Yes, it’s the other “s” word — services. SaaS services are frowned upon by many institutional folks and usually valued far lower than subscription revenue. Even recurring services revenue finds itself way down the valuation curve. In some cases, this disdain for services may be warranted. In others, it’s misplaced. The irony is that the market’s reluctance to fully value services in SaaS companies can push some founders and CEOs away from strategies that could well make, rather than break, their software valuation.
When SaaS Services Make Sense
Cash is King, But That’s Not the Most Compelling Reason
First of all, it’s important to remember that services generate cash. I was on a call the other day when a SaaS founder mentioned how he used services to generate quick cash whenever he needed it. The predictability of subscription revenue is great, but it doesn’t create that kind of make it and bank it shot in the arm. The challenges are staying focused on the software business, not getting hooked on those services hits, and delivering the services at a high margin. The latter means not selling hours.
So while cash flow may be a good reason to sell some services atop your SaaS revenue, the best reason is retention. I ran an enterprise martech SaaS and can attest that services improved onboarding, engagement, usage, and retention. SaaS buyers, even at the SMB scale, need help to make the best use of tools. And their chances of renewing are far higher when they see full value from an indispensable part of their business life. Many SaaS solutions don’t become indispensable on their own. They need a bit of help, and services deliver that help.
To Monetize or Not to Monetize SaaS Services
If cash is the second most compelling reason to welcome services into your SaaS revenue mix, then it may be expendable. One of the nice things about having a valuable services offering is that you can barter it away without eroding your subscription revenue. I have always lived by a policy of one price for everyone. Consistent pricing translates into a better sales process and more predictable sales cycles. That said, I am always ready to add value when a deal demands flexibility. One of the best ways I’ve found to do that is services.
When you add value using services that improve adoption, usage, and retention, you improve the customer experience, improve the likelihood of renewal, and show that you’re willing to give to get the business. Obviously, that giving should be judicious and restrained. But within those parameters, giving away some services that ultimately help you renew the customer down the road is a pretty good trade.
Categories of High-Value SaaS Services
Let’s define high-value in terms of both the customer and the business. That’s not to say there can’t be a services offering that only benefits the customer, but thinking of them as double-edged swords is much more likely to help your subscription revenue. To make it easy, let’s say that a high-value SaaS service is one that deepens software adoption. That’s pretty plain and simple. Those were words we lived by at ion interactive. We wanted services that made our tool indispensable. Here are a few ways to make yourself stickier with services.
Stickiness starts with usage. And usage begins with purposeful, high-velocity onboarding. When expectations are accurately set in sales and marketing, onboarding should be set up for a smooth ride. But there’s often some friction that can lead to stalling. Quality onboarding services can minimize the friction to help a customer get fast and clear value from your SaaS. I had a meeting with a fellow CEO yesterday who shared my experience with high-value onboarding introduced before closing the deal. Aside from more successful implementations, we’d both seen shorter sales cycles and higher win rates attributed to those early introductions. It’s a confidence booster to meet the smart people who will ensure your success even before you ink the deal.
Not every SaaS has integration opportunities, but for those that do, they’re huge. Why? Because the more connections you have, the deeper you’re in. That depth and dependency equal stickiness. More connections mean higher switching cost, and switching is churn. I know a lot of SaaS CEOs (and CTOs) who look at integrations as almost like busy work. But most of us know that strategic integrations expand your reach. So when you have those integrations built into your tool, why not add some services on top to take them the last mile for your customer? In my experience, most integrations are only as good as the best practices applied to their implementation.
Do It For Them
Sometimes the best thing you can do for your customer is using your tool on their behalf. This may not be a long-term solution, but many SaaS buyers have eyes bigger than their stomachs. They often need more hands and hours than they have and your services team may be uniquely suited to be their savior. Of course, there’s goodwill that goes along with playing this part, but much more important is that your team gets the absolute highest value out of your tool. When you set that ideal example, it takes the pressure off the implementation and it makes it easier for you to teach them how to fish down the road.
Cross-Sell and Up-Sell Expansion Opportunities
A lot of my advice thus far has been around early-stage services delivered on or around onboarding. A side benefit of bundling initial contracts with services attached is that customers get an early taste of the expertise you can lend. As contracts evolve into later stages, expansion revenue becomes more important. One way to increase the value of renewals is with services. And one way to sell more software is by using those services to help that along. For example, it may be more plausible to widen your footprint to new departments if you can help make that happen with services. If your customer has no previous experience with your services, that expansion may be harder to sell.
SaaS Services Delivery
The last thing a SaaS can afford are services delivered at a 20% margin. That’s extreme, but not unheard of. To deliver SaaS services at rational margins of 60% or more, you have to steer clear of selling time. This is a much bigger topic than this paragraph can hold and I promise to write a follow-on article about how we delivered high-margin services. You’re on the right track if you’re selling deliverables and value rather than people and time. More on that later.
The Other, Other “S” Word — Sweet
SaaS services can be sweet additions to your revenue mix and retention. In order to do that, they have to deepen adoption and they have to be packaged and delivered wisely. When you deepen adoption, you reduce churn and increase lifetime value. All of those upsides hit your subscription revenue, which is the highest value revenue you’ve got. Those are pretty solid reasons for embracing SaaS’s dirtiest word — services.