SaaS and the Elusive Path to Profitability
2 comments April 28th, 2008 David Bush - Iasta
I love writing about the topic of supply management vendors and the SaaS industry. Nothing gets software companies with itchy trigger fingers so tweaked, which creates a flurry of anonymous comments, meant to defend the business practice of losing money. I will have an permanent escort at the ISM conference, so I don’t get shanked in the restroom.
Hence, when I read an article by Bruce Richardson, of AMR, about the difficulty that SaaS companies have in achieving profitability, I found it very interesting. Apparently, this profitability problem is not isolated to supply management. Most on-demand software companies are pouring resources into sales and marketing and losing the battle. He quoted RightNow’s CEO, as describing the strategy, which amounts to loss leading.
When I talked to CEO Greg Gianforte a few weeks ago, he agreed it costs a lot of money to sign new accounts. These high initial costs can be offset by a successful land-and-expand strategy. He said his annual contract value was running $85K for an 18- to 24-month deal, with the average transaction worth $150K. Most customers will spend eight times what they did on the initial transaction by making five or six additional purchases over the next three years. RightNow offers 30 products.
This means every acquired client is a Vegas dice roll, and a pretty unstable model, from my perspective. Everything is riding on - the upsell. It also demonstrates that the point is not to make traditional profits, but rather, to increase perceived “value” of the company. Fortunately, the old days of throwing in everything, with no intention of monetizing it, have mostly faded away. This practice is highly destabilizing to our industry, as it builds buyer conditioning that there are no costs and it should all be “free”.
Also, from a buyer perspective, understand your TCO. Clearly, if your vendor is losing money to work with you, they will eventually try to reclaim those losses. The alternative is worse, from the buyer side - liquidation or acquisition of your vendor. I see some important things that every procurement organization should ask its prospective partner:
- How much does it cost to acquire $1 of revenue for your company?
- How long have you been operating under these conditions?
- What is the business plan to correct and stabilize this pattern?
- What other charges will be incurred by our team later, that are not being described now?
- What is going to be the upsell strategy long term with your products?
If the number is in line with reasonable costs, your vendor is under control and likely has reasonable goals (yes, Iasta fits this category, and I do know what it costs us for every $1 in sales).
If it does not work out financially for the vendor, more questions must come out:
You cannot forecast everything, but this are very simple indicators which will be directionally accurate.
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