microsoft powerpoint - tfp-rationalizingtraditionaltosaas-080404
TRANSCRIPT
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Drew WrightApril, 2008
Rationalizing Traditional Software Pricing to Software as a Service (SaaS)
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Technology Finance Partners (TFP)
Customer Finance
Programs
Pricing Consulting
Sales Tool Creation
Business CaseAnalysis Service
ROI / ValueConsulting
Financially Oriented Sales and Marketing Consultants
Revenue Optimization Sales EfficiencyField Level Support
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Why Rationalizing Traditional to SaaS Matters
Traditional VendorsNeed to respond and compete . . . but need to understand and forecast business impact
SaaS Providers Helps in anticipating competitive response and in developing TCO conversation
SaaS Start-UpsLikely competing with traditional and provides a competitive benchmark when developing pricing.
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Estimated Cumulative Costs
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Months
Cum
ulat
ive
Cos
ts
Internal Subscription
Subscription vs. Perpetual (A Customer’s First Impression?)
Software & Maintenance
Seasonality
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1 6 11
16
21
26
31
36
41
46
51
56
MonthM
onth
ly S
pend
Based on Peak Need
Based on Actual Use
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Estimated Cumulative Costs
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Months
Cum
ulat
ive
Cos
ts
Internal SaaS
The Real Total Cost of Ownership & The Underlying Opportunity
Patches and updates
Version Upgrades
Hardware Refresh
Revenue Optimization
Hardware & MaintenanceImplementationFacilities, ConnectivityOperations Management
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Falling in to SaaSC
usto
mer
Fin
anci
ng
Subs
crip
tion
Pric
ing
Whit
e Lab
el via
MSP
On Demand Option
Software as a Service
Revenue
Business Operations
Firewalled Division
Transformative
Start Up
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From the Trenches: SaaS Poster Child
Employee Spend Management
Select Data from Annual Income Statements (000s)Year 1999 2000 2001 2002 2003 2004 2005 2006 2007Total Revenue 37,809 35,704 41,099 45,097 56,737 56,550 71,831 97,145 129,107Cost of Ops 18,633 27,832 24,961 21,987 23,214 23,264 28,450 37,846 43,711S & M 28,993 38,581 24,941 16,669 14,549 14,329 17,484 22,907 34,154R & D 19,371 31,212 16,449 10,606 10,356 8,773 9,336 12,445 15,866G & A 10,385 14,795 10,729 6,800 6,710 7,295 10,319 14,458 18,759Other 8,859 2,167 266 1,490 1,140 1,140 1,140 2,420 2,965Operating income (48,432) (78,883) (36,247) (12,455) 768 1,749 5,102 7,069 13,652
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007Revenue Growth 87.8% -5.6% 15.1% 9.7% 25.8% -0.3% 27.0% 35.2% 32.9%Cost of Ops 49% 78% 61% 49% 41% 41% 40% 39% 34%S & M 77% 108% 61% 37% 26% 25% 24% 24% 26%R & D 51% 87% 40% 24% 18% 16% 13% 13% 12%G & A 27% 41% 26% 15% 12% 13% 14% 15% 15%Other 23% 6% 1% 3% 2% 2% 2% 2% 2%
First Even Switch
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Stepping Up to SaaS
Customer Financing
Subscription Pricing
White Label via MSP
Revenue
Business Operations
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Step 1: Customer Financing
“As the popularity of SaaS increases, expect vendors that can provide vendor-led financing options and payment alternatives to use them to combat the SaaS offerings.” – Forrester
Cumulative Cash Flow Comparison
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Financed + Maintenance Subscription
License & Maintenance
Maintenance Only
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Stepping Up to SaaS
Customer Financing
Subscription Pricing
White Label via MSP
Revenue
Business Impact
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Step 2(a): Field Driven Subscription Pricing . . . “The cocktail napkin approach.”
Too simplistic, too onerous . . . and you’ve got control issues!
License + Maintenance
------------------------
-------
Term
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Step 2(b): Rational Subscription Pricing . . . Agnostic Flexibility
Pricing committee’s view of agnostic pricing
Acceptable payback on licenseNo impact on maintenanceLevel of commitment (term and minimums)Risk factoredTime value of money factored
Sales view of agnostic pricing
CompetitiveCommission neutral (on a deal by deal basis)Ability to respond at the deal level (discounting)Contractual flexibilityOpportunity to make more money
14 Interactive conversion tool available at www.tfpllc.com
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Stepping Up to SaaS
Customer Financing
Subscription Pricing
White Label via MSP
Revenue
Business Impact
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Step 3: Partnering with Managed Service Providers (MSPs) . . . A Simple Equation?
SoftwareMaintenanceImplementation
Application DevTech Support
SoftwareVendor
What is your core competency?
SaaS to theEnterprise
UsersProgram Manager
FacilitiesLocationsHardwareNetworkingOperationsBilling
MSP
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Estimated Cumulative Costs
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Months
Cum
ulat
ive
Cos
ts
Internal SaaS
Picking the Right Partners
Revenue Optimization
Balancing the MSP’s strategic valuewith
Your level of participation
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Impact on Revenue
Customer Financing
Subscription Pricing
White Label via MSP
Revenue
Business Operations
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Simple Comparison – Revenue Recognition
$0$200,000$400,000$600,000$800,000
$1,000,000$1,200,000
1stQtr
2ndQtr
3rdQtr
4thQtr
5thQtr
6thQtr
7thQtr
8thQtr
9thQtr
Quarterly Revenue
Perpetual Subscription Pay per Use
Cumulative Revenue
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
1stQtr
2ndQtr
3rdQtr
4thQtr
5thQtr
6thQtr
7thQtr
8thQtr
9thQtr
Perpetual Subscription Pay per Use
Note: Installment payments provides payment plan of subscription with revenue recognition of perpetual . . . longer term subscription commitment can be funded to obtain cash of perpetual
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Revenue Impact of Application Mix (Go / No Go)
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Impact on Business Operations
Customer Financing
Subscription Pricing
White Label via MSP
Revenue
Business Operations
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ChannelSales
ChannelSales
From the Trenches: Channel Conflicts
Customer
DirectSales
ChannelSales
Partner
Partner
Partner
Field Support
SalesMngmt
Customer SaaSProvider
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Proposed Pricing at 40% Margin•Software•Maintenance•Preliminary Field Level HW Architecture•Budgetary Dedicated PS Headcount
$0
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
$90,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Cumulative Revenue Cumulative Cost
Resultant Margin and Payback•Software•Maintenance•Refined HW Architecture•Refined PS Estimate
From the Trenches: Operational Impact of Providing a Turn Key Solution (being too good of a partner)
Payback
18% Margin
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Top and Bottom Line Impacts
Need to have the rigor of a start up, but could see substantive R&D andoperations gains if software platform unified to one version and delivered as a multi-tenant Web service
Short term hit (unless purely incremental); proper design can create predictable annuity growth
On Demand / SaaS
Expected operational costs around partner management, sales ops, order fulfillment . . . higher cost if “turn key” / minimal efficiency gains
Short term hit (unless purely incremental); proper design can create predictable annuity growth
Subscription (w/ MSP)
Lowest cost optionUp front revenue recognition & can drive incremental revenue
Customer Finance
Bottom LineTop LineApproach
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. . . from “Bessemer’s Top 10 Laws for Being “SaaS-y”By Byron Deeter, Bessemer Venture Partners (Feb 25, 2008)
Your key business metrics are: CMRR (Contracted Monthly Recurring Revenue) and Cash - “Bookings” is for suckers.
It takes at least $300K of CMRR to climb the Sales Learning Curve -Stop at three sales reps until at least two of them are making $100K MRR quotas.
Separate your “hunters” and “farmers” - As soon as you’ve climbed the Sales Learning Curve, begin ramping your sales force by hiring renewal-oriented account managers.
Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand.
Single instance, multi-tenant - Have only one version of the code in production. Really. “Just say no” to on-premise deployments.