SAAS Services Revenue Riddle - 'Services' hold equal if not more stake in success of SAAS

SAAS CEOs are always on the prowl for one thing for sure and that is about how do I increase my recurring revenue and profitability. It’s no different for other CEOs but more so for the SaaS folks who are on the run to ring the bell on wall street. I am not going to touch up on the usual obvious avenues but  instead  talk about ways and means of recasting and optimising already existing sources of revenue to bolster the recurring Revenue and profitability. Recurring is the key to profitable sustenance of the SAAS  business model.

Professional Services are imminent but SAAS companies typically shy away from 'Services' in their balance sheets for obvious reasons as they tend to dent margins. To note, SAAS itself expands to 'Software as a Service' and 'Service' holds equal stake in success just that they costs more and that’s the challenge.  If services are streamlined, canned and optimised they can be predictable and recurring sources of revenue turning the very challenge into opportunity.  Following are the plausible ways of achieving the same.

Cost of customer retention should be part of cost of customer acquisition

 Services are eyes and ears at customer site and nothing else can provide more genuine visibility to customer. Firms spend huge dollars in customer acquisition and happen to weigh down the fact that customer retention, upsell and cross sell year on year is as good as acquiring a new customer. Best way to ensure customer retention, upsell and cross sell is to ensure paying extra attention to services. Paying extra attention to services means compromising a bit on already lower Services margins but it would be nothing when compared to dollars pumped into customer acquisition. NPS will be a bonus and it will also have a positive cascading effect on new customer acquisition.  In every opportunity, Saas firms should look at recasting considerable portion of services cost into customer acquisition cost because that is eventual output anyway if services are well executed. This move will help in lowering the dent caused by Services margin, improve NPS, retain the customer securing ARR ,create opportunity for upsell and cross sell and also help in firming up new leads.

Identify Services  which can be run as  JDPs

 Services by nature are hard to be limited in scope, they tend to expand. Expanding scope of services means expanding dents in margin by services. On one hand, it’s not easy to put a hard stop to services for the customer and on other hand can’t afford to have margins pulled down. One best way out of this tricky situation is to keep a watchful eye on the services being delivered to customer from the holistic perspective and just not from that particular customer and if it makes sense then Joint Development program (JDP) should be the way to go. JDPs not only create a unique value proposition for both the customer and the Saas firm but also  provides an option for the SaaS firm to turn the services cost of the JDP into R&D or Engineering investment and the rest finance geeks would know how it will bolster the margins and provide intangible benefits.

Productising Value Adding Services

 Services are imminent and continue to thrive in SAAS business, it’s just that they typically morph into 'speciality services' like deployment services, support Services, consulting Services, expert Services, governance services. Good news is that they are more organised and in fact more predictable.  Being more organised and predictable paves way to productising them and ensuring better control on margins for those services. These services can be easily positioned as supplementary products right in the initial sale its self as the value they add to those products is obvious and seamless.  It makes it a win-win situation for SAAS firms and customers as it will be a easy sell with high margins for SAAS firms and value offered upfront to the customers. Few of top notch SAAS companies do this successfully and SAAS companies need not wait till they gain a market share to do this, in fact they can get going with this approach to firm up their market share.

Delineating App support from Services

 App support is predictable in terms of revenue, in terms of subscription, its relatively high margin compared to usual services and best part is its recurring. It is something no customer would shy away from and is typically signed as part of the services because it is aligned more with services. Given the attributes of app support especially the predictable recurring revenue part, it definitely deserves its own bucket. App support revenue bucket needs to be accounted separately from services and aligned with license revenue which not only improves the Subscription revenue and margin but also makes it easy to manage. Key is that this delineation should start right at contracting and the rest follows.