The New SaaS Company Realities
The rapid rise of SaaS has created new challenges for the software vendors providing these on-demand solutions.
The shift from on-premise applications to a cloud delivery model has not only changed the way enterprise software is acquired and utilized, it has also changed how independent software vendors operate to meet their customers’ escalating needs. Now, the application provider is responsible for ensuring the availability and performance of the software application – regardless of where the user is located or how many users are accessing the application at the same time.
This is not an easy task. It means that the software provider must not only continuously improve the quality of its software functionality, but also ensure that it can deliver its solutions in a reliable fashion around the world.
The SaaS provider must now assume the costs and complexities of building the service delivery infrastructure to support its applications and the associated customer data. Since subscription revenue in a service business can only be recognized incrementally (compared to the upfront revenue recognition in the traditional perpetual license model), the operating costs associated with that infrastructure build out places significant financial constraints on the SaaS provider.
And yet the quality of the customer experience can’t be compromised. Service latency and availability issues can quickly translate into customer frustration and service abandonment.
Customer churn is a major concern in a SaaS model because it can have a severe impact on short-term revenue streams and long-term profitability and viability. Lost customers not only represent a direct financial loss, but in today’s networked world, dissatisfied customers can easily and quickly broadcast their discontent via social channels and seriously hurt the SaaS providers’ market image and reputation.
David Skok, a managing partner at Matrix Partners, has published an economic analysis of the revenue impact of churn on a SaaS company. Skok’s analysis suggests that if a SaaS company cuts its churn rate in half, it can double customer lifetime value (CLTV).
For instance, a SaaS company with a Monthly Recurring Revenue (MRR) of $10k in the first month that is increasing its sales by $2k/month can produce $180k or 60% more revenue in five years by reducing a 3 percent per month churn rate 50%!
In order to prevent customer churn caused by dissatisfaction with the application performance and availability, SaaS companies must properly architect their service delivery infrastructure in general and the database design in particular.
Stay tuned next week when I’ll examine “The Shortcomings of Traditional Database Architecture” and how today’s SaaS market realities revealed a number of fundamental flaws in the DBMSs of the past.
This is the third in a multi-part series on “Executing a SaaS Strategy: The Role of the Database.” You’ll see a new post from me every week for the next several weeks on the topic, but if you’d like to access the entire series now, you can download it here.
Jeff Kaplan is the managing director of THINKstrategies, the only strategic consulting firm focused entirely on the business implications of the transition of the technology industry from product-centric to services-driven solutions, including software as a service (SaaS), cloud computing and managed services. Follow Jeff on Twitter @thinkstrategies.