Rationalizing Traditional Software
Pricing to Software as a Service
(SaaS)

     Drew Wright
     April, 2008




        ...
Technology Finance Partners (TFP)
Financially Oriented Sales and Marketing Consultants


         Customer
               ...
Why Rationalizing Traditional to SaaS Matters


  Traditional Vendors
    Need to respond and compete . . . but need to
  ...
Subscription vs. Perpetual
             (A Customer’s First Impression?)

                                                ...
The Real Total Cost of Ownership & The
                   Underlying Opportunity
                                         ...
Falling in to SaaS                            Revenue
                                              Business
             ...
From the Trenches: SaaS Poster Child

                                            Employee Spend Management

Select Data f...
Stepping Up to SaaS


                                   Revenue
                                   Business
             ...
Step 1: Customer Financing

     “As the popularity of SaaS increases, expect vendors that can
     provide vendor-led fin...
Stepping Up to SaaS


                                  Revenue
                                  Business
               ...
Step 2(a): Field Driven Subscription Pricing . . .
“The cocktail napkin approach.”




                                  n...
Step 2(b): Rational Subscription Pricing . . .
Agnostic Flexibility

Pricing committee’s             Sales view of agnosti...
14   Interactive conversion tool available at www.tfpllc.com
Stepping Up to SaaS


                                  Revenue
                                  Business
               ...
Step 3: Partnering with Managed Service
Providers (MSPs) . . . A Simple Equation?
  Software                      MSP     ...
Picking the Right Partners


                                                       Estimated Cumulative Costs
           ...
Impact on Revenue


                                  Revenue
                                  Business
                 ...
Simple Comparison – Revenue Recognition


                     Quarterly Revenue                                          ...
Revenue Impact of Application Mix (Go / No Go)




                       20
Impact on Business Operations


                                   Revenue
                                   Business
   ...
From the Trenches: Channel Conflicts

                     Field Support
            Channel
             Sales
 Channel
 ...
From the Trenches: Operational Impact of Providing a
Turn Key Solution (being too good of a partner)
 $90,000,000



 $80,...
Top and Bottom Line Impacts
      Approach                 Top Line                  Bottom Line

Customer Finance        ...
. . . from “Bessemer’s Top 10 Laws for Being “SaaS-y”
By Byron Deeter, Bessemer Venture Partners (Feb 25, 2008)

    Your ...
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Microsoft PowerPoint - TFP-RationalizingTraditionaltoSaaS-080404

  1. 1. Rationalizing Traditional Software Pricing to Software as a Service (SaaS) Drew Wright April, 2008 1
  2. 2. Technology Finance Partners (TFP) Financially Oriented Sales and Marketing Consultants Customer Pricing Finance Consulting Programs ROI / Value Consulting Business Case Sales Tool Analysis Service Creation Revenue Optimization Field Level Support Sales Efficiency 2
  3. 3. Why Rationalizing Traditional to SaaS Matters Traditional Vendors Need 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-Ups Likely competing with traditional and provides a competitive benchmark when developing pricing. 4
  4. 4. Subscription vs. Perpetual (A Customer’s First Impression?) Estimated Cumulative Costs $1,200,000 Software & Maintenance Based on Peak Need $1,000,000 Cumulative Costs $800,000 $600,000 Seasonality $400,000 $25,000 $20,000 Monthly Spend $200,000 $15,000 $10,000 $0 $5,000 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 $0 Based on Actual Use Months 1 6 11 16 21 26 31 36 41 46 51 56 Month Internal Subscription 5
  5. 5. The Real Total Cost of Ownership & The Underlying Opportunity Estimated Cumulative Costs $2,500,000 Patches and updates Hardware Refresh $2,000,000 Cumulative Costs Version Upgrades $1,500,000 $1,000,000 Hardware & Maintenance Implementation $500,000 Facilities, Connectivity Operations Management $0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 Months Revenue Optimization Internal SaaS 6
  6. 6. Falling in to SaaS Revenue Business Operations Customer Financing Firewalled ing Division Pric Transformative SP Start Up n M iptio a vi l ion scr be pt dO La an Sub em te D hi On W Software as a Service 7
  7. 7. 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 2007 Total Revenue 37,809 35,704 41,099 45,097 56,737 56,550 71,831 97,145 129,107 Cost of Ops 18,633 27,832 24,961 21,987 23,214 23,264 28,450 37,846 43,711 S&M 28,993 38,581 24,941 16,669 14,549 14,329 17,484 22,907 34,154 R&D 19,371 31,212 16,449 10,606 10,356 8,773 9,336 12,445 15,866 G&A 10,385 14,795 10,729 6,800 6,710 7,295 10,319 14,458 18,759 Other 8,859 2,167 266 1,490 1,140 1,140 1,140 2,420 2,965 Operating 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 2007 Revenue 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 8
  8. 8. Stepping Up to SaaS Revenue Business Operations White Label via MSP Subscription Pricing Customer Financing 9
  9. 9. 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 Maintenance Only $12,000,000 $10,000,000 License & Maintenance $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 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 10
  10. 10. Stepping Up to SaaS Revenue Business Impact White Label via MSP Subscription Pricing Customer Financing 11
  11. 11. Step 2(a): Field Driven Subscription Pricing . . . “The cocktail napkin approach.” n tenance Licens e + Mai --------- ---------- ------------ rm Te Too simplistic, too onerous . . . and you’ve got control issues! 12
  12. 12. Step 2(b): Rational Subscription Pricing . . . Agnostic Flexibility Pricing committee’s Sales view of agnostic view of agnostic pricing pricing Acceptable payback on Competitive license Commission neutral (on No impact on a deal by deal basis) maintenance Ability to respond at the Level of commitment deal level (discounting) (term and minimums) Contractual flexibility Risk factored Opportunity to make Time value of money more money factored 13
  13. 13. 14 Interactive conversion tool available at www.tfpllc.com
  14. 14. Stepping Up to SaaS Revenue Business Impact White Label via MSP Subscription Pricing Customer Financing 15
  15. 15. Step 3: Partnering with Managed Service Providers (MSPs) . . . A Simple Equation? Software MSP SaaS to the Vendor Enterprise Software Facilities Users Maintenance Locations Program Implementation Hardware Manager Networking Application Dev Operations Tech Support Billing What is your core competency? 16
  16. 16. Picking the Right Partners Estimated Cumulative Costs $2,500,000 Balancing the MSP’s strategic value $2,000,000 with Your level of participation Cumulative Costs $1,500,000 $1,000,000 $500,000 $0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 Months Revenue Optimization Internal SaaS 17
  17. 17. Impact on Revenue Revenue Business Operations White Label via MSP Subscription Pricing Customer Financing 18
  18. 18. Simple Comparison – Revenue Recognition Quarterly Revenue Cumulative Revenue $1,200,000 $2,000,000 $1,000,000 $1,500,000 $800,000 $600,000 $1,000,000 $400,000 $500,000 $200,000 $0 $0 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 1st 2nd 3rd 4th 5th 6th 7th 8th 9th Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Perpetual Subscription Pay per Use 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 19
  19. 19. Revenue Impact of Application Mix (Go / No Go) 20
  20. 20. Impact on Business Operations Revenue Business Operations White Label via MSP Subscription Pricing Customer Financing 21
  21. 21. From the Trenches: Channel Conflicts Field Support Channel Sales Channel Partner Channel Sales Sales Partner Partner Sales Customer Mngmt Direct SaaS Sales Customer Provider 22
  22. 22. From the Trenches: Operational Impact of Providing a Turn Key Solution (being too good of a partner) $90,000,000 $80,000,000 18% Margin $70,000,000 Resultant Pricing at 40% Margin Proposed Margin and Payback $60,000,000 •Software •Maintenance $50,000,000 •Refined HW Architecture •Preliminary Field Level HW Architecture •Refined PS Estimate •Budgetary Dedicated PS Headcount $40,000,000 $30,000,000 $20,000,000 $10,000,000 Payback $0 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 23
  23. 23. Top and Bottom Line Impacts Approach Top Line Bottom Line Customer Finance Up front revenue Lowest cost option recognition & can drive incremental revenue Subscription (w/ MSP) Short term hit (unless Expected operational purely incremental); costs around partner proper design can create management, sales ops, predictable annuity order fulfillment . . . growth higher cost if “turn key” / minimal efficiency gains On Demand / SaaS Short term hit (unless Need to have the rigor of purely incremental); a start up, but could see proper design can create substantive R&D and predictable annuity operations gains if growth software platform unified to one version and delivered as a multi- tenant Web service 24
  24. 24. . . . 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. ann.flynn@tfpllc.com drew.wright@tfpllc.com 25
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