You may have noticed the rise in subscription services and business models. The likes of Spotify in music, Netflix in video and, of course, Dollar Shave Club in FMCG, which was bought by Unilever for $1bn.
Amazon’s Prime membership, and more recent Fresh service, are both forms of subscription. Even relatively low-consideration items that might not have regular or predictable repeat purchase cycles can work within a subscription offering. Printer ink is increasingly sold ‘as a service’ via a subscription model, for example HP Instant Ink.
But I would go further and argue that all businesses can, and should, learn from Software-as-a-Service (SaaS) businesses who are, arguably, the masters of subscription-based propositions and models.
The Fundamental Reason
Ultimately the reason we should all think like SaaS businesses is that it forces us to focus on delivering a great product/service with excellent customer support.
Great sales and marketing cannot save a mediocre SaaS business in the end, it can only amplify what successfully meets genuine customer needs.
SaaS thinking keeps you at the top of your game and keeps you honest.
1. A Focus on Product & Service
Successful SaaS businesses are obsessively product and customer-centric. They really care about the quality of the user interface, the customer support, documentation, training, tutorials, on-boarding, and renewal experience.
This is largely because they know the overall customer experience drives all their key success metrics (see following points) and also because they know their customers will share their experiences, both privately and publicly via review sites and social media, and this in turn drives awareness and (sales) conversion success.
It is very hard in SaaS for good sales to make up for a mediocre product/service.
And marketing’s job becomes less about pushing out a message and more about listening to customers in order to help refine and improve the customer experience.
Service and support should be seen as a revenue source, not a cost center. In the SaaS world, it is often said ‘customer success is the new sales’. If your mindset is only a one-off transaction, then any support or service seems like a cost that detracts from the value of the sale you made.
As soon as you look at it from a subscription perspective, with a lifetime value (LTV) and the opportunity to upgrade the customer, service becomes a fantastic opportunity to engage with customers, delight them and increase their profitability and yield.
But wouldn’t it be great if every business cared first and foremost about the quality of their product, service and customer experience? Surely they would be stronger brands and more valuable businesses?
2. The KPIs Favor Loyalty and Value
Most businesses focus on revenue and profit. The metrics that matter most to SaaS businesses are much more focused on the value of a customer relationship over time because the business model is one of recurring revenue with the opportunity for increased yield (spend/customer).
Saas metrics that matter include: Customer Acquisition Cost (CAC), Lifetime Value (LTV), yield, churn, monthly recurring revenue (MRR).
In the early days of a SaaS business you are focused on customer acquisition but it quite quickly becomes apparent that success is actually based on yield and loyalty in the long run. To get customers spending more and staying loyal you have to provide a compelling product and great service.
It’s that simple. And that hard.
If you believe you are selling something one-off, then you tend to think mostly about top-of-funnel metrics, and cost per acquisition (CPA) is based on a single conversion event. This makes it harder to get a return on marketing investment.
With SaaS, however, you can often justify spending more to acquire customers because you know their longer term value. And the better your product/service, the more you can afford to spend acquiring customers.
So if more businesses thought like SaaS businesses they could afford to spend more on acquiring customers and therefore driving growth.
3. You Live and Die Every Month
Many businesses think one transaction at a time. They just want to make the next sale. They do not think, or even appear to care, whether the customer might buy again from them in the future.
Other businesses do have a recurring relationship but it is on annual basis. So again the focus is to get the sale in and then start panicking about the renewal only a short time before the year is up.
SaaS businesses typically have monthly recurring revenue (MRR). This means customers can leave you every month, not quarterly or annually. Which means you just cannot get lazy, you have to keep delivering value, and you cannot afford to disappoint customers — they are not tied in to a longer contract so they can just leave.
This monthly cadence also means SaaS businesses’ operational rhythm is ‘agile’, their culture is about rapid iteration, test and learn, about automation and scaling, about being ‘always on’. These are things that all businesses are aspiring to as part of their ‘digital transformation’ efforts.
Again, if we thought like SaaS businesses and had to keep our customers happy every month, and operated like SaaS businesses in a more agile way, then we’d all have better businesses.
4. You’re Competing Globally
Finally, SaaS businesses are typically global by default even if focused on a particular country or region. This means they are competing globally and have to be world class to survive and thrive.
Once again this global competition is healthy in keeping a SaaS business sharp. If we all thought like this and benchmarked our offerings against the best in the world then we would be forced to up our game.
SaaS businesses are very demanding, no doubt. However, if you get it right then it is surely one of the best business models in the world, combining high growth, huge scale, high profit margins, and recurring revenue streams.
This is why successful SaaS businesses are so highly valued. If you can bring SaaS thinking and approaches to your business then you should be able to hugely increase your business’ value both to your customers and shareholders.