October 25, 2018
PUBLISHED BY Bryan Stolle
SOURCE Wildcat Venture Partners
The most pervasive and pernicious SaaS business model myth? It’s that “Professional services revenues are ‘bad’ and have no place in a SaaS company’s revenue mix”. This myth has led many entrepreneurs (and their boards) to ignore or even actively avoid professional services as a component of the company’s market offering.
The result? This myth jeopardizes the growth and success of the company. It’s simply untrue, and following it can have serious, even fatal, consequences. Here’s some data from top public SaaS companies:
|Services Revenue/Total Revenue||Service
|@ MVT (Approx $5M)||@ Growth ($20M-50M)||@ IPO||Today|
|Workday (HR app)||40.0%||34.0%||34.0%||16.5%||14.4%|
|Marketo (Marketing app)||n/a||8.6%||9.7%||12.6%||11.2%|
|Coupa (Spend Mgmt app)||25.0%||15.3%||11.8%||13.1%||10.8%|
|Mulesoft (App integration)||n/a||15.9%||18.6%||20.5%||16.4%|
|Rally (DevOps app)||35.5%||18.7%||15.3%||20.4%||10.0%|
|ServiceNow (Service app)||n/a||8.3%||17.0%||8.4%||7.9%|
|NetSuite (ERP app)||n/a||n/a||27.2%||28.4%||20.4%|
|Apptio (IT Management app)||n/a||26.5%||18.4%||15.9%||13.6%|
|Cloudera (Data Mgmt App)||n/a||33.5%||23.3%||18.1%||11.5%|
|Zuora (Billing App)||45%||33.3%||28.3%||28.2%||22.8%|
Data sourced from company S-1 and 10-Q filings, board reports and management interviews
During the start-up phase professional services accounted for over 1/3rdof revenue, on average. At Wildcat Ventures, in our experience as SaaS investors, we have sometimes seen services revenues equal SaaS revenues (50% services) during the “Traction Gap” phase.
During the early growth phase (post MVT), professional services were over 20% of revenues on average, and still above 20% of revenues at IPO. Even as more mature public companies, services are still north of 18% on average. I think we can put a stake through the heart of the SaaS professional services myth! To be sure, not every SaaS company needs to invest in professional services, but it’s the exception not the rule.
Especially in a startup’s early days, professional services are often a loss-leader, provided below cost, as part of the cost of doing business when customer success and reference-ability have a very high value to the company. In some cases, it’s even offered for free. Phil Fernandez, founder/CEO of Marketo explains their approach, “We went a long time at Marketo not charging for services, and even featured a prominent page on our web site titled, ‘At Marketo, your success doesn’t have a price,’ that explained that we didn’t have a services business.” They didn’t have a “services business” but they most certainly did have professional services as part of their early startup-phase playbook.
So why do these notably successful SaaS companies have professional services in their go-to-market mix? Professional services can directly impact many of the key critical levers and drivers for the SaaS business model.
- Customer satisfaction/success – When customers struggle to implement your product, or get any real value from it, they are not going to be your fans and advocates. This dissatisfaction will be reflected in low NPS scores, poor analyst reviews and limited word-of-mouth lead generation. It will also be very difficult to build a reference base and the all-important customer success case studies
- Customer retention/High gross churn – If customers are walking out the back door almost as fast as they are walking in the front door, you can never build an efficient revenue model, no matter how good your sales engine. You will burn too much capital for the revenue generated, jeopardizing future funding. If you do manage to find funding in this scenario, it will be increasingly expensive, unnecessarily diluting founder and employee ownership.
- Expansion uptake – “Land and Expand” isn’t a viable strategy if the customer boots you off the beach before you establish a value-based foothold.
- Net churn – If “b + c <100%+”, you will never be able to achieve the growth and scale needed to attract serious investor interest.
The whole point of the SaaS model is consistent “recurring revenue.” If customers fail to renew, it’s not recurring revenue. It’s “fake revenue”, and the company has been giving its investors “fake news”. Both are a recipe for below benchmark growth rates, and a short career as CEO.
Another key argument for investing early in professional services is that it takes some of your fate out of the customers hands and places it in yours. Without professional services, you are relying solely on the customer to figure it all out and make it work. And, you have little control over the pace at which they do so. When you are working together as a joint implementation team, you can influence the schedule, ensure that best practices are being followed, and call in more resources or huddle with the executive sponsor if things are not on track.
Lastly, a good professional services team is an invaluable conduit of product/market fit information, identifying key deficiencies in product capabilities and ease-of-implementation functionality, as well as identifying future opportunities for new value-added features in the product mix. Professional services can significantly speed up this learning process, as well as test ideas in the field, where the feedback is the most informative and valuable.
Clearly, professional services have been and still are a key part of the SaaS playbook for the highly successful companies in the table above. Yet, I still sit in board meetings and hear many VCs explain to the management team that services are bad, and “good SaaS” companies don’t have or need services. Not every SaaS company needs to invest in professional services, depending on the market, nature of the product and business model, but most do! I’ll explain when and why SaaS companies should offer professional services in the next installment (Part 2).