One of the key issues that concerns investors and management teams alike vis a vis the SaaS business model is its potential to consume a large amount of capital until finally reaching profitability. Many people have written about this topic, including me.
SaaS companies are typically built upon a stream of relatively low cost subscription licenses, paid out monthly/quarterly/annually — even multi-annually. Unfortunately, for the vendor, the subscription model usually generates far less up front cash than a traditional ‘perpetual license’ software model. But, over time, the compounding effect of the SaaS model can build into a nice annuitystream — provided churn rates are minimized.
It is this up front cash differential that is the primary appeal of the SaaS model over the traditional software model with customers. However, this differential is also what makes the model vexing for the SaaS management team and the investors.
If we examine the income statement of a typical SaaS company, we find that the operating ratios are not that disimilar from a traditional software company that uses a perpetual license model. Both require similar sales, marketing, engineering, SG&A, etc expenses. However, the SaaS company has the additional burden of absorbing the expense of delivering and managing the service.
The compounded problem of less up front cash and additional expense can make the SaaS model a challenge for the vendor. Therefore, in order for a SaaS company to be successful it must be very efficient in how it designs, builds, markets and sells its service.
Also, while the operating ratios of both models may appear to be similar there are some fundamental differences in how each generate revenue. In a perpetual software license model, revenue is a function of sales capacity. That is, revenue generation is driven by the number of fully onboarded and trained sales representatives. In contrast, SaaS revenue generation is a function of lead generation; sales capacity should only be added once it is determined that sales will be unable to keep up with total lead pipeline generation.
In a traditional software company, lead generation typically comes from 3 primary sources: sales, marketing and partners. We can debate the ratios but basically a traditional software company should expect the sales, marketing and partner organizations to each deliver 33% of the leads in each period in sufficient quantity such that there is an overall pipeline of 3x+ the total number of qualified opportunities needed to achieve the period’s revenue objectives.
In a SaaS model, given its cash constraints and dependency upon lead generation to drive revenue, it is imperative that the lead generation function be highly structured and optimized.
In all companies, but especially in a SaaS company, the marketing function should be held equally accountable for revenue production as the sales organization; sales should be held accountable for “in period” revenue production and marketing should be held accountable for “future period” revenue production – where “future period” revenue is in the form of contacts generated by any form (sales, marketing and/or partners) that are qualified and then converted into “sales-ready” leads.
In addition, rather than just the 3 primary lead sources discussed previously (sales, marketing and partners) one other lead source must be added. This critical lead source is “customers”. Done correctly, this is the lowest cost lead source and most valuable; there is nothing more credible than a customer who is willing to promote the benefits of your products. In a SaaS model constrained by cash, it is imperative that you harness this lead source and maximize its effect.
Here are two simple suggestions to help you leverage your customers in the lead sourcing/generation process:
- Make it easy for your existing customers to share with anyone else the output of your application. For example, the UI should enable a customer to send graphical reports with data generated by your application with the phrase “powered by..” at the top and bottom of the report. And, you should enable/encourage the recipients to click on “powered by..” which can take them to a landing page where you can serve an offer to trial the application.
- Create a community. There are a number of community applications out there (e.g. Jive, Lithium, HelpStream, HiveLive, etc.) and you can pick any one of them that appeals to you depending upon the type of features you desire (e.g. ranking/ratings engine, chat, surveys, etc.). These applications enable you to embrace your customers daily, query what they like and don’t like about your products and to use them as mavens and/or super references. You can then use your community as part of your SEO/SEM strategy. On your landing pages, you can offer the prospect a trial and at the same time give them the ability to roam/query your community to find out whether your “marketing hype” matches up to reality. Nothing like a real customer to sell a prospect.
The bottom line is that in order to make the SaaS model successfully work for you – as well as your customers – you need to focus on lead generation. And, due to the cash constraints, you must be hyper-efficient in managing your lead sourcing/generation process. The key here is to harness the power of your customers. Without them, you will place the financial burden of lead generation primarily upon your company and potentially consume more capital than is necessary.