In 2014, IDC estimated that more than one-quarter of enterprise applications would be offered via SaaS model by 2018, up from one-sixth in 2013. According to Transparency Market Research, the overall SaaS market will reach $164.29 billion by 2022. Many software companies today are in the midst of entering the attractive, yet very different business model. When planning for the investment, there are some critical aspects software companies must consider that are easy to overlook.
Many of the executives that I work with cite the factors outside the SaaS’s technology as being just as important, if not more important, to the success of a SaaS launch. A good place to start is to look at what I call the 5 P’s of SaaS.
Determining what features will be included in the SaaS offering can be a painstaking task, but very important to the success of the offering. Typically, software companies that are adding SaaS are looking to move down market to small and medium-sized businesses that don’t require a long sales cycle. These market needs are more basic and users can sign up for the service with minimal cost of sales.
Determining what the SaaS “does” should be calculated by interviewing your current customers, getting input from consultants and reviewing competitors. A customer advisory board (CAB) can be formed to formalize the process of gathering their needs and thoughts on new product features. The use of SaaS consultants can also be leveraged for 3rd party input on what should and can be built can help a lot. Consultants can also provide insight as to what future technologies will exist that may influence your industry and your SaaS. Both customers and consultants can also provide insight as to what competitors are offering, at a high level. It can be hard to get exact details because competitors’ inventions are proprietary, but understanding the basic competitive landscape will help craft your offering and differentiating value to the market.
Pricing is hard because of all the inputs that go into formulating it. To start, understanding your customers and your competition can go a long way to determine the price.
When looking at your customers to determine price, ask yourself what value you’re providing to them. Or, what’s the value of the value your SaaS provides? You can simply ask your customers this question. You should also ask your customers what they’d value in a SaaS more. Is it number of named users, amount of storage, functionality or other? This will help determine what exactly you’re basing the pricing on…and how much you’re charging.
Another major input is competition. It’s important to understand who you’d be considered alongside and how your functionality and price stacks against them. One should, again, leverage their customers for this. Another tactic might be to simply sign up for a competitor’s solutions that’s readily available. Understand your customer’s options.
The reality is that you’ll need to experiment with the reoccurring SaaS pricing. Gather the data on new customers gained per time period and their average total lifespan as a customer and then refine the pricing.
If you have channel partners and/or resellers, you’ll want to rollout a comprehensive communication plan on how they can react to the changes to their revenue cycles and offerings.
Channel partners are an important component to increasing the lifetime value (LTV) of your SaaS customers. Your customers will need the expertise of local partners to maximize their investment. That investment, of course, is spread out incrementally each month instead of a large 1 – 3 year contract, as typically before. The change in the way your partners are paid will be of concern to them, but explaining the recurring model to them and it’s benefits should ease some anxiety about the change.
Partners should be encouraged to shift their services from initial implementation packages to more strategic, more comprehensive customer success services. They can become trusted advisors in approaching the cloud in general. They can be of assistance in explaining to customers the benefits using your SaaS offering’s premium features, which is the best way to mitigate churn and grow recurring revenue for both your company and your partner.
A standardized playbook can be published and sent out to partners on the changes to accounting, service offerings and required employee skills, followed up by partner managers on how each specific partner could implement company-specific plans. This type of care ahead of launching your SaaS will retain your best partners and your best customers.
Customer Acquisition Cost (CAC) will be at the forefront of your mind when setting marketing budgets. Knowing how much it costs to acquire a customer will help you set the parameters around what SaaS features will be required to figure out what price to charge monthly. Typically, the SaaS model’s customer acquisition is done through digital media, so hiring a seasoned digital marketer with SaaS customer acquisition experience will be vital. Senior marketing executives should also receive training on the terms and concepts within digital marketing because it’s very different than traditional sales and marketing media and techniques.
Analytics will be crucial to use and leverage to keep the CAC as low as possible. The monthly media spend will be expensive, so you’ll need to become an expert at your acquisition funnel to optimize and justify the cost. Web analytics professionals should be hired along with digital media purchasing experts. To tie the two roles together, a mid to senior level digital marketing manager should be also be hired.
The messages in promoting your SaaS will most likely be very similar to your legacy products, with the difference being the relatively low cost to get started, low cost of maintenance and the ease in which your customers can start realizing value.
Who will build your SaaS solution? It’s an important question. In developing SaaS, a software company can double their developer headcount while maintaining their legacy solutions. Finding a development partner will give you the talent and capacity flexibility you need to build the system without firing employees after the SaaS project is completed.
Software companies many times find hiring a consulting company for the SaaS build to work as a team with their development staff as a good solution. The combined teams should work on a day to day basis throughout the entire lifecycle, from requirements gathering to UAT. This provides the consulting company, or vendor, with the subject matter expertise and the software company, or client, with training on new technology at the same time. When the project is finished, a software company’s staff can many times then support the SaaS and the maintenance on legacy solutions given back to the consulting company. By finding a vendor who will act as a partner in helping you bring a SaaS to market, you can mitigate the total overall cost, train your employees and bring it to market much faster with higher quality.
When you have the business fundamentals nailed down above, your functional requirements and architectural design decisions will be more swift and accurate because your technical team will have more context surrounding what they’re helping you to achieve.
Adding SaaS to an existing software offering can be a great way to add new, high-growth revenue streams to your business. The fact that it’s a fundamentally different business model creates changes outside the technology mix which must be addressed to give the initiative the greatest chance of success.
Chad has over 10 years of experience in the application development industry co-innovating with technology pioneers to increase market share. He does this by facilitating complex technology discussions and providing practical, risk-contained solutions to accelerate innovative roadmaps. His passion for what he does stems from his belief that building technology that solves problems, within the constraints of time and resources, is the ultimate expression of creativity. At home with his family, his passion is being an artist and the father of two active children. Chad has a Bachelors of Science in Design, Marketing, and Rhetoric from the University of Minnesota.