The acceptance of the SaaS model has grown steadily over the past few years as the old licensing model failed to efficiently respond to modern business needs. SaaS altered the rules of the game and traditional on-premises software vendors still struggle to adapt to the changes in their competitive environment. Due to the complexity of supporting multiple business models, traditional players are naturally disadvantaged compared with pure-play SaaS companies. Legacy sales, finance and compensation method and structures, outmoded product management and development, and maintenance support practices without adequate consideration of customer experience and success – all of these factors cause them to lag behind.
The market for on-premises software is undoubtedly shrinking. And with many new entrants quickly moving up into the higher tiers of the SaaS market, all the major players are making “big bets,” either by acquiring SaaS companies or by building SaaS versions of their products. The majority of large software businesses still generate most of their revenues from on-premises software; therefore, it is natural to adopt strategies that add longevity to their core products, and for the customers of those products.
SaaS upends old business models
Established software vendors still have a hard time adjusting to the economics of SaaS and the changes that are necessary to succeed in this new model. They have built software empires selling customizable packaged software for large perpetual licenses, supplemented by rich professional services fees and lucrative incremental revenue from maintenance support. They have constructed their license agreements so that customers have no alternative but to continue to pay for maintenance support; otherwise they find themselves in violation of the license agreement. These contracts oblige customers to pay maintenance fees regardless of whether or not they see any business value from such services.
For large traditional vendors like Oracle, SAP and IBM, transitioning to SaaS is a long and arduous process and the results often turn out to be quite different from what was initially expected. They have been trying to pave the path to SaaS through series of acquisitions. However, these companies are still deeply tied to the on-premises software model. With mixed revenue models and outdated sales strategies, they struggle to make money from their SaaS product portfolios.
Making further acquisitions to sustain growth in the cloud may not be sufficient. It is a common scenario that traditional providers purchase cloud companies and, instead of adopting cloud business practices, they force the acquisitions to their mold, resulting in atrocious SaaS customer attrition rates in the high teens and low-twenties range (13-24 percent). This happens due to a variety of reasons including stalled product innovation, poor customer services, unreliable cloud operations, or simply because customers are attracted to newer SaaS providers, proving that SaaS barriers to exit virtually do not exist.
Vendors and the capital markets understand that, with SaaS, the initial revenue growth is slower and it takes longer to break even. This is a massive change for traditional vendors that are used to generating the bulk of their revenues in the first year, typically with selling product bundles and application suites.
To make up for the difference in cash flow, SaaS sales organizations need to adjust and focus on driving recurring revenue growth through a different account strategy, based on “Land, Cultivate and Expand,” as I described in a prior SandHill article (“Sales Motions in the Cloud and SaaS Customer Journey”). Moreover, sales that used to rely on their existing relationships with the CIOs will now have to reach out to the line-of-business leaders. This is not an easy transformation for vendors that have the enterprise through the lens of IT.
They also must create proactive customer support and success services to promote adoption and usage of the product, keep the cost of renewals low and reduce churn to maximize customer lifetime value, as I explained in my SandHill article, “Customer Success Services for Sustained Growth”. Therefore, they need to track and methodically manage and improve SaaS business metrics, including CAC (customer acquisition cost), CRC (customer retention cost), MRR (monthly recurring revenues), customer health score and LTV (lifetime value of customer).
Companies like Adobe, NetSuite, Workday and Zendesk have shown that, when managed well, SaaS is a scalable and financially attractive model. A great example of this is Adobe Systems and the company’s decision to transition its Creative Suite to the cloud. According to the company, 20 percent of customers that are purchasing subscriptions to Creative Cloud weren’t Adobe customers before the transition.
Adobe is not only witnessing a steady increase in Creative Cloud subscriptions, but it also gained more visibility into customers’ product usage, which enables it to consistently push out software updates relevant to user needs. The company also successfully transformed its sales organization to support the recurring revenue model.
To succeed in a market dominated by born-in-the-cloud companies, traditional vendors have to move beyond simply repositioning their old offerings as SaaS and truly embrace cloud as a business model to create new innovative products and outstanding services that delight customers on a sustainable basis. They need to fundamentally transform their business or spin their SaaS offerings as separate business units with their own product development, sales, services and customer success organizations.
The transition from an on-premises software model to a SaaS subscription model is challenging, and only a few will succeed. Those companies that make a successful transition will generate loyal buyers, increase revenue and position themselves for continued profitable growth.
Omid Razavi is a cloud sales and customer success leader and currently advisor to software and technology companies to grow and/or transform their sales, services and operations for the cloud. Dr. Razavi has over 20 years of leadership experience in managing sales and services at various companies in Silicon Valley. He may be reached at LinkedIn and Twitter.