New Financial Models
SaaS-oriented business models have a very specific way to look at costs, recognize revenue and perform financial analyses. The excellent website The SaaS CFO is a great way to build hypotheses for costs and revenues:
- Costs: Service (R&D, support, maintenance, hosting, account management and client success salaries), Sales (sales and marketing salaries, marketing costs), administrative costs, client churn
- Revenues: Average Recurring Revenues (ARR), minus churn, one-time services
Obviously, these metrics will vary from one product to another, but they need to be anticipated and planned for at the beginning of the project. This is because, per the financial data of most cloud-based software companies, it takes time before a SaaS model becomes profitable.
From a financial point of view, a SaaS model generates high costs at the beginning of the client acquisition with a cumulative revenue stream during the lifetime of the client relationship. This is relevant because after an initial significant investment to develop the new products, the recurring revenue model will increase over time, multiplying its ROI.
On a side note, given the time needed to reach profitability, it can be interesting to identify parallel sources of revenue. This mitigates risks — such as consulting or training services — but can only be limited as they aren’t recurring and you don’t want to lose your overall focus, either.
New client relationships
Once the client has signed for your recurring product or service, the contractual relationship is established. At this stage, it becomes critical to focus on client experience to ensure the long-term success of the partnership.
Client Success software SaaS vendor Gainsight published an insightful diagram on the SaaS world (Customer Journey Engagement Models), describing the 4 stages of the relationship: land / onboard / adopt / seasoned customer. This model is all the more interesting given that it corresponds to what happens in the case of a SaaS software contract. Bear in mind that once the client has signed and the software is implemented, it’s not the end of the process, as it would be in a classic project-oriented world, but just the beginning.
Your company will need to build a new client experience for which this sort of framework will become very useful. In order to ensure the client will renew, it will be necessary to look at various elements:
- How is the system used by the client? Is adoption measured? Are support tickets carefully and quickly solved? Do we measure client satisfaction on a regular basis?
- What is the state of the individual relationship with the client? Are we taking care of our internal champion? How do we try to convert the detractors?
- What is the client’s perception of our company? Do they feel they’re part of a community? Do they get regular opportunities to meet and learn with other clients? Do they have a word to say regarding the product and its roadmap?
One step at a time
During this lifecycle, it’s necessary to plan regular meetings, starting with a dedicated kick-off, followed by health checks, review and renewal preparation. You need to be aware of the potential risks over the course of the relationship (low adoption, lack of sponsor, support tickets, decline in usage, etc.) All must lead to immediate corrective action to ensure Client Satisfaction scores remain high and to prepare for a smooth renewal, without which the whole project is at risk of not being profitable.
Your company might already be on the way to implementing these new business models. You now need to be consistent in offering new recurring services to your clients: client support and satisfaction, success management, training, and ongoing innovation. This will require an internal mobility push and the investment in training in new set of skills, but with a reward in terms of payback and client retention.
“You need to ensure that your teams have the proper competencies to manage all aspects of the new business model.”
From then on, you need to focus on the organizational impact in your company: beyond classic change management, how do organize properly to make sure the client receives the proper ongoing attention with a carefully crafted client success framework? You need to ensure that your teams have the proper competencies to manage all aspects of the new business model.
Upskilling your teams
The main skill required to sell such new recurring products or services is “solution selling”, which puts emphasis on solving client’s issues in the long run. Therefore, since the relationship with the client is going to be a lasting one, the respective positions of the company and the client are less that of a supplier/customer than that of partners. It’s important to consider that, in a recurring-type of business situation, the ROI from the client is more than “just” payment for the services; you should get their regular feedback on the product, from quality, to support, to their engagement to help improve it, and the personal relations built over time change the previously existing dynamic to become much more balanced.
In conclusion, the key element to remember is that as soon as you want to sell any type of ongoing contract, the relationship will become a partnership as opposed to classic vendor/client dynamic.
You need to carefully adapt all dimensions of the business, from sales to project to financial planning and – most importantly – to client success and marketing to make this long-term bond with the customer successful.
More CEOs of Fortune Global 500 companies have graduated from HEC Paris than any other university in Europe, and nearly 4,000 graduates are currently CEOs, CFOs, or have founded their own companies. According to the Financial Times, the HEC Paris Executive MBA is ranked #1 in Europe and #3 in the world; click here to learn more about this world-class program.