Do We Really Understand “As A Service?”

“As A Service,” particularly SaaS has become the “fashion” in business over the past decade. While everyone touts the subscription or term payment models as new and innovative, they have existed for decades, minimally. When I was selling mainframe computers (back around the time when the wheel was invented), I could only offer a subscription payment. Customer could choose to sign contracts for several years, but they couldn’t purchase them outright. Like today’s offerings, ongoing maintenance, service, support were built into the monthly pricing the customer paid. The customer could upgrade, and the monthly fee would be adjusted for that upgrade.

The problem with the way we look at “As A Service,” is we tend to conflate an business strategies, financial, cashflow, revenue recognition strategies; and GTM/sales strategies. And this confusion may cause us to be unresponsive to the needs of the markets/customers and our own financial/growth strategies.

The reality is these are separate and distinct. We tend to think, mistakenly, that the SaaS selling methodology is applied to “aaS” offerings, because of the subscription nature of the offering. And we look at complex selling methodologies for “purchase” driven sales, for example capital equipment, professional services, etc.

Likewise, we tend to think that only in SaaS do we care about customer retention and revenue growth opportunities. We “think,” outright purchase is different, that we don’t care as much about retention and growth, we want to find the next new opportunity. “We’ve gotten the customer’s money, let’s go someplace else.”

The reality is the payment methodology has little to do with the sales approach.

The classic SaaS, consequently other “aaS” approaches has it’s origins in consumer product marketing/sales. It’s highly transactional, the customer is relatively experienced in buying these items, the risk associated with a bad decision is very low, and very few people are involved in the buying process.

But we also see too many organizations with SaaS or “aaS” a service offerings, where the buying/selling process is very complex. Selling 10 seats of an offering is profoundly different than selling 10,000 seats of the same offering. The first can be highly transactional the second is very complex. We don’t go after the 10K opportunity with a SDR saying, “We have a great product, can we schedule a demo…” A lot more people are involved, many more issues are involved, and the risk is more profound.

In any sales situation, whether it is an “aaS” or purchase offering, the buying/selling approach has to be aligned with the level at which we are selling. Either can be very simple or transactional, either can be very complex. Our GTM strategies have to be aligned with the buying process, not the cashflow of the payment terms.

More interesting is the business financial strategy around “aaS,” specifically how it might impact many of the struggles SaaS companies may be facing.

I’ll address this from both a customer and vendor POV.

From a customer POV, sellers focus on, “You subscribe, you only pay $X per month.” It’s an attractive proposition to the customer, they think, “I only have to find $1K in my budget, rather than $36K. It’s much easier to justify!” But the reality is they are committing to a contract, for example a 36 month contract, or $36K. I’ll repeat this, the customer is committing to $36K, the only difference is how they pay for it.

As CFOs start looking at this, they may be concerned about cashflow, but they are more likely concerned about total lifetime cost. So they look at the net present value (NPV) of paying $1K for 36 months, or they pay $36K up front. They are looking at which decision is better from a financial POV.

Some years ago, a large software company that had offered their software on a purchase plus maintenance basis, asked me to evaluate continuing to offer that option or to switch to a subscription offering. In looking at it, we found the cashflow break even at about 27 months (we included the software, maintenance, and the cloud based costs in the analysis). What attracted them to switch to primarily SaaS offerings, other than the market fashionability of the offering, was they made more money over the 36 month period rather than the outright purchase. Stated differently, the customer would be paying more for exactly the same service.

As they converted to primarily SaaS payment methods, they had to manage market expectations, because revenue recognition changed, but as they explained it to their major shareholders, over time, their stock price actually went up.

What about customers who don’t want that upfront purchase or cash outflow? What about those that want to spread it out over time. The financial markets solved this problem decades ago. When I was selling computers and we switched from “aaS” offerings to purchase, my customers said, “We prefer the monthly payments we have always paid.” And, I would introduce them to the leasing companies, to solve that problem.

Perhaps, the most interesting thing is to look at the financial model and impact from a vendor point of view, particularly as we see so many SaaS companies struggling.

In the subscription or monthly payment offering, the vendor has a commitment for money over a period of time, let’s say a 3 year contract. They just collect it in monthly increments. And this, creates a cashflow issue.

While a vendor might have commitments, over a long term, for revenue, they are incurring expenses they have to pay today.

Often, VC and other funding covered that cashflow issue, but it creates other challenges. But more recently, we’ve seen investors less tolerant, demanding their portfolio companies start spending within their means.

In fact, we are now starting to see a number of SaaS companies offering “purchase” options. While they are still pricing on a monthly subscription basis, more and more are saying, “Pay the full year up front and you get X months free.” These are offered to help these suppliers manage cashflow issues, and these are, in effect, purchase offerings. Vendors are 20%+ discounts the cumulative monthly payments to get the money upfront.

As my mind wanders about the business possibilities of this, I get the sense of deja vu all over again. Imagine the case, what if vendors want to accelerate cashflow, getting payments up front, yet customers want to continue to pay on a monthly basis? Imagine a finance company buying the contracts of a vendor, giving them the cash up front, yet allowing the customer to continue to pay on a monthly basis. We’ve seen this so often in other markets, I suspect the time is coming in SaaS for these interesting offerings that solve both the customer and vendor problem.

In conclusion, we have to stop conflating business strategies, financial strategies, and GTM/sales strategies under one banner, “XaaS.”

1. Every business wants and needs to create customers for life. We need to service those customers constantly, we need to continue to innovate and develop new offerings to get them to continue to buy (Simple example is there have been about 15 major models of the iPhone and I think I have purchased 20…)
2. Our selling strategy has little to do with whether our offering is subscription or purchase. It must be driven by the customer buying process. For very knowledgeable/frequent buyers, involving very few buyers, and low risk (not necessarily low price), a transactional buying/selling process is more appropriate. For offerings that impact more people in the customer, that are much more complex and represent higher risk, a consultative/complex buying/selling process is more appropriate.
3. When doing financial modeling, “aaS” versus purchase, versus others represent differing cashflow alternatives. And there is no one answer to what is right. Ultimately, NPV probably wins for customers (though not always), and accelerating cashflow may be critical to suppliers. And we can satisfy both with creative financial offerings. In transitioning from one model to another, there are some shareholder management issues, but lots of companies have this experience.