ARE YOU A PRODUCT OR A SERVICES BUSINESS?
WELL THAT DEPENDS...
Amy from Precursive takes a look at the factors that drive the revenue mix of the modern SaaS business between Product and Professional Services.
The recurring-revenue business is not new, however in the world of SaaS, the sales trend for subscription-based products is rapidly becoming the norm. In fact, the days of the big, one-off software purchases could be numbered. Instead, the customer is expecting to pay a monthly subscription to access their cloud-based services, exemplified by providers such as Salesforce, JIRA or Precursive.
In this arrangement, making sure that your customers are using your product and seeing value now falls firmly at your feet, the provider. If they are not seeing value, they churn and that effectively means life or death to the SaaS business model.
So while a customer may initially come to your SaaS business to purchase your product (in the form of a licence), they very often will also need your services in addition, to get to the full value of that licence investment.
Suddenly the definition of a Product and a Service Business becomes a little blurred. Is it any wonder that Chetan Puttangunta's tweet has driven such a lot of interest?
It’s a snapshot analysis of the modern SaaS business for sure - two major B2B SaaS players moving from near parity in terms of product and Professional Services revenue to a major swing towards product revenue as they scale. The data points are simple to grasp, however judging by the discussion provoked, the story is more complex.
It pays to go back a step and look at what was happening pre-SaaS. The big, legacy Enterprise software providers, such as Cisco saw their Professional Services arm as a source of recurring revenue. Their customers were locked into their product, and in order to continue to capitalise on the customer relationship, it made absolute sense to provide ongoing services on top.
The SaaS delivery model has transformed this relationship and now we see two main ways of managing value delivery.
The first approach is to focus on your product and grow an ecosystem of partners to service your customers. Salesforce is probably the best-known mover in this space. Their Professional Services revenue has been consistently made up only around 7% of overall revenue since 2001*, while their external network of Service Integration partners has grown exponentially around them. In the same vein, while business services software suite Workday may only have 15,000 employees on its books, there are quadruple the number of ‘Workday Implementation Consultants’ operating on LinkedIn. And that’s not to mention the number of Global Systems Integrations houses currently delivering these services.
Alternatively, we can see a ‘services first, productise later’ model. Effectively this is when a SaaS business starts life acting like a services business - bespoke building each of their product implementations to fit the exact needs of their high ARR Enterprise customer-base. Once they have a suite of industry specific playbooks in place, they can then capitalise on this IP by releasing it as an off-the-shelf product. This is the Veeva model.
The question is, what is the best model to follow? Well, that depends. Ask yourself the following:-
How ‘high-touch’ is the implementation of your product?
That is, is it a Slack or is it a PatSnap? The average Slack customer requires minimal human intervention to get up and running on the product, normally automated through bots. PatSnap, the legal IP analytics data platform operates at the opposite end of that scale to the point that their customer would be happy to pay for their services, rather than investing time in learning how to effectively self-serve. In the words of their Director of Professional Services:
“It’s the outputs the customers are focused on, the insights they can get from our product. They don’t want to focus on operating the platform.”
What proportion of your revenue comes from new business vs established business?
Straightforward maths on this one. If your customer-base is pretty well established on your product, it's more than likely the services heavy-lifting in terms of initial configuration may be behind you. Lots of new customers coming onboard? Flip the emphasis back from product revenue to services.
Have you been around long enough to establish your credibility with partners?
Because if you have, you have more chance of getting the buy-in from a partner network prepared to learn the intricacies of your product and provide the services you need to get your customer to see value.
Have you been around long enough to perfect your product?
That is, have you had time to hone your product across multiple Enterprise use cases? Once you have allowed enough Enterprise customers to drive your product roadmap and come up with a product that is truly sector specific, then it should be the case that your customers can get up and running quickly with little implementation services required.
And finally, how good is your product? Are you using services as a ‘crutch’ to bridge the gap between what you promised your product delivers and what your customer needs? Tough question to answer, but it's worth giving it some thought.
What’s your Professional Service / Product Revenue split?
Plenty of room for discussion, as Chetan’s tweet demonstrates. What is your approach to Professional Services and Product Revenue and how do you see that developing in the future? It would be great to hear your thoughts - please leave us a comment below.