In the World of SaaS, ROI is an Ongoing Calculation

The concept of Software-as-a-Service (SaaS) has transformed the software industry. On the demand side, clients enjoy the new consumption model, with generally lower entry points, continual support in some cases, and a less capex-intensive approach overall. And the software/SaaS providers have learned that business success and profitable growth depends more as much on the full adoption of their solutions and renewals across their customer base as it does on winning net-new customers. So they invest heavily in Customer Success (in the form of onboarding and implementation services) and Customer Support resources to ensure customer satisfaction and maintain a strong renewal rate.

Buyers also have their financial metrics and most business purchase decisions, including software, must be supported by some sort of financial analysis and forecast, using financial instruments such as: 

Return-on-Investment (ROI) — Total Cost of Ownership (TCO) — Internal Rate of Return (IRR) —  

Payback Period — Net Present Value (NPV)

In response, many software vendors routinely offer one or more tools to establish value during their sales process – tools such as an online ROI calculator or other spreadsheet templates. Or they help buyers to develop their own business case, perhaps by providing data collected from their existing client base. This was so important in the traditional software sales process that the vast majority of vendors even deploy a supplemental consulting resource to collect data and advise on the topic.

The irony is though, in my experience, most sales conversations still dwell and stay focused on the price of a product or subscription instead of the value. This is due to some serious muscle memory on both sides of the purchase decision:

  • A business culture of sales quotas and discount models instead of a customer-first, value-based selling approach 
  • A focus from buyers on the cost budget they must invest instead of the value they are creating.

The other issue with most vendors’ ROI tools is that they are mostly focused on the initial investment approval process and tend to produce a one-off report. Anyway, collecting accurate data is quite difficult and so most of the ROI/TCO/IRR/NPV forecasts are some sort of estimate based upon many assumptions. Often, the document is completed on a pro-forma basis and not validated; and it is hardly ever audited at a later date on the actual outcomes of the project.

SaaS has also democratized software buying and many SaaS subscriptions are now signed up by individual contributors out of their expense budget – curiously, in these cases, IT or procurement only gets involved when the renewal phase is reached. But the SaaS spending honeymoon is likely ending. Chief Financial Officers are now turning their attention to these software expenditures and expect answers –  answers in their taxonomy of return on investment, business outcomes, and revenue contribution. 

Many SaaS providers tell me that the renewal negotiation has moved from a “shall we continue the project” discussion to an almost full-blown re-evaluation of the initial investment decision. Compliance guidance, or just good procurement management practice, is pushing buyers to evaluate a new shortlist in the renewal phase and each additional user group or functionality is treated as a brand new project.

The potential advantage for the current SaaS supplier is that they have, hopefully, provided a strong customer experience and that is well documented. Another is that the supplier is able to prove that their service has provided value to the organization: 

  • At the minimum, as measured against the forecasted benefits from the start of the project
  • Ideally, based upon a continuous value management process. 

I’ve known DecisionLink as a pioneer in the topic of customer value management for quite a while now, so I wasn’t surprised to hear they were interested in the above developments. They decided to find out how the SaaS industry is reacting to this new emphasis on ongoing value management and field a survey across numerous SaaS sales organizations. Then, they asked me to review and analyze the survey data and write up an insights report which you can see here

I hope you will enjoy the report and it will help in your planning; whether on the demand or supply side. It also discusses lessons learned in the SaaS industry that will be useful for all sectors. Manufacturers of any type of goods can transform from a “product” orientation to a “solution” orientation by packaging up their “piece of hardware” and wrapping services, maintenance and support, upgrades, financing, monitoring, replenishment and other value-add services to an otherwise commoditized piece of hardware. For example, original equipment manufacturers (OEMs) that produce tractors, airplane engines and printers, are all delivering full solutions “as-a-service”. 

Always keeping you informed! Peter.

Leave a Reply

Your email address will not be published.