Smart SaaS

I was listening to an interesting panel discussion at a recent SIIA show in San Francisco that a very good panel:

Joe Talley, Partner at Deloitte who was the moderator; Ken Goldman CFO at Fortinet a large privately held firm and former CFO at Siebel; Sandip Gupta, President, NetMagic a profitable private company; Jeffery Kuhn, Managing Partner FLG Partners, a CFO advisory firm; and Bill Soward, CEO at Adaptive Planning.

Here were some of the interesting tidbits I picked up.

General perceptions on the panel of the economic outlook were cautiously optimistic for the SaaS market.  Adaptive Planning just conducted a survey of financial executives in the last 60 days that stated that these buyers are more pessimistic about the future than they were at the end of December.  A lot of that pessimism was due to the lack of marketplace visibility, challenges in hitting quarterly sales targets and future cost reductions.

Important Business Metrics

Others felt that SaaS companies are faring better during this recession because of the importance of taking a metrics-based approach to running their businesses.  Key business indicators that need to be carefully monitored include:

MRR – Monthly Recurring Revenues.  Are they predictable? Have they been consistent? Are they shrinking or growing? These are all important MRR trends to monitor on a monthly basis.

Churn – The percentage of customers who don’t renew your software service.  This is a critical metric because no matter how effectively you sell, if you are losing more than you are selling it can be impossible to reach profitability.  Another Churn component to keep an eye on are if your Churn or Renewals percentage is consistent but your overall number of seats or dollar amounts shrink.

Renewals – Percentage of customers who renew your service.  See above.  Another important indicator is if customers are renewing for multiple year terms, this can save your firm precious resources annually to renew your customers.

Cashflow – How much cash are you generating on a monthly/quarterly basis.  This is vital in modeling a future path to profitability as well as effective expense control.  Cash management is really important in this environment especially for smaller firms because VC funding is very difficult.

Another good point that was made, is that when times are tough, many smaller firms will take on debt when cash is tight.  The panelists felt this was a very bad idea and that pursuing debt makes it harder to run a business in a downturn.  It is a better idea to think about ways of selling more services, software or content to your existing customers

Communications

I agree with several of the panelists that one good way to improve renewals and reduce churn is to over-communicate with your customers.  During the last recession, many software companies went out of business and your customers are nervous unless you are a large publicly traded firm.  This type of communications strategy is especially important with large customers who might provide most of the MRR for your company.

In addition, this approach is also applicable for your employees and investors as well. Opening the lines of communication, good and bad, will calm everyone down and make it somewhat easier to manage these key relationships.  Talk about corporate goals, KPI’s and several panelists said it is important to practice empathy.

Changing Sales Environment

The recession is definitely changing software buying habits.  Customers are now more attuned to buying a subscription rather than an upfront software license.  Part of the reason for this is that capital is really tight, and your customers are trying to manage their cash carefully.  Some firms, like Adaptive Planning, claim to be able to collect up to 12 months of cash upfront at the time of their deals being signed.  This is a good best practice because it provides much needed operating capital for the SaaS firm and it also can be a way for customers to get up to an additional 5% discount on their deal for a 1 year upfront payment.

The panel agreed that customers were buying fewer seats, training less people and looking at longer roll outs.  The deals tend to be a little smaller but deals are still getting done. Because SaaS deals are usually handled as an operating expense, it may be possible to get deals done without the intervention of the CFO.  But there are still many deals that require not only the CFO to sign-off but also require the CEO and even sometimes the Board to approve the deal.

Customer Acquisition Costs

CAC or Customer Acquisition Costs, is another metric that is important for SaaS companies to monitor.  These costs during the recession have also risen.  Even though growth is not viewed as important during the recession as cash conservation, it is an ideal time to take share from competitors.  This is why many firms are looking at extended trials and even giving their software away to seed their pipeline with future deals that can be harvested as the recession ends and companies start buying again.

Other Marketing and Sales Ideas

Think seriously about shifting your model from an enterprise, field sales orientation to more of a tele-sales approach.  Continue to do lead generation and automate your processes, because your sales teams still need leads.  Cutting out your lead generation activities to save some near term money can cripple your company later on.

Know who your real sales performers are and upgrade those who are not performing.  There are a lot of talented people available in the market, now is the time to improve your team.  Re-organize your sales team to be leaner, more focused and effective.

Regional seminars can be very effective.  Partially because there are too many webinars but also because people can travel anymore but might want to get out the office to see you in person.  It is also a way for the potential customer to see if you and your company are for real.

What I took away from the panel is that if you manage your SaaS firm by monitoring these important Key Performance Indicators and are decisive about making decisions, today’s SaaS firms will emerge from this recession as not only survivors but winners.