XaaS: 6 Keys To Successfully Transforming From Transaction to Relationship

If You Aren’t Thinking XaaS Already - You Will Be

“XaaS” or “anything-as-a-service” has become one of the most prominent tech buzzwords over the past several years.

Every company seems to either be getting rich from XaaS, transitioning to XaaS, or thinking about XaaS - probably including you, or your competition:

Adobe: 1,000% increase in stock price since 2011, after transitioning from boxed (“perpetual”) to Creative Cloud.
Microsoft: 3-fold increase since 2016, when the company fully committed to Microsoft 365 after a slow start from 2010-2015.
Hewlett Packard: in 2019, signaled it will make its entire portfolio available in XaaS offers by 2022.
Cisco Systems: in 2020, longtime CEO John Chambers said "If I had to do Cisco over, I'd do it all as a subscription based model” (“Leading during a crisis: a conversation with John Chambers”; March Capital Partners webcast; 15 April 2020; from YouTube).

And now, the COVID crisis has intensified interest in XaaS. The online channel has, in many countries, become the only way to reach both B2C and B2B customers. For consumers, credit is extremely tight and therefore companies need to offer a lower outlay path to capture customers.

Ok - But What Is It?

XaaS is simply a business model: recurring relationships, instead of transactions. Ignore all the permutations such as PaaS, IaaS, HaaS, etc. - there’s really only two flavors:

Leasing: capex to opex. As old as renting farmland to a tenant. In this model, customers enjoy usage or access rights on a periodic basis, as long as payments are made, instead of having to buy the product or service outright. Car leasing, SaaS services such as CreativeCloud and Salesforce.com’s Lightning, and streaming services such as Spotify are all examples of leasing-based offers.
New offers: new features enabling new value. Particularly important for hardware companies. New functionality enabled by software, connectivity, and processing unlocks features customers find valuable and worth paying a premium for. The new functionality can be monetized in service packages instead of baked into the hardware purchase price. Signify (Philips Lighting), Schneider Electric, and John Deere have all introduced IoT service offerings layered on top of their hardware products.

Is it Good For Me?

This recurring relationship model unlocks 4 key benefits for providers:

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Predictable, smoothed revenues. Revenue changes from spiky and unpredictable to smooth and steady, as product/service releases change from generational to constant upgrade.
Predictable, lower costs. Gone are development rushes, marketing blitzes and sales promotions required with generational product launches. Sales moves from acquisition (or even worse, re-acquisition) to lower-cost renewal.
Larger addressable markets. Car leasing works because a heart-stopping US$50,000 one-time purchase becomes an affordable US$500 monthly bill. The perceived price drops, more customers see it as affordable, and suddenly your addressable market can multiply several times over.
Sticky, direct customer relationships. The decider, payer, and user become one, as the individual can use a corporate card without pre-approval or even a receipt to procure products or services. In some cases, customers can procure directly from vendors, removing distribution costs.

Will My Customer Like It?

Yes! Customers also derive 3 big benefits from XaaS:

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Cheaper, easier procurement: There’s value for customers to also merge the decider-user-payer into one person. Purchase orders are expensive, IT approvals require headcount, and nobody likes having to send a purchase approval request to their manager.
Affordability and access: Automobile leasing wouldn’t work unless consumers thought it was a better offer than buying outright; they valued getting access to a car they previously couldn’t dream of affording. The same goes for any XaaS offer (if it is done right).
Automatic upgrades: Customers no longer need to worry about buying the latest version, making an expensive forklift upgrade, or major purchase requisitions. Instead, with no effort, they always get the latest version - automatically and invisibly.

Six Keys To Getting It Right

XaaS works great for both vendors and customers - but it is not easy, and if you are transitioning from transaction to relationship, you can make a mess of your existing business if you are not careful.

From my experience working with three leading companies that have transitioned to the XaaS business model, I have identified six keys to winning in XaaS:

Right motivation: If you want to build better, more valuable customer relationships by making your customers’ lives easier, you’re on the right track. If you’re trying to chase a hype cycle to please the stock market, things will get painful. Fast.
Right product and service design: Pricing isn’t purely based on payback periods versus one-time purchase, and you don’t have to capture all of your product/service value in subscriptions. The key is quantifying customer perceived value, and your incremental cost.
Right go-to-market: Your traditional channel partners may not be best suited for offering services, and the temptation to go direct will be extreme - but may not be your best move. And customer acquisition isn’t the end of the funnel - it’s the middle.
Right capabilities: Recurring means constant contact and interaction with customers - not just booking sales. Many new skills in AI and customer success must be built.
Right goals: XaaS is short-term pain for long-term gain. If you’re looking for a quick return - you won’t make it through the Valley of Death every XaaS company has to cross.
Right commitment: XaaS is a big change, and the temptation to make tiny steps or pull back after early challenges will be strong. To keep everyone on board - customers, channel partners, employees, and investors - strong commitment and communication are critical.

Over the next few weeks, I’ll elaborate on each of these keys to winning in XaaS.

I’ve worked on successful business model transformations in three of the world’s leading technology companies, covering all geographies. Are you looking for a strategic “secret weapon” to advise you on your business model transformation, without excessive hype or exorbitant information technology bills? I’d be delighted to discuss how I can put my experience to use on your business model transformation. Contact me. I am here to help.