digging economic moats for your xaas business - … gainsight keynote.pdf · digging economic moats...

©2015 Gainsight. All Rights Reserved.

Digging Economic Moats for Your XaaS Business

J.B. Wood President and CEO

©2015 Gainsight. All Rights Reserved. 2

Global Footprint

65+ Countries | 500 Memberships | 300 Tech Companies

Our mission is to increase revenue and profit performance of technology companies by optimizing service businesses.

Thought Leadership Research-Intensive Model

115 Deep dive audits

1150 Benchmark analyses

7K Analyst inquiries

In the last 4 years… In the last year…

80% are Fortune 100 Tech Firms

Amazon “Tech” Category Best Sellers

130K Benchmark data points

515K Survey data points


"I skate to where the puck is going to be, not where it has been.” - Wayne Gretzky


2009

2011

2013

“We Have a Problem…”

“A New Purchasing

Model Is Coming”

“Industry Transformation”

4 Coming This Month!

A Journey… “Profitable XaaS”


Tech & Service 50 Index vs. Cloud 40 Index

5

TSIA TS50

TSIA Cloud 40


Revenue Multiplier (market cap/revenue)

6

Average: Q4 2015 5.6

1.4 1.7 1.7 1.8 1.8

2.1 2.6

5.1 5.5 5.5 5.6 5.7

6.1 7.5

7.9 8.1 8.2

8.6 10.4

14.1

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Lifelock

IntraLinks

Jive Software

RealPage

Athena Health

Google

LogMeIn

Veeva Systems

Ultimate Software

ServiceNow


However, The Mountains Are Eroding…

7

0

5

10

15

20

25

LivePe

rson

Marin So2

ware

EGAIN

Brightcove

Num

erex

RackSpace

Carbon

ite

Jive So2w

are

Bazaarvoice

IntraLinks

Lifelock

inCo

ntact

Channe

ladviso

r

Barracud

a Networks

BoKom

line Techno

logies

RealPage

RingCe

ntral

Bene

fiNocus

Cornerston

e Ond

emand

Marketo

Veeva System

s

LogM

eIn

Textura

Demandw

are

Athe

na Health

Google

Med

idata

SalesForce

Fleetm

aUcs Group

Sps C

ommerce

Red Ha

t

Cven

t

Qualys

NetSuite

UlUmate So2w

are

Splunk

Proo

fpoint

Guidew

ire So2

ware

ServiceN

ow

Workday

Current Last Year


GaaP Profitability Problem Not Going Away At Scale

8


The Slowdown Fish

9

PROFIT

LOSS

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+

Time

COST REVENUE

Profits

Losses

Growth Slowdown

costs

revenue


The Slowdown Fish

10

PROFIT

LOSS


Time

COST REVENUE

Losses

Growth Slowdown

New Investor Messaging

“Hyper-Growth”

“Growth +

Profits”


Why aren’t we already there?


Economic Moats – What Drives Sustained Tech Profitability?

12

6. Virality/Low Cost of Sales

4. Network Effect

3. Economies of Scale

Economic Moat

5. Diverse Revenue Streams

2. Unique Capabilities

1. High Switching Costs


Economic Moat - Traditional Tech Alignment

13

Virality/Low Cost of Sales

Network Effect

Economies of Scale

Medium

Medium

Low

Economic Moat Traditional Tech

High

High

High

Diverse Revenue Streams

Unique Capabilities

High Switching Costs


Economic Moat XaaS 1.0 – All Same or Worse

14


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium


The Cost of Sales Problem


Sales and Marketing as a Percentage of Revenue

16

50%

40%

Workday Licensed Software

Rackspace Google

30%

20%

10%

0%

52%

60%

40% 38% 29%

14% 13% Saas

Companies Salesforce


XaaS Revenue Waterfall

17

115%

$115m

100%

$100m

End of Year Revenue:

Total $’s End of Year

Starting ARR: Total $’s Available

to Renew at Beginning of Year

90%

$90m

Retention Dollars

Upsell Dollars

Cross Sell

Dollars

Customer Churn Dollars

Downsell Dollars

Retention Rate = 90% Expansion Rate = 25%

Churn = 7% $3m Downsell = 3%

$7m Upsell = 10%

$10m Xsell = 15%

$15m

YoY Growth Rate = 15%

Source: TSIA SRG Cloud Benchmark Study

©2015 Gainsight. All Rights Reserved. 18

Effectiveness

Efficiency

Data Quality

Stickiness

Quantity

Who

Land New Customer

LAND ADOPT

Descriptive Analytics

Predictive Analytics

Outcome Analytics

Consumption Analytics Platform

Cost-Effective Selling

Channels

Data-driven and CGT-driven

Lead Gen

X-Sell Sellers

Renewal Sellers

Upsell Sellers

Large Upsell Sellers

EXPAND RENEW

Outcome Engineering

Customer Success Team

Customer Service Teams

Customer Growth Teams

TSIA LAER Model – The Key to Reducing Cost of Sales


Economic Moats XaaS 2.0

19


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium

XaaS 2.0

Medium


The Revenue Diversification Problem


The Three Profiles of Xaas

21

Future Value Aggregator

Unit of Consumption by Customers (users, pageviews, clicks, etc.) Confident in Pricing/ Revenue Model

Revenues Growing Faster Than Expenses

Profitability Horizon

Mid-Term Wedge

Current Profit Maximizer


FVA Profit Horizon

22

PROFIT

LOSS


Time


COST REVENUE



23

Rapid Growth (usually triple-digit)





Not yet

No

5+ years

Mid-Term Wedge



MTW Profit Horizon

24

PROFIT

LOSS


Time

Mid-Term Wedge

COST REVENUE



25


Mid-Term Wedge


Growth (high double-digit+)




Yes

Yes, maybe barely

3 to 5 years


CPM Profit Horizon

26

PROFIT

LOSS


Time


COST REVENUE



27


Mid-Term Wedge


Growth, could be slowing




Yes, usually multiple

Yes

Current to 3 years


Friction Extremes

28

Easy Acquisition Easy Adoption

Maximize Margin

EASY PROFITABLE


The Friction Curve

29

FUTURE VALUE AGGREGATOR

MID-TERM WEDGE

CURRENT PROFIT

MAXIMIZER

Harder Purchase Decision

Easier Purchase Decision

Higher Profits Per Customer

Lower Profits Per Customer


Iron Triangle

Portfolio & Pricing

Customer Engagement Model Financial Keys

Key XaaS profits decisions live in these three areas


The 3x3 of XaaS

31

Portfolio And Pricing

Customer Engagement

Model

Financial Keys

FUTURE VALUE

AGGREGATOR

MID-TERM WEDGE

CURRENT PROFIT

MAXIMIZER

•  Revenue mix •  Margin and profit targets •  Sales and marketing •  Key performance metrics

•  New customer landing strategy •  Adoption framework •  Customer expansion model •  Renewal responsibility

•  Technology offer definition •  Value-added service offer definition •  Offer(s) pricing model

Harder Purchase Decision

Easier Purchase Decision

Higher Profits Per Customer

Lower Profits Per Customer


XaaS Revenue Streams

32

TOTALS

Revenue Streams

Technology Subscription

Premium Annuity Account Services

Professional Services

Transaction Revenues

Aggregate Business Model

% of Company Revenue

COGS%

GM%

S&M%

R&D%

G&A%

OI%

©2015 Gainsight. All Rights Reserved. Low Average High

Gross Margin Profiles (TRIMMED RANGE)

33

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% SOFTWARE PRODUCT

GROSS MARGIN

SUBSCRIPTION GROSS MARGIN

ANNUITY SERVICES

GROSS MARGIN

PROJECT SERVICES

GROSS MARGIN

TRANSACTION SERVICES

GROSS MARGIN


Bundle Growth Chart

34

ATTRIBUTE

Portfolio Components

Core Offer

Tech Support

Module A

Tech Support

Outcome Services

FVA STAGE NEAR-TERM WEDGE STAGE

CURRENT PROFIT STAGE

Core Tech Subscription

Adjacent Modules

Attached Services

Operational Services

Adoption Services

Information Services

Outcome Services

Basic Basic

Consulting

Tech Support

Basic

Diverse Complete Simple

1 5 10 TOTAL NUMBER OF OFFER BUNDLES

Core Offer

Module A

Implementation

Premium

Data Supplement

Core Offer

Module B

Implementation

Managed Services

Premium

Data Supplement

Advanced Analytics

Pay for Performance


FVA Revenue Streams

35

TOTALS

Revenue Streams






% of Company Revenue 90% 10% 100%

COGS% 40% 40% 40% GM% 60% 60% 60%

S&M% 60% 15% 56% R&D% 20% 20% 20% G&A% 15% 15% 15%

OI% -35% 10% -30.5%


Competitor A’s Price

Competitor B’s Price

Core Subscription Prices and Margins Get Squeezed!


Expanding the Portfolio of Offers

37

ATTRIBUTE


Core Offer

Tech Support

Module A

Tech Support

Outcome Services




Adjacent Modules

Attached Services


Adoption Services


Outcome Services

Basic Basic

Consulting

Tech Support

Basic



Core Offer

Module A

Implementation

Premium

Data Supplement

Core Offer

Module B

Implementation

Managed Services

Premium

Data Supplement

Advanced Analytics

Pay for Performance


MTW Revenue Streams

38

Revenue Streams






% of Company Revenue 70% 20% 10% 100%

COGS% 35% 35% 65% 38% GM% 65% 65% 35% 62%

S&M% 45% 12% 8% 35% R&D% 18% 10% 5% 15% G&A% 12% 12% 12% 12%

OI% -10% 31% 10% 0%


Strategic Diversification

39

ATTRIBUTE


Core Offer

Tech Support

Module A

Tech Support

Outcome Services




Adjacent Modules

Attached Services


Adoption Services


Outcome Services

Basic Basic

Consulting

Tech Support

Basic



Core Offer

Module A

Implementation

Premium

Data Supplement

Core Offer

Module B

Implementation

Managed Services

Premium

Data Supplement

Advanced Analytics

Pay for Performance


CPM Revenue Streams

40

TOTALS

Revenue Streams






% of Company Revenue 55% 20% 15% 10% 100%

COGS% 25% 25% 60% 10% 29% GM% 75% 75% 40% 90% 71%

S&M% 42% 10% 5% 5% 26% R&D% 20% 10% 5% 8% 15%

G&A% 10% 10% 10% 10% 10%

OI% 3% 45% 20% 67% 20%


The Profitable Economic Moats of XaaS 2.0

41


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium

XaaS 2.0

Medium

High

High

Medium

High

High


Customer Success Will Play A Central Role in Profitable XaaS 2.0

•  Drive down sales costs •  Optimize waterfall economic performance •  Diversify revenue streams

A Lot More Than Just Adoption and NPS!


Digging Economic Moats for Your XaaS Business

THANKS!

J.B. Wood President and CEO

digging economic moats for your xaas business - … gainsight keynote.pdf · digging economic moats...

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