Five tips to SaaS success

Channel Dynamics' Cam Wayland shows how to survive the transition to annuity models.

We often get asked about why resellers have not truly embraced the concept of SaaS (software as a service) and other "on demand" or annuity models faster.

The technology platforms and applications are now generally stable, the benefits for the end user customers seem clear enough, so why does SaaS still only represent a small portion of the typical reseller's income today?

We believe it can be summed up by "Show me the money!" and the challenge of moving to an annuity revenue stream compared with the current buy/sell margin based business model.

A number of our vendor clients already have some SaaS products but often find it difficult to get resellers to actively sell their service. The advice we give them is to stop thinking about the product and start thinking about explaining the business model's benefits and transition requirements, both for the customer and for the channel.

One of the key advantages for the customer is that "the service" is a monthly operating expense delivered via the internet and can be scaled up or down, or even terminated with a month's notice. This gives great flexibility compared to what may have been a capital purchase of a fixed number of licences.

However, this flexibility has a flow-on effect for the vendor and the channel in that revenue can usually only be recognised when the customer gets billed for the service each month, not up front.

For the channel this usually means a small percentage of the customer's monthly bill as a trailing commission, paid monthly. Compare the numbers for a typical anti-virus, spam etc SaaS service versus two "traditional" approaches of either a gateway appliance or a server/desktop software licence for an SMB of 50 seats.

A software solution could be Trend Micro Worry Free Advanced at approximately $4,200 list price. A gateway appliance solution could be the Netgear STM150 with a similar list of approximately $3,850. Both of these include one-year software updates.

For the reseller, say a 10 percent margin on a discount of 30 percent off-list gives them a profit of $325 for the Trend software or $300 for the Netgear box.

Compare this with a SaaS alternative from Manage Protect of MP Mail & Web; $5.50 each per service per user per month i.e. $11 x 50 = $550 per month, including updates. The reseller would get a 10 percent commission which is $55 per month.

It would take six months for the reseller to make the same profit from selling a SaaS solution compared to a "traditional" software or hardware or solution.

However, profit is not cash, working capital or cash flow and most resellers need the cash ASAP to pay for stock and the running costs of the business, including the sales person's wages and commission.

Ask a sales person whether they want their commission now or spread over 12 months and I know what most will say!

If the channel is to really embrace SaaS and other annuity services, resellers will first need to understand and fund their short to medium term cash flow and working capital requirements, and then assess the technology suitability.

However, it is not necessarily an all-or-nothing approach. All of the above product examples could be suitable depending on the customer's requirements. Look for opportunities to start making a gradual transition to an annuity model.

In our experience it will take 12-18 months of steady building of the annuity base before the full financial benefits are realised.

There are other things for the reseller to consider in making this transition. Resellers must embrace the concept of "customer lifecycle management" engagement, which is vital to the success of an annuity business compared to a standard supply relationship.

There are critical times in an ongoing billing relationship that, if not managed well, will put the service and therefore the annuity at risk, such as provisioning, first bill and leading up to contract renewal time.

If this is managed well the multiple positive contacts will make the customer less likely to look for an alternative product, and will usually lead to them calling the incumbent reseller first for other items as well. Look at the various telcos for examples of both good and bad customer lifecycle management.

A number of distributors have recognised this need as well and have built quite sophisticated "back end" support systems, primarily around traditional software licensing and renewals. Express Data is recognised as a leader in this area, but other strong examples include Ingram Micro, itx and others.

One indication of the trend is the launch of Annuity Systems as a business unit of Distribution Central. Their entire business model is based on assisting resellers with customer lifecycle management more cost effectively than the reseller could. This helps lift the renewals rate and channel profitability as well as customer satisfaction and "stickiness".

Here is a quick check list for resellers moving to an annuity model:

1. Understand the monthly cash flow and working capital requirements of your business. How will moving to an annuity model impact these?

2. Should you invest in your own billing and management platform or use that of the distributor or vendor? Which can provide flexibility and granularity in customer and reseller reports?

3. Best practise SaaS or annuity resellers will have two types of sales people active in the account: "hunters" to acquire the customer and "farmers" to ensure the customer keeps billing or renewing. Churn is the enemy of annuity models.

4. Review and/or redesign the appropriate sales compensation scheme to encourage annuity sales and customer longevity.

5. Work to a plan and gradually start to build an annuity base. It will generally take approximately 12-18 months of steady annuity type sales to be able to be in a position of strong cash flows from trailing revenues.

The industry is heading towards SaaS and other annuity based billing of infrastructure, VoIP, and other services, and "box" margins are not going to get any better.

Resellers should be investigating which vendors and distributors have the products and systems to support the needs of their clients. They must also be able to adapt their own business model and channel model to suit.

Cam Wayland is director of consultancy Channel Dynamics