By Dev Raman and Neha Kulshreshtha Kapoor
SaaS as a delivery model, essentially is designed for and targeted towards individuals or small business users, to its inroads as an effective tool serving global corporations for their critical applications. We look at what SaaS companies need to do if they wish to consolidate the inroads they have made into the Enterprise segment.
The Small and Medium enterprise (SME) segment, with its simple needs and processes had hitherto shied away from technology, finding it either too cumbersome or too expensive. SaaS removed those barriers to entry with its timing of the expense, shifting the budget from Capex to Opex, limiting technology hassles for the SMEs and lowering the total cost of ownership (TCO) of technology.
Thus, the focus of SaaS companies was primarily around new client acquisition, while the challenges were centred around the management of the multitude of customers. However, given the number of clients, logo churn did not have much impact on the monthly recurring revenue (MRR).
While SaaS companies continue to gain foothold within the SME market, they also began to tap into the world of large corporation. As Enterprise customers contemplate between On-Premise and Cloud delivery models, let us briefly consider the benefits of On-Premise Delivery- traditionally the go-to route for large corporations.
The Pros of On-Premise Delivery:
TCO (Total Cost of Ownership) vs Renting: Paying per user based fee or monthly recurring fee over a period of time, often ends up being much higher than outright purchase of license. With easy access to Capital at relatively low costs, large enterprises (Enterprise Customers) often prefer an outright purchase of a license.
Business Complexities: Enterprise customers are wary of hosting their data on public clouds (on-going cyber hacks/leaks pose constant threats). Besides, there is debate around who owns the data.
Vendor Life Expectancy: There is an inherent risk of business operations coming to a standstill in the event that a SaaS vendor goes out of business (its tough building profitable SaaS businesses!).
Despite the benefits of On- Premise Delivery, the arguments in favour of SaaS are becoming very compelling. While large companies may have access to huge capital and investment in expensive servers may not be an issue for many, the prudence of an asset light, cloud hosted technology is hard to ignore.
Keeping Up with the Times: The business environment, today, is strongly influenced by the way we use technology on a personal level. As consumers, we want the latest version of an app or frequent updates at no additional cost. We, especially the millennials are a ‘renting’ generation and cannot handle having to work with an outdated product or older model of technology. This shift towards the latest and the most updated will see a decline in preference for On-Premise delivery models.
Flexibility to Adapt: The digital era has ushered in an onslaught of voluminous data. Furthermore, the constantly changing business environment and fierce competition demands greater agility from enterprises. The possibilities presented by leveraging cloud and data together are immense. Storage elasticity and pay-as-you-go models provide Enterprise customers with an opportunity to explore these possibilities effectively and the ability to respond to the changing dynamics quickly and efficiently.
SaaS Favours its Customers: Another major positive aspect for a SaaS customer is that the SaaS vendor is always in a ‘sales mode’. An unhappy customer can move to an alternate vendor at any time; thus, the balance of power in this vendor-customer relationship, remains with the customer at all points. On the other hand, when it comes to a license model, it can become prohibitively expensive to discard a technology once it has been purchased or to change a vendor. The balance of power, in this scenario shifts to the vendor, once the sale is concluded. This is not a good situation for any customer to be in.
As more large enterprises experiment with cloud-hosted platforms, it appears that the future belongs to SaaS.
SaaS and the Enterprise Customer:
Enterprise customers are seeking solutions for problems they encounter across their ecosystem. These problems may be due to the sheer scale of operations that command a high degree of automation or due to the nature of their customers. They also seek cost efficiency. The purchase decisions are invariably influenced by recommendations from industry peers where use cases have been established at scale or through internal recommendations by colleagues/employees.
There are also concerns around replacement and opportunity cost of choosing a solution and the time needed to go live. These businesses have made investments in technology and hence want solutions that are compatible with or can latch on to existing legacy systems, thereby causing minimal disruption to daily operations. They do not want to deal with multiple vendors and prefer a single vendor who can offer them an end-to-end solution tailored to their needs.
The rules for SaaS vendors to sell to Enterprise customers remain largely similar to an On-Premise license sale. However, the product strategy needs tweaking. SaaS players are working to address the needs of Enterprise customers by offering staggered pricing (no more freemiums), deeper engagement with the organization through a solutions-based approach, combining tech-stack (owned and third party) and collaborating with partner networks successfully. A workable approach for SaaS businesses selling to Enterprise customers could include the following:
1. Identify the problems
2. Prioritize the problems
3. Build Solutions
4. Sell to Customer
5. Retain and back to Step 1.
Since the promoters of SaaS companies are often ‘techies’, the temptation to build everything possible into the technology is immense. The mindset is that the more tech you build, the more you will sell. The flip side of this approach results in the company spending all its time and resources into the building the platform, thereby leaving nothing for the ‘go to market’ phase.
The outlook should be and must be to ‘build what you can sell’. It is prudent to prioritize problems/features, select key problems to address and lock in a few paying customers through a modular sales approach. The best hook for a customer is a vendor who has a solution to their key problems.
From then on, it is important to maintain a fine balance between sales and product development, so as to ensure that you get the best return on your investment.
Theoretically, the price should increase to offset inflation over time. However, due to competition, price often come down and a modular sales approach can help in future price negotiations.
Selling SaaS: The common foible is to assume that a sale can be made without visiting the SaaS customer. The sales process for SaaS companies is like any typical enterprise sales process. It involves generating leads, attending multiple meetings at various levels, making detailed proposals, going through lengthy negotiations with some POCs thrown in and finally, the art of closing the deal. The earlier a start-up understands this process and makes the necessary capital investment to build and grow it, the higher are its chances of success. It is useful to remember that the technology the Enterprise customers buy is rarely the best that was built; it is usually the one that was sold to them most effectively.
Retaining Customers: Enterprise customers require a high-touch engagement to ensure that they are using the product and to avoid churn. MRR churn impact is high when an Enterprise customer is lost. High engagement also allows for further upsell and cross sell opportunities.
Investing in SaaS: The financial market likes to generalize that the SaaS businesses should have a 70% + GP margin and 12 months CAC recovery. These metrics are oversimplified. As SaaS becomes ubiquitous, business models will be manifold and will not match up to such generalizations. Furthermore, these kinds of generalizations lead to a disinterest in investor funding for more evolved SaaS models and allows incumbents with large cash resources to gain a larger market share.
While the SaaS industry will overcome challenges to varying extents, it is also imperative that the investors recognize that more complex engagement models will exist and can be funded profitably. On the performance front, tracking Monthly Recurring GP (MRGP) as the base metric, instead of MRR will neutralize the impact of GP in evaluating SaaS companies. This will allow the companies to bundle the tech platform with differing extents of services based on the needs of the customers. Cost of account management should also be captured in MRGP.
Average revenue per account versus is a better metric than a unit base metric, and a growing account indicates increasing relevance and customer ownership. Since the number of users can be expanded easily, per unit revenue becomes less relevant as long as the LTV/CAC is healthy.
Sales cycle will be longer, hence tracking customer acquisition costs over a period rather than the previous or current month’s costs is recommended. It is preferable to track the cost as a moving average over a suitable period such as three to six months.
Conclusion: we have made a case for why SaaS for Enterprise customers is here to stay. We have pointed out the benefits of SaaS and provided a roadmap for SaaS businesses in terms of how to address the needs of large corporations and establish their services within that environment. We have also offered an overview for investors to allow for innovation and evolution of the SaaS delivery model. What started as a niche service to meet the needs of individuals/SMEs has now gone mainstream. SaaS is no longer a blip but an enduring reality.