In this article, the author puts forward the idea that the essence of SaaS is renewal, why does the author say this? Let's take a look at the author's views and insights.
SaaS business is essentially a subscription revenue model, that is, users have to pay on a periodic basis if they want to use the service. Therefore, when we talk about renewal, we mean the user subscription fee, and more and more SaaS companies use the renewal rate as the core metric of subscription measurement.
"Renewal" actually has a more colloquial synonym: repeat customers, and the industry where this word appears most frequently is the restaurant industry.
In terms of performance, the biggest difference between SaaS and traditional installation and deployment software is that the former pays an annual fee to rent the service, and the latter buys out at one time. This seems to be just a difference in "quotation method", but in fact, it has a huge impact on the service model, sales model, business model, company valuation and other dimensions. Traditional software sells products, while SaaS sells services.
1. Innovate service models
The traditional software implementation failure rate is high (the implementation cost is also very large), or the user experience used after the launch is very bad, the industry often says that the problem of rapid change in customer needs and the problem of enterprise execution, but in fact, it is still a mechanism problem of "interests and contributions are not mutually effectively restricted".
From the perspective of software companies, sales have already achieved their performance tasks when the contract is signed, so sales reps and even pre-sales support consultants will often "dig holes" for the R&D department behind them with the purpose of "winning the order" in the face of competitive incentives, even if they over-promise (in fact, the reality seems to be that this is often done). In the following years, there is only about 15% of the maintenance fee, and the benefits are not much.
And SaaS's annual payments have revolutionized that. For example, a traditional software project with a price of 500,000 yuan is quoted at 100,000 yuan per year for a SaaS company. After the customer contract is signed and implemented, the "Customer Success Department (CSM Customer Service Management System)" will take over the service. The customer success manager has a very clear goal is to make the customer use it well, so that the customer will renew it after 12 months! With the renewal fee of 100,000 yuan, the CSM will have performance and bonus, so they will attach great importance to customer feedback. If the enterprise does not use it well, CSM will even re-conduct demand research and secondary development. Why? Because the customer uses it well, there is still 100,000 yuan * N years in the future!
Therefore, the service of SaaS companies must be more secure. Conversely, if a SaaS company charges for 5 or even 6 years at a time, this is more risky for the customer than using traditional software. Because there is no renewal fee to be charged within 5 years, CSM will not pay attention to this customer for the next 4 years.
From the perspective of this process, SaaS innovates the service model of the software open industry, so that the interests of customers have been guaranteed for a greater and longer time, and the entire industry has a better market environment.
2. Innovative sales model (business model)
The annual fee model has also greatly affected the sales gross profit model of SaaS companies.
In the above example, although the initial charge of 100,000 yuan is much less than 500,000 yuan, the threshold is lower, the sales difficulty and sales cycle are shortened, and the sales representative of a SaaS product can also achieve millions of yuan a year, or even more sales revenue. For SaaS companies, the renewal cost from the second year onwards is very low, with CSM taking 20%~40% of the fees, and the remaining 60%~80% is gross profit.
Therefore, the gross profit of new orders sold by SaaS can be very low, and even the 0 gross profit policy can be used to give 10%~30% of the first transaction commission to sales (the commission ratio is 3~10 times that of the traditional software industry), and 60%~70% of the rebate to agents.
Our goal is no longer to buy the product, but to make the customer successful first. Only on the basis of allowing customers to use our products, whether it is to reduce costs and increase efficiency, or business growth, we have achieved success. We can continue to sell more services to customers. The significant impact of this business model is based on the very nature of SaaS.
A good cycle: good products help customers solve problems, bring a good reputation – get more customers and revenue – the company has a good cash flow to invest in R&D and organizational upgrades, and better help users solve more problems.
Nothing proves the value of a product like getting it ripe enough to be marketable and selling it out.
3. Change the value of the company
The annual fee model also determines the value of the SaaS company, or "valuation".
SaaS companies are valued by annual revenue, and in the United States, SaaS companies are valued at about 10 times annual sales, which is completely contrary to the price-to-earnings ratio (market capitalization earnings) of about 20 times for traditional listed companies.
We can simply calculate that if a traditional company completes annual sales of 10 million yuan, the net profit is about 1 million yuan (10%), the market value = 1 million yuan X 20 times the price-earnings ratio = 20 million yuan, and the market value is only 2 times the sales of 10 million yuan.
According to the SaaS valuation model with a price-to-sales ratio (market value is about a multiple of sales) of 10 times, a SaaS company with annual sales of 10 million yuan is valued at 100 million yuan!
If I were an investor, I would strictly evaluate ARR (Annual Recurring Revenue), not just the total annual revenue. That is to say, the income must be converted according to the service period, and if it is charged for 3 years at a time, only the part that will be performed in the current year can be used as the current year's income.
Of course, for large enterprises, a procurement decision-making process has a high cost, and it is normal to take the initiative to ask for 3 years of procurement. At this time, the SaaS company's quotation must not follow the traditional quotation model (only 15% of the maintenance fee will be charged in the future), and the fee from the next year onwards will be at least 50% of the first year, not 15%.
The top two SaaS companies in each industry in the future will be very valuable, and they may have 60% or 30% of the market turnover respectively.
Fourth, summary
SaaS makes industries more efficient, more accurate, and more economical, and every industry deserves to be redone with the Internet.
The biggest difference between the SaaS model and traditional software is not that the software is deployed in the cloud or in the customer's corporate office, but the charging model. Annual charging (renewal in the following year) is the key to the SaaS model, and if the business is normal, the annual renewal revenue (including additional purchases) will gradually exceed the revenue of new orders and become the main body of the SaaS company's revenue.
In China's relational society, customers are Xi to who supports me, I trust whom, I give money to whom, and vice versa, the logic also holds, I give money to whom, I will find who to provide services, so the customer success department directly to the customer to sign the renewal contract is the most efficient.
Therefore, as a new business model, the core and essence of SaaS is "renewal". If the majority of customers fail to renew successfully, SaaS companies that receive only one payment do not meet the SaaS business model.
For SaaS companies with poor renewal rates (e.g., less than 60%), what is the problem they need to find out if the product's PMF (Product-Market-Fit) is not completed and is in a hurry to release, or the customer success manager's service is not done well, or the sales department simply chooses the wrong customer (which is often the main reason why customers do not renew)?
And for those SaaS companies that charge service fees for many years at a time, they don't even have the opportunity to find their own problems. The SaaS charging model shapes the organizational structure and service mechanism of SaaS companies. Therefore, we insist on not selling orders for many years, so as to polish and mature the product and truly achieve customer success.
This article was originally published by @短剑在闲逛 on Everyone is a Product Manager and is not allowed to be reproduced without permission
The title image is from Unsplash and is licensed under CC0.
The views in this article only represent the author's own, everyone is a product manager, and the platform only provides information storage space services.