Success With SaaS

View from Haleakala - Filip Szymanski Software companies that started out with a license business model are now scrambling to catch up with all the Software-as-a-Service vendors that have emerged in the market. Early SaaS players such as Salesforce.com that started in 1999 have a huge lead, but many more have appeared over the years, and even investors are taking notice by driving up valuations, with record-setting acquisitions of Github and Mulesoft in 2018. What does it take for an enterprise software company to introduce SaaS and compete? Commitment . Executive team must buy into the SaaS business model with full knowledge that revenue & profit will dip in the short term as customers elect to purchase a SaaS subscription instead of a perpetual license. SaaS can be challenging for public companies where investors expect near-term profitability. When Adobe switched their portfolio to subscription, they saw a revenue dip and the stock traded lower, but now Adobe enjoys r...

Photo by Agnieszka When enterprise software companies embark on selling SaaS, they typically run into compensation challenges, especially when existing license customers express interest in SaaS. First and foremost, the compensation setting should align with the SaaS strategy. Make sure to have buy-in at the senior leadership level if SaaS is the future business model for the company (a complete shift to Cloud/Subscription like Adobe) or a delivery option while continuing on the license software path. To achieve the former, you will need to lean into SaaS by encouraging sales reps to position SaaS offerings, while the latter requires minimal change to ensure sales reps don’t shy away from must have SaaS opportunities. Unlike a license sale where revenue is recognized immediately, SaaS revenue recognition is over the duration of the contract creating a multi-year EBITDA impact. Either way, you need to have a position before embarking on sales compensation; otherwise, you will not ...

Establishing SaaS at an enterprise software company that sells license products is challenging. To succeed, you need to understand what is different about SaaS. I found that to be successful an enterprise software company has to develop expertise for: SaaS Sales: The sales process, contractual commitments, and buyers are different. SaaS is a value sale that consists of both product functionality and services. Because services have an underlying cost, the pricing and discounting process will have to ensure profitability and frequently will be more rigorous than with a license sale. As in the ubiquitous Salesforce.com marketing, the sales rep has to be knowledgeable on the value proposition of SaaS and be comfortable negotiating service contracts with SLA’s and operational commitments vs. a more straightforward license contract without them. Negotiation can become tricky with existing customers because license contracts require revision and frequently customer procurement will ha...

Biking up Haleakala, Maui - Filip Szymanski When introducing SaaS at an enterprise software company, there are a number of factors that impact EBITDA (earnings before interest, taxes, depreciation, and amortization) and the profitability challenge only gets bigger when growth accelerates. From my experience, you have to consider the following factors: Delayed Revenue. SaaS is a subscription business model where revenue is recognized as the service is delivered. So that fantastic $300k License deal the sales rep was going to close is now $150k/yr, and if you close the deal in Q4, that revenue starts the following year. When switching to subscription, you should expect a revenue dip before it starts to recover and all that “deferred revenue” starts to stack up. That is why you need executive buy-in, and if you are a public company, this has to be messaged carefully to investors as there will be an impact to EBITDA in the near term. Sales Behavior: SaaS or License? If you compe...