Product Management: Moving to SaaS
Karl Rumelhart is a leading expert in subscription products - providing solutions to enhance SaaS capabilities and retain more customers. The SaaS model is now the standard for new software licenses. However, the ability to drive profitability is not as simple as traditional enterprise models. As Karl explains, product teams must keep a watchful eye on the sellability of their SaaS products to remain competitive and viable.
Gainsight CPO on Product Management (Part 2)
It’s easy to look at the “old way” of doing business in the enterprise software world and say, “why would you change that?” In other words, why would you move away from a cost-effective model with high margins? Unfortunately, vendors can’t have it that easy. Ultimately, product management teams have moved toward subscription as a service (SaaS) models in order to adjust to customer demands.
To quote Geoffrey Moore: “Product is no longer king. Supply is not the scarce ingredient in the economic equation anymore. Now it is demand. And that means that the customer is king.”
Unlike traditional enterprise agreements, SaaS models shift every risk to the vendor as opposed to the customer. Instead of perpetual licenses that pay vendors with upfront capital, SaaS agreements provide services on an annual or monthly basis. As a result, the gross margins are okay and it’s critical to retain as many customers as you can. Furthermore, with less capital being received upfront, SaaS companies need to keep their sales pipeline filled with many prospects.
Product management teams in this space need to be very sales-focused. In other words, you have to focus on making your SaaS product as sales-friendly as possible. For example, you need to develop solutions that reduce churn or attrition with your customer base. With gross margin being much lower in SaaS models, it’s critical to retain customers. One way to do this is to constantly upsell. Simply put, it’s much easier and cost-effective to add new features to a customer’s account than it is to source new customers.
To stay on top of these factors, I like to use two equations with a ratio that combines the two. The first is “cost to acquire a customer” or CAC. Here is how to calculate CAC – which tells you how much you need to spend in order to bring on a new account:
Sum of Sales & Marketing Expenses / Number of New Customers
The second is “lifetime value” or LTV. Here is how to calculate LTV – which will provide a summary of the payback that your customers will provide:
Avg. Customer Revenue x Gross Margin / Churn Rate
Finally, the CAC-to-LTV ratio gives product management teams a simple view of their business viability. This model provides a clear overview of how much money you can expect to earn over time after making an investment to acquire a customer. In the end, SaaS models are here to stay and enterprise services can be effective in leveraging the model to reach more customers. That said, it is critical to stay on top of your bottom line.