SaaS Myths (#1) -- Great SaaS Companies Don't Have Professional Services (Part 2 of 3)



November 2, 2018

In the first installment, we showed how professional services are a key component in most successful SaaS company playbooks. Mature SaaS companies derive almost 20% of revenues from professional services and invest almost 14% of total expenses (COGS + OPEX) in same. For early stage SaaS companies, it can be as much as 50% of revenues. Even when offered below cost or bundled free, professional services are usually a significant part of the go-to-market and customer success effort.

Do all SaaS companies need to make professional services part of the playbook? Typically, the answer is yes, but not always. Lightweight tools/apps; some horizontal apps, especially communication and/or collaboration apps; and any app designed to be self-service due to the obvious and “low implementation effort” nature of the problem, may require only light implementation and “success” assistance. This assistance often comes in the form of phone or online chat support, AI-based chat or chat-bots, community-based forums or online knowledge-bases.

For most, however, professional services are a crucial element in the customer success mix. The following application categories or scenarios are the most likely ones where professional services should be a key part of the company’s thinking:

  1. Green-field business applications, where there has never been an existing equivalent business process and supporting software. Think eCommerce, web analytics, marketing automation, content recommendation/optimization, and a host of other apps when they first came to market. These functions either never previously existed in the business, or were done with complex manual methods, or in very different and far less efficient/effective ways than is now possible.
  2.  Complex business applications where the app is intended to become part of key business workflows. The more people, functions, and business units the new SaaS app will touch, and the more deeply it touches or changes existing critical business processes, the more professional services become a vital component of implementation success, stickiness and long term recurring revenue.
  3. Typically, hand-in-hand with scenario #2, the more existing business systems and data sources the new SaaS software needs to integrate with, the more critical professional services become. This is especially true as IT will be involved, given the many data integrity, app and data security considerations to work through.
  4. Green-field customer use, where the application category may be well established, but the specific customer in question has never implemented a comprehensive app-based solution for the target business processes.
  5. The customer has an older non-cloud on-premise app, and is upgrading to a cloud-based SaaS app. Existing integrations will likely be very different with the cloud app, as will many capabilities and features that were not possible in the older generation app. There may be significant business process changes requiring extensive change management planning and assistance.

The first scenario is the one where I see new startups getting into the most trouble when they ignore professional services as a key component in their go-to-market strategy. Following are a couple specific examples from marketing automation related companies (names withheld to protect the innocent).

The first company was having great success acquiring customers based on a compelling vision and a charismatic promotional entrepreneur. The company offered a product that would allow customers to measure certain marketing efforts in ways that had not been possible before. That in turned would allow it to create more effective higher converting marketing programs. Revenues had more than doubled for two straight years.

The company offered some basic training/onboarding help and product usage support but, did not offer professional services to help show the customer how to use this new data effectively. The customer was on their own when it came to changing and/or creating new business processes, and on how to integrate the new app into their existing relevant business workflows.

The result? Churn was out of control. The company was losing almost 50% of the revenues it had earned the previous year. That’s temporary or one-time revenue, not recurring revenue! It also meant that the company was really growing at only 50%, not 100%, the difference between a so-so private early stage SaaS company and one that is on the benchmark trajectory for successful public SaaS companies. That, in turn, resulted in an inside down-round when the company couldn’t find new investors, with significant dilution for the founders and team.

The second company had a similar problem. Their app offered new information and insights about marketing program effectiveness, as well as real-time recommendations to targeted consumers to drive higher conversion. It gives Amazon-like capabilities to all the brands and online retailers. As with the first example, the company wasn’t investing in professional services to help the customer rethink their marketing programs in light of these new tools and data, and to build the software into the customers’ marketing technology mix.

The result? Several large customers churned, and the company was unable to hit the ARR bar several potential new investors had set for investment consideration. Without a new outside lead, the existing investors were unable to fund the next round, and the company was sold with no return to the founders and a considerable loss for the investors.

The cautionary tales above illustrate the dangers posed by the wives’ tales, rules of thumb, and unicorn myths which abound in the start-up world. Too many are either patently false, like “SaaS companies don’t have services” or are very misleading without a lot of additional context which is all too often missing from the discussion. Blindly following these “rules” and ignoring the realities of your business including the needs (spoken and unspoken) of your customers has real-world consequences. Up to and including losing significant money for your investors and wasting years of your life.

Part 3 will review some successful techniques and approaches leading SaaS companies have used to deliver an optimized and highly effective service offering that drives faster expansion and upsells, while reducing churn, and increasing LTV. That in turn leads to faster growth and larger marketshare, for less capital invested, and ultimately greater value and returns for all your stakeholders.

Read the original blog post in Forbes here.