It’s no news to those in high tech that the shift from on-premise software to SaaS has not only begun; it’s in full force. The number of high profile companies that have converted some or all of their on-premise software models to either SaaS delivery mechanisms or SaaS subscription models has snowballed in the last few years. According to a recent Gartner report, 40% of all CRM software sold in 2012 was SaaS-based.*
Some of these companies, such as Salesforce and ZOHO, started out as SaaS companies, but others, like Ceridian, Adobe and Autodesk, are making the transition from on-premise delivery and/or perpetual pricing models to SaaS delivery and pricing models. Some are incorporating SaaS slowly into their portfolio (Autodesk) while others are making a wholesale transition (Adobe). Making this transition carries both opportunity as well as perceived and actual risks. How you make the transition can increase or decrease either.
Some executive teams find the transition to SaaS so intimidating that they become paralyzed, unable to make the decisions necessary for success. In other cases, companies dive in headlong without first understanding how SaaS offerings will play out in their existing install base, how customers or competitors will respond, or how the migration/transition of existing customers will affect the financial performance of the company in the short and long-term.
There are multiple levers companies must manage when making this transition. Companies I’ve worked with who made this transition were most successful when they carefully examined and made thoughtful decisions about six key areas when designing and launching their SaaS offer: Behavior, Customers, Metrics, Sales Compensation, and Financial Impact.
Let’s start with the first three:
Behavior: Companies need to ask themselves and determine answers for the following key questions:
- What behavior do we want from our customers? From our sales people?
- How does the design of the offerings and the price points relative to our existing offer drive these behaviors?
- If you are simultaneously offering both on-premise and SaaS solutions and accompanying pricing, what is the relationship between the two and how do customers make the price/value trade-off decision?
- Is the sales force compensated to drive SaaS options? Or is it best to just make a wholesale change and not offer both options? Do we offer SaaS only to new customers but allow existing customers the choice?
Customers:
- Who is going to opt for the SaaS offering? For whom is it best designed/targeted?
- Is this going to help us penetrate a new market segment?
- What happens to existing customers and how will they perceive the change?
- How many of them, and at what pace do we want them to convert to the subscription model?
As with any new product launch, understanding who the target market is for this offer (and rarely is it all of an existing customer base) and how they are going to adopt it and use it is key to understanding what the offering design should look like: levels, capabilities, metrics, price points, etc.
Metrics: What are the metrics we will use to structure the offer and charge for it?
Often in a SaaS model – the old metrics a company used to charge for their software may no longer apply or at least need to be modified. (See metric examples below) Companies who used to charge a per-user fee, per check fee, or per server fee may need to rethink their metrics. Three aspects have to be researched, validated and modelled:
- What metrics best align with how customers use and get value from the SaaS offer?
- How easy is it for customers to understand and estimate the cost to them?
- Does this metric highlight our competitive advantage?
Some metrics seem to be perfect in theory—like paying per project, per GB or per download—but how that plays out in real usage scenarios and in customer’s ability to estimate their costs will drive the final decisions on which metrics to use.
In the next post, I’ll cover the three other key considerations for companies to consider when transitioning to SaaS: Sales compensation, Financial model, and Pricing.
