Three Actions to Improve SaaS Profitability

It’s no secret that SaaS companies are facing a profitability crisis this year. If your company is going through it right now, keep reading.

“The cost of employees and infrastructure is increasing. Borrowing money to cover costs is becoming more expensive. And you can’t leverage a soaring company valuation. This is the new normal.” – Thomas Lah

Luckily, TSIA has been conducting research on profitability and the as-a-service model for years, and we have some answers beyond cost-cutting across the board.

We believe that there are three key actions #SaaS companies can take to increase profitability this year:

1. Monetize services
2. Migrate commercials
3. Modify growth engines

What do these three steps entail? That’s exactly what we’re diving into in today’s issue. If you’re considering trimming headcount to cut costs, read this first.

Step 1: Monetize Services

Monetizing services is the most self-explanatory of the three steps, and is the easiest way to increase profitability. However—because SaaS companies have been giving so much away for free (education, professional services, customer success, etc.)—a common belief is, “The customer won’t pay for that! They expect it to be included in their core technology subscription.”

But the reality begs to differ.

This clip is from Thomas’ recent webinar, “The Year of Profitable SaaS.” Watch the on-demand recording here.

About half of the companies we surveyed monetize customer success, and over 80% monetize technical support. 

“When you do a good job at defining compelling customer success offers, and make it a real business, you add value to the customer and they are happier.” – Thomas Lah

If companies are monetizing things like customer success, they’re more likely to be profitable.

Furthermore, our research shows that when companies with monetized customer success saw that:

• Expansion rate grew by an average of 10 points.
• Dollar retention rate grew by 2 points.
• NPS improved by 17 points.

“You probably do not want to charge for all service motions, especially in consumption-based pricing models. However, there is a threshold you should set where, once crossed, you do charge for those services.” – Jodie Paxton

Services that are commonly monetized include:

• Customization of the technology solution.
• Advanced education on your technology.
• Specialized support from designated technical account managers.
• Predictive maintenance services.
• Managed services.

Step Two: Migrate Commercials

One of the largest expenses for most SaaS companies is cost of sales. How do we deal with that? Make the model more efficient. As Thomas says,

“Not all transactions are created equal.”

This step entails mapping commercial responsibilities based on complexity. This involves migrating some, lower-complexity commercial responsibilities from sales representatives to other resources like customer success managers, renewal specialists, and technology.

What does this look like?

• Allowing customer success managers or renewals specialists to take charge of some/most renewals.
• Giving #CustomerSuccess expansion responsibilities.
• Implementing #automation, such as auto-renewals or automated expansion opportunities within the product.
• Saving the most complex, strategic transactions for the sales team.

This is not taking away from the sales team—in fact, this helps the sales team perform better.

Sales representatives need to be laser-focused on the largest, complex, and most strategic opportunities. When customer success and renewals specialists help with lower-complexity deals such as #renewals and expansions, sales reps have more time to focus on higher-complexity deals, such as landing a new sale.

This step is also supported by data:

• Companies who give their #CSMs targets and incentives for expansion have a 14% higher renewal rate.
• Subscription growth rates fall by 8% when sales executives receive full quota relief and commission when they are responsible for renewals in their assigned accounts.
• There is no material change to contract renewal rates when renewals specialists, customer success managers, or even auto-renewal, has the primary responsibility for renewals.

Step Three: Modifying Growth Engines

After making sure they had a competitive product, historically, #B2B technology companies have accelerated their growth by hiring more sales representatives and spending more money on outbound marketing. While not invalid, this approach is becoming outdated.

Leveraging customer telemetry and data-led growth will become key to profitability and long-term success.

“Whoever owns the data, owns the customer. Whoever masters data, increases growth, productivity, profitability, and retention.” – J.B. Wood

TSIA believes there are five relatively new growth engines successful #XaaS companies will leverage in the future—all of which are driven by data:

Many tech professionals have heard of the terms product-led growth, or customer-led growth. But what makes them worth the hype? 

These new growth engines are enabled by aggressively and effectively leveraging product and customer telemetry, which can provide significant financial benefits:

• Companies who utilize data and analytics in the renewal process see a 17% increase in on-time renewals.
• Companies who select and segment target accounts for sellers based on similar profiles of successful customers see a 12% increase in upsell.
• Companies who leverage data and analytics to align proposals to customer outcomes see a 7% increase in average win rate.

In Closing

If you want to learn more about each of these three steps, check out this paper by Thomas Lah, which covers each one in detail and explains why SaaS companies have historically been unprofitable.

If you prefer learning through video, check out the webinar previewed throughout this article, "The Year of Profitable SaaS."

Our conference, TSIA World INTERACT, is the perfect opportunity to gain greater knowledge about profitability in the current environment and discuss challenges and solutions with other tech professionals.

We’d love it if you could join us and our community next month, May 8-10, for this experience.

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Thank you for reading. Have any feedback? Send it to madeleine.alexander@tsia.com.