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
Soft Cost Savings
- Improved user productivity
- Faster cycle times
- Better reporting
- Transactional accuracy
- 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.