In 1998 Concur revolutionized the software industry by introducing their Software as a Service (SaaS) pricing and delivery model, rather than the traditional license and maintenance model. The model was revolutionary at the time because for a fixed monthly fee, customers got access to a continuous stream of small improvements, rather than getting stuck on an old version and facing a big expense when they chose to upgrade.
Fast forward to today. It is hard to imagine buying most software through anything other than SaaS. Now a recurring theme that we hear from our non-software customers is that they want to move their business to a subscription-based model, but is XaaS (anything as a service) really the best answer for everything?
It turns out that, as is true for most things, XaaS is not the best fit for every offering. There are seven things that need to be true for XaaS to be the optimal answer for your business.
First and Foremost, It must be the best answer for the customer!
Sure, a recurring revenue stream with low incremental selling cost sounds great. It makes our financials look great, and might even increase our valuation; and it is really alluring to want to be like the “cool kids” in Silicon Valley. But, no matter how attractive it looks to your business, XaaS won’t work unless it makes sense to the customer. Even in the software world where it frequently is the customer’s best option, it took years to convince customers that SaaS was a better model. It not only needs to match how they think about and realize value, but also how they budget and allocate costs.
Your offering must continually deliver more value over time
Even if your offering delivers a lot of value, if the customer could buy it once and forget about it and still receive most or all of that value, it is not a good candidate for XaaS. You need to have a way to continually update and improve the offering in ways that deliver more value to the customer. If either there are limitations to your ability to update the offering for clients or limitations to how you can improve the offering over time, then you probably should consider something other than XaaS.
There needs to be an identifiable/understandable unit of measure
SaaS works because there is a clearly defined and understandable unit of measure for what is being purchased, a user seat. Does such a thing exist for your business? It needs to be something that you can clearly explain to the customer and police over time. It may be possible that you can add something to your offering to, for example, measure and monitor customer usage. But it should be obvious that this needs to be acceptable to the customer and that the cost of monitoring needs to be included in your business case.
XaaS won’t create a “perverse incentive” for your customer
This is really important. Make sure that moving to a subscription or XaaS model won’t give the customer an incentive to change the way they operate and lower what they pay you. Years ago, we worked with a company that made aircraft brakes. They were trying to undo the damage that had been done when the entire aircraft braking industry had shifted from a price per braking assembly pricing model to a cost-per-aircraft-landing or CPAL (since everything in aerospace needs an acronym) pricing model. The thought was that the brake manufacturers could do a better job of managing the maintenance and life of the brakes. What they missed was that there are two primary ways to stop a plane; brakes or reverse thrusters. The result was that the airline still bore the cost of using reverse thrusters, but the wear on the brakes was no longer their problem. This created a “perverse incentive” for the airlines to encourage pilots to use the brakes more than reverse thrusters, the maintenance cost per landing went up – and this product line’s profitability went down.
You must have an easy way to “turn off” your offering
Another reason that SaaS works, is if a customer stops paying, it is easy to disable their access. How would you go about disabling your offering for a customer if they stopped paying? If it requires someone going to site to disable or remove it, that is problematic.
Your cash flow can support a significant reduction in short-term revenue
This may be obvious, but when you shift from an up-front price to an ongoing subscription, your short-term revenue will often go down. Especially if the new subscription model doesn’t dramatically increase customer adoption rates and your offering requires an up-front capital expenditure, your revenue will almost certainly be lower at least for the first year or two. Be sure to take this into account when you are evaluating XaaS as an option.
Your business must have a high fixed cost and low variable cost
Last, but not least, is that your offering must be highly repeatable with very little, or even no, custom work for a new customer. Again, SaaS works because the cost to develop the software is spread across all of the customers and, in general, the cost to add a new customer is low or almost nothing. If your incremental cost to add a new customer is high, it is likely that you will lose money for a significant period of time. The lower your cost to add a new customer, the more suited it may be for an XaaS mode.
An ongoing revenue stream may sound very enticing, but it is not the right answer for every offering. Prices create incentives, and incentives change behavior – be sure to think through all of the implications before making any changes. And, bottom line, even if it sounds good to you, if it isn’t the right answer for the customer, as long as they have choices, it will not work.