Sondergaard, Senior VP of research, thinks that 2009 IT spend could be 2.3% to no growth at all.
What is interesting is that what growth there is, Software-as-a-Service will be one of the top spending market segments according to reports by Verizon and Gartner. The reason for the optimism is primarily because these types of types of technology investments can lower a company’s total cost of running their business. This relates to my last blog post that TCO is going to be the major driver for technology buyers in 2009.
My prediction for 2009 is that this will be the Year of the Subscription. Not that subscription-based business models are anything new, just think about the next time you pay a bridge toll, your mobile phone bill or your mortgage. The reason for my prediction is that companies are now faced with a once in a generation restriction on capital and companies are thinking more about reducing costs and how to make these technology purchases using their operating budgets. With this focus on operating expense purchasing by buyers, this will place tremendous pressure on technology firms that only sell their products through a traditional capital expense model.
Here are some simple tips to get your technology business leverage a Subscription business model:
If you are an Existing Technology company with little or no recurring revenues:
- Evaluate your business for ways to provide new subscription products, services or content to your existing customers.
- Offer a subscription pricing option to new customers that have a capital budget constraint.
- Add a premium support option that can be priced as a subscription upgrade to a customer’s existing maintenance or support offering.
If you are a SaaS company then you should consider:
- Re-evaluate your pricing and packaging strategies to maximize your competitive advantage against traditional competitors. Now is a great time to grab markeshare.
- Focus on customer satisfaction because the only weakness in a subscription model is when your customers don’t renew their contracts. Keep your renewal rates up and look to up-sell at renewal time.
- Be very clear on your company’s recurring revenue metrics; customer acquisition costs, lifetime value of you customers, and customer profitability, to name a few. You should then develop specific plans to improve and monitor these metrics on a monthly or quarterly basis.
Keep in mind that even though this will be a difficult year, but there is always opportunity in a chaotic market for innovative companies. Remember 2009 is the Year of the Subscription.
Remember the good ol’ days of selling software, when you could talk to customers about the virtues of ROI, or Return on Investment? ‘Our new software can cut your costs by 90%, make you more strategic and you will get that raise you were looking for!’
Funny thing, that was only about 6 months ago. Even Software-as-a-Service sales professionals were skilled at ROI selling but now ROI is out and TCO, or Total Cost of Ownership is back in.
The reason for the change is that buyers don’t care about investments or benefits, they are only concerned with reducing and managing costs. So this should be really good news for SaaS providers because their solutions not only provide ROI but clear TCO advantages. Some of these advantages include:
- No hardware required: web servers, application servers or firewalls
- No software required: database, infrastructure or security software
- No IT team required: DBA’s, IT managers, security guys, etc.
It seems like most companies have already thinned their workforces, frozen their budgets and trimmed unnecessary spending in an effort to reduce costs. What you are going to see next is IT Cost Swapping. This is when you start doing a line item review of all of your IT and business costs and realize that your customer is probably paying a huge amount annually for ERP maintenance to your friends at Oracle and SAP and not getting much in return. In a recent CIO magazine article about the upcoming SAP maintenance fee increase from 17% to 22%, a Forrester survey of over 200 SAP customers found that over 85% saw little or no value in these annual fees. So it is a stroke of genius to raise the costs as the economy goes into the toilet, right? Well SAP isn’t alone, Oracle is also planning on a large price increase in 2009 which could be as large as 10%. In fact Oracle said that their maintenance revenue was the most profitable component of their business, that’s because it’s pure profit!
A smart Cost Swap Strategy could involved a portfolio analysis of all of your customer’s ERP software and building a plan to replace older on-premise ERP products with up-to-date SaaS products. The advantage with this approach is that your customer can get the benefits of modern software, while actually reducing their overall IT cost structure. For more Cost Swapping ideas, drop me an email at: kevin@montclairadvisors.com.
Back to top