Six Ways To A New YOU:
XaaS Success Key #4: Capabilities
In previous sections, I’ve covered the right reasons to transform to XaaS, the right product and service offers, and the right GTM.
In this article, I’ll cover the new capabilities you need to develop to get XaaS right.
I’ve previously mentioned in From Transaction To Relationship: 6 Keys To Winning In XaaS that the transformation to XaaS isn’t necessarily easy – but it is rewarding. A key principle here is the benefit of more smoothed revenues and costs, enabled by XaaS.
Why isn’t it easy? Transforming to XaaS does require some new capabilities. Table 1 summarizes the major capabilities and capabilities changes you need to make in the XaaS transformation journey, in relative order of difficulty.
Product development: From Rush to Continuous
In XaaS, gone are the late nights rushing to complete major product releases. Instead, product development is continuous.
In From Transaction To Relationship: 6 Keys To Winning In XaaS, I mentioned that one of the benefits of XaaS is that customers always have the latest and greatest version of any product. As a result, product introductions become feature introductions – smaller, more frequent, more incremental. As an example, when transforming from packaged software to SaaS, Adobe shifted from major version releases approximately every two years, to releasing new features as soon as they are ready, many times every year.
To support these continuous releases, product development changes from large teams swelling in size, working on large product releases, often with last-minute rushes to completion, and then potentially contracting in size after the release is complete.
Instead, fairly consistent teams work continuously on individual features, releasing them whenever ready. It’s a complete realization of agile development.
There are benefits for the vendor in this model – teams no longer get burned out rushing to complete major releases. Instead, work is smoothed and continuous. Team size can be held more constant, with less last-minute additions, then post-release contractions.
Product companies, especially those leveraging IoT, can realize these benefits as well. While major product releases may still require rushes, new features can be deployed to customers directly through the network, continuously, avoiding drawing both hardware and software development teams together into major rushes.
Given the benefits for vendor, team and customer of the continuous development cycle, this transition can be relatively simple. It mainly requires a change in thinking about the role of development teams, and the role of product introductions.
Marketing: From Launch to Brand
Marketing also realizes the benefit of not having to support infrequent, major product releases. A major product release is the growth engine of most companies, supporting pricing levels, creating segmented demand, and driving a big market splash of attention.
Unfortunately, they also require extensive and expensive marketing spend to support the launch and ensure its success. Since these major product launches tend to happen infrequently, they lead to spiky marketing costs. They also create tremendous risk – a failed launch could literally bring down the company. As well, they create extensive marketing team burnout, just as these launches do for the development teams.
However, in XaaS, the emphasis shifts to supporting the brand because … there are no major product launches, just continuous feature launches. Spending instead can go to supporting the brand, which has the promise of always giving the customer the latest and greatest product offering regardless of what they have purchased in the past. And as spending goes to the brand, it becomes smoothed. In many cases, it may even decrease since less goes to launch support spending.
This change is also relatively simple, given it drives so many internal benefits for the vendor. A significant challenge may exist as the marketing function changes its thinking from launches and releases to brand.
Channel: From Indirect to Own Web Storefront
In XaaS Success Key #3: Go-To-Market/Part 2: XaaS Channels: Changing Lanes, I already discussed the opportunities and tradeoffs related to selling XaaS direct or indirect. If you do decide to focus on a direct approach, you’ll need to build the capabilities to do this.
Don’t underestimate this step! While it seems easy to set up a web presence and start selling direct, even companies we would consider already savvy at ecommerce struggled with establishing a web storefront for selling XaaS.
Why? It’s not just setting up a cart and payment methods. To truly be successful, you need to set up all of the related functions for customer success – which in itself is a critical capability. Communities, support, training, all need to be a critical part of the web presence.
Also, they need to be properly costed. One software vendor I worked with developed its web presence relatively blind to the costs – not a major problem, until customer acquisition costs (CAC) needed to be calculated. CAC is an important concept I’ll return to in a future article.
Sales: From Hunter to Gatherer
In my experience, one of the biggest and maybe most difficult change for companies transforming to XaaS is the change in sales capabilities and approach. The sales organization can become one of the strongest resistance points to an XaaS transition. While change is never easy, the concerns can be managed to everyone’s benefit.
How does sales behavior change? No longer are salespeople hunting for the big whale, the big sale that hits the quarterly quota. Instead, salespeople must adopt a gatherer approach, seeking to sell the largest number of units, then moving to ensuring customers renew, consume more, and upgrade their services. Much more effort goes in after sale, than before sale.
This is partly driven by XaaS product and service design into standardized packages in which one unit is as valuable as the next. Now, certainly some customers will be worth more as they will purchase more units, but the sale becomes less complicated due to standardized packages and standardized bulk buying discounts.
It’s also due to the fundamental economics of XaaS. As I mentioned in XaaS Success Key #3: Go-To-Market/Part 1: The XaaS Sales Funnel: Deeper Than You Think, the money is in renewals. Since they money is in renewals, initial customer capture remains important, but realizing the full value from the customer relationship requires ensuring renewal and upsell opportunities.
Sales operations must fundamentally change as well. Training, enablement programs, and most critically, compensation structures and programs must change in order to change behaviors with the sales team.
A key question is whether sales compensation will be reduced. Not necessarily; in fact, it could increase as greater value is realized by customers and in turn is captured by the vendor. The timing of the compensation may change, but with proper structuring based on lifetime value of the customer relationship, this concern can be mitigated.
Another critical question many companies have is, whether the standardization in packages, and the move from big-game hunting to gatherer behaviors creates opportunities for efficiencies – or less politely, reductions in headcount. Not necessarily. Less effort may go into initial customer acquisition, but more ongoing effort goes into renewal and upsell. Skills may change, but workload doesn’t necessarily change.
Customer Data: From Marketing To Everything
A major software company I worked with made the transition from packaged software to SaaS. Again, the transition wasn’t simple, and many critical issues were figured out after launch, on the fly. After several months, the company realized that it had no customer renewals strategy – and not to beat a point to death, but the XaaS money is in renewals.
The company realized it had no information on how customers were actually using the product. In the past, the company would send live human beings out into the field, literally watching over customers’ shoulders as they used the product. The data returned was subjective, spotty, hard to analyze.
After moving to SaaS, the only regular communication between the company’s servers and its software was a single monthly ping, to see if the customer had paid and still enjoyed usage rights. Jokingly, we said that E.T. was phoning home, but only once a month.
Analytics Throughout The Lifecycle
To be successful at XaaS, and get that critical renewal money, E.T. needs to phone home much more often than once a month, and with far more information than just whether the customer has paid.
We’re all familiar with capturing customer data to make marketing more effective – witness the success of Salesforce.com’s Marketing Cloud, and Adobe’s Experience Cloud. These focus on the discovery stage of the lifecycle.
But just as the sales funnel goes beyond purchase, as I discussed in XaaS Success Key #3: Go-To-Market/Part 1: The XaaS Sales Funnel: Deeper Than You Think, customer data and analytics goes beyond purchase all the way to renewals.
Customer behavior – on many levels – can be collected and analyzed to maximize the value of your customer relationship throughout the customer lifecycle. I’ll pull out a few examples to highlight:
Customer support: Most companies track customer support calls to identify major incidents and track customer satisfaction. But a major SaaS player determined that the number of customer support calls were a key indicator of propensity to renew. Zero calls meant the customer likely wasn’t even using the product, and therefore was unlikely to renew. More than 3 calls indicated the customer was dissatisfied or having problems, and also unlikely to renew. One to two calls indicated the customer was using the product and engaged with the product enough to likely renew.
Product usage: As Marc Benioff, founder and CEO of Salesforce.com says in his book Beyond the Cloud, he realized he was sitting on a goldmine of information, in that his cloud-based software could see how customers used the product. Regular on-premise software companies were, like the software company in the story above, flying blind. Data can be collected to determine which features customers use most, which ones they have problems with, and then correlated to key value indicators such as propensity to use more product, to buy more services, and to renew.
Figure 1 shows a (very limited) sample of the type of analytics you can perform throughout the customer lifecycle.
Figure 1: Customer Data To Collect Throughout The Customer Lifecycle
For Product Companies Too
These methods of learning about customers are not limited to SaaS companies. Hardware companies that deploy IoT – sensors and connectivity – are also able to learn dynamically and digitally how their customers engage with them throughout the lifecycle, enabling the same types of benefits that SaaS companies enjoy.
Keep It Private?
Of course there are data privacy tradeoffs and regulations to be considered, which are beyond the scope of this article. Overall I’m not implying that you spy on your customers. You can anonymize the data, aggregate it, and look for patterns.
What I am recommending that you get to know your customers’ behavior so deeply that you can provide them with more value from your product. They, in turn, will provide you with more value.
There’s Big Money Here
What if I told you I could save you 75% of your customer acquisition costs, AND save you over half of your renewal costs for existing customers? Sounds pretty good, right?
In my previous article, XaaS Success Key #3: Go-To-Market/Part 1: The XaaS Sales Funnel: Deeper Than You Think, I mentioned that for XaaS, the money is in renewals. Even for products requiring ongoing maintenance and occasional upgrades, about half of total contract value is realized in the first year. However, for XaaS, only around 15% of total contract value is realized in the first year.
Clearly, more money comes later.
Reality Check: Most Do Renewals Wrong
A major software company I worked with did not have a renewals strategy even after 6 months of embarking on the transition to SaaS. We studied the practices of typical subscription companies – such as cable TV and telecommunications, and came to some surprising discoveries.
First, most subscription companies are terrible at renewals. Sometimes, renewal costs were as high as 50% of CAC, leading to payback periods of as much as 6 months.
Second, the reason they are terrible at renewals is because they don’t use data and analytics to know their customers, and thus resorted to expensive methods to “win back” customers that did not renew.
The economics of bad renewal capabilities are stunning – in general, I’ve found that for most XaaS companies, 90% of their renewal budget gets directed at renewing only 10% of customers. Even worse, 25% of the budget gets wasted on the 20% of customers that won’t renew.
And what does this money typically get spent on? Usually it’s on costly “win back” spending such as discounts, giveaways, and highly expensive telemarketing calls that erode price points and do little to create more valuable customers.
Doing Renewals Right
There are three steps to doing renewals right – and these are key capabilities any company in XaaS must develop in order to succeed, enjoying those compelling economics I mentioned earlier (Figure 2). By far the most important of these is the third step, investing in customer success.
Figure 3: Salesforce.com Hierarchy Of CRM Offers
1. Know Thy Customer
First, companies must capture key customer usage data, in order to determine propensity to renew.
2. Pick Teams
The second key step is to categorize customers according to propensity to renew. In general, in any cohort, 70% of customers will renew without intervention, 20% will refuse to renew, and then a critical 10% are sitting on the fence, trying to decide whether to renew. In general, this 10% of customers are your target for renewal efforts, although obviously, all of your customers should receive your attention.
3. Make Them Winners
Winning XaaS companies develop a strong customer success capability, dramatically lowering the percentage of customers that won’t renew or are hesitant with much greater cost-effectiveness.
How much more effective is customer success spending than winback spending? An SaaS leader I analyzed budgeted only 3% of annual recurring revenue (ARR) for customer success, with retention rates well over 90%, while a pay TV company I analyzed spent over 11% of ARR on winback spending with renewal rates in the 70% range. Clearly, it is much more effective.
Customer success sounds magical but it is actually simple; it merely means making sure your customer can use and does use your product, and intervening wherever necessary to make sure they can and do use your product. It is a “stitch in time saves nine” approach, involving communications and training tools and methods aligned to the size of the customer account. A benefit for SaaS and IoT companies is that much of this support can be automated by dynamically capturing information around customer usage.
So…How Do You Feel?
Smoothed revenues, but also smoothed costs and smoothed stress on your team – XaaS produces multiple benefits for the vendor. Master these four new capabilities, and these benefits can be yours!
What is your take? What do you feel are the major capabilities shifts and challenges in transforming to XaaS? Contact me; I’d love to hear from you!