Software as a Service (SaaS) has arrived. Over the last decade, early SaaS companies like Salesforce and NetSuite paved the way by changing the way that software was purchased. We recently measured that 80% of our target customers (U.S. school districts) preferred subscriptions to traditional software license models.
As an education technology company, our leap from perpetual licenses to SaaS was fueled by both opportunity and survival. The movement towards subscriptions in our market is driven by a variety of customer considerations including risk aversion, budget predictability, and implementation flexibility. This is not surprising given the large percentage of software licenses going unused in public education.
We are two years into our transformation and have discovered that success requires not only a new set of values but also a healthy balance of planning, patience, and optimization. Below are some of our key takeaways from the experience.
#1 – Develop a roadmap with benchmark milestones
Transitioning to a SaaS business is a big undertaking, and one that will likely require several years. First, develop a roadmap that outlines a realistic financial mix over a timeline. For example:
This is a critical step for several reasons. First, outlining the goals over time will enable you to then align the go-to-market strategy with those objectives. For example, you could start by just offering a portion of the product line as a SaaS while maintaining the rest as license, or SaaS only for deals of a certain size, or only in certain geographies. If your business is transitioning completely to a SaaS then the roadmap should also define when the transformation is “done” and when end-of-life for the existing sales model will occur.
Second, developing a collective understanding of the plan will empower leaders across the organization to make decisions that are in alignment with that timeline. We learned that by having clear milestones throughout the first year created a collective sense of urgency and helped identify some early issues.
Another reason to develop a roadmap is for cash flow planning, which brings us to the second key takeaway.
#2 – Create a realistic financial plan
Instead of chasing large upfront deals, SaaS companies bill on a monthly or annual basis with the goal of extending the average customer lifetime value and having more predictable cash flows. The transition time period itself, though, can be a tough one to weather financially if not done right.
In our case, revenue generated from a SaaS customer in one year is about one-quarter of that produced by a perpetual license customer. One of our colleagues once referred to the ‘high’ of the upfront enterprise cash and revenue recognition as ‘crack cocaine’—it feels great (and looks great on the top line), but it isn’t necessarily healthy for the business in the long run. This trade-off between large up-front cash versus smaller cash at periodic points over time is one that needs to be well understood, communicated with stakeholders, and planned for in advance by conserving cash, decreasing expenses, exploring financing options, or other measures.
#3 – Align incentives with your roadmap
In our case, we ultimately found that two levers drove the tempo of our transformation: the compensation plan of our sales team and the relative pricing between our perpetual license and SaaS offerings. We intended to make our transformation more gradual, but what occurred instead was an almost overnight “flip” in our sales mix when we adjusted both the sales team’s compensation plan and the pricing at the same time. While it was the direction we wanted to go, the pace of the transformation outpaced our expectations and our plans.
#4 – Embrace the responsibility for customer success
Becoming a SaaS company means that your customers are making a purchase decision every renewal period. Customer expectations are higher with SaaS, and the value they are getting must be proven out constantly.
A shift to SaaS means a shift in the vendor-customer relationship. In the days of license software sales, the responsibility for success was on the customer. With SaaS, because customers are making a purchase decision every time they renew, the onus of successful deployment, implementation, and usage is essentially now on the vendor.
That shift in responsibility from the customer to the vendor required, in our case, many changes across the organization. Automated renewal letters for nominal annual support fees were replaced with several “live” touchpoints from account managers throughout the year. Software releases had to be more frequent to meet customers’ increased expectations of continuous product enhancements and perception of value. Customers’ usage of the software had to be monitored and systems created such that if a key customer’s usage fell below a certain level, additional support, professional development, or training was triggered.
Implementing all of those changes required not only new operations, but also a redefinition of core values and a shift in culture, which leads us to point #5.
#5– Reshape culture around customer success
Building a culture that prioritizes customer success requires that employees become more aware of and sensitive to customer needs. Sixty-five percent of software licenses go unused in education and that figure is as high as 90% in other enterprise software markets. In SaaS business models, low product usage is often the root cause of poor retention rates. Companies that are successful in SaaS are vigilant about monitoring customer usage in the first month, quarter, and year and make the necessary investments to bolster adoption.
#6 – Let go of customers who no longer fit your model
Perhaps the hardest realization one makes during a SaaS transformation is that not all current customers will transition to your new offering. Some customers may prefer their own infrastructure, rely on heavy customization, or simply have needs beyond your new offering. Some of these customers may be your biggest advocates and closest friends. Letting go of them (and the revenue they bring) will be hard.