Revenue as a Service
   The business end of SaaS
       LA2M, January 13, 2010
Fields of Dream
         2000                 2010
     If you build it,       If they come,
    they will come       it’l...
Software as a Service
    •   Write-once, run-once - a/k/a “Timesharing”
         • Teletype, Uniscope, VT-100, Ontel, ......
NOT                     SaaS
    •   Brick-and-mortar        •   e-Commerce
        e-Commerce sites,           digital pu...
SaaS Cost Centers
    Marketing
     • Listening
     • Setting Expectations

           Retention           Closed

     ...
SaaS Cost Centers
Engineering
 • Managing Infrastructure
 • Managing R&D - Enhancements and Escalations
 • Managing Releas...
SaaS Cost Centers
                                Customer    Service
    Customer Service
                               ...
SaaS Cost Centers
    Operations
    •   Collecting Money
    •   Spending Money
    •   Saving Money
    •   Making Money...
SaaS Business Models
    The A B C’S:
     •   Ad-based revenue
     •   Brokerage-based
     •   Charity case
     •   Su...
SaaS Business Models
     Ad model:
       • Content/functionality is the “Honey baits the trap”
       • The good: Woo-Ho...
SaaS Business Models
     Ad model success factors:
      •   Don’t commoditize - be jaw-droppingly compelling
      •   D...
12
SaaS Business Models
     Brokerage model:
      •   Make connections, take a cut
      •   One or many middlemen (MLM, fr...
SaaS Business Models
     Brokerage model success factors:
      •   Better connections command better commissions
      •...
How much for How long?
     $                                revenues




                           y2 y3 y4         t
  ...
SaaS Business Models
     Charity model:
      •   FREE content/functionality - ask for donation
      •   The good: belon...
SaaS Business Models
     Charity model success factors:
      •   Invest heavily in viral juice
      •   Invest moderate...
Cost Basis   Segmentation   Revenue Basis




18
SaaS Business Models
     Subscription model:
      •   Tried and tired: Web Apps, Affinities, SocNets
      •   Infomediar...
SaaS Business Models
     Subscription model success factors:
      •   Closely align fees and costs
      •   Outsource l...
5% 10%
                                                        20%




                                                   ...
SaaS Mutts
     A? B? C? S? Why choose just one!
      • Freemium: the Charity/Subscription mutt
      • Affiliate Marketin...
Investment and Return
           Mktg   Engrg   CS     Ops   Founder   OPM      Revs


  Ads


Broker             oy     m...
The Money Shot
     • Revs = Service Fees Collected per unit time
     • this is easy: it’s just the gross price you charg...
The Money Shot
     • Revs = Service Fees Collected per unit time
     • CoSD = Cost of Service Delivery per unit time
   ...
The Money Shot
     • Revs = Service Fees Collected per unit time
     • CoSD = Cost of Service Delivery per unit time
   ...
The Money Shot
     • Revs = Service Fees Collected per unit time
     • CoSD = Cost of Service Delivery per unit time
   ...
The Money Shot
       • Revs = Service Fees Collected per unit time
       • CoSD = Cost of Service Delivery per unit time...
The Money Shot
       • TLCN = Total Lifetime Customer Net Revenue
       • TLCN tells you how much money you can make
   ...
Thank You!
                David C. Bloom
                 866.205.9780
               www.factotem.com




     TLCN = ((...
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Revenue As A Service

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SaaS ("Software as a Service") is the new Field of Dreams. Too many great online applications falter, for want of an effective business model.
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Video of this presentation @ http://la2m.org/events/turning-software-service-saas-revenue

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Revenue As A Service

  1. 1. Revenue as a Service The business end of SaaS LA2M, January 13, 2010
  2. 2. Fields of Dream 2000 2010 If you build it, If they come, they will come it’ll make money Monuments Mel Brooks’ in the desert “The Producers” www.work.com www.bolt.com (www.business.com) (www.ning.com) 2
  3. 3. Software as a Service • Write-once, run-once - a/k/a “Timesharing” • Teletype, Uniscope, VT-100, Ontel, ... • Diversity of terminals: • Web widgets, ... • Mobile apps, ... • MMORPGs (SL, Wii), ... • Chumby, iPod, Kindle, Tomtom, ... • The A B C’S of SaaS: • Ads, Brokerage, Charity, and Subscription 3
  4. 4. NOT SaaS • Brick-and-mortar • e-Commerce e-Commerce sites, digital pure-plays, hollanders.com, e.g. iTunes.com, e.g. • Banks/brokers, • Online financial service portals, e.g. service pure-plays, bankofamerica.com e.g. paypal.com • annarbornews.com • annarbor.com • SaaS businesses have entirely different economics that set them apart from other online businesses 4
  5. 5. SaaS Cost Centers Marketing • Listening • Setting Expectations Retention Closed Conversion Pipeline Attraction Informable 5
  6. 6. SaaS Cost Centers Engineering • Managing Infrastructure • Managing R&D - Enhancements and Escalations • Managing Release Trains New Features Development Staging Bug Fixes Testing Release
  7. 7. SaaS Cost Centers Customer Service Customer Service Issue • Issue Resolution • Voice of the Customer V.o.Cust • Issue Escalation V.o.Comp • Voice of the Company Happy Pays Touchpoint Branding Happy 7
  8. 8. SaaS Cost Centers Operations • Collecting Money • Spending Money • Saving Money • Making Money • Raising Money 8
  9. 9. SaaS Business Models The A B C’S: • Ad-based revenue • Brokerage-based • Charity case • Subscription 9
  10. 10. SaaS Business Models Ad model: • Content/functionality is the “Honey baits the trap” • The good: Woo-Hoo! Turn traffic into money. • The bad: Rust never sleeps - sustainability is a bitch • The ugly: Ad networks say, “thank you!” • Web 1.0: impressions (“banners and eyeball plays”) • Web 2.0: clickthroughs (“AdSense and PPC”) * • Web 3.0: behavioral targeting - very investor-friendly * Note: pay-per-conversion is not the Ad model! 10
  11. 11. SaaS Business Models Ad model success factors: • Don’t commoditize - be jaw-droppingly compelling • Don’t try to attract traffic - widgetize • Don’t try to sell ads - use the ad networks • Gather as much info on your customers as you can • Tried and tired: web, mobile, streaming • Innovative: gaming, GPS devices • Listen, Listen, LISTEN 11
  12. 12. 12
  13. 13. SaaS Business Models Brokerage model: • Make connections, take a cut • One or many middlemen (MLM, franchise, e.g.) • The good: very attractive value proposition • The bad: needs exclusivity/IP to maintain market • The ugly: many swings, few hits • Pay-per-conversion incurs customer’s risk • (this model only works if you can manage that risk) 13
  14. 14. SaaS Business Models Brokerage model success factors: • Better connections command better commissions • Don’t dig a big hole! Invest sparingly, incrementally • IP: algorithms (Shazam, eHarmony, e.g.) • Exclusivity: turf (Classmates, Hulu, e.g.) • Diversify and cross-sell: (Amazon, eBay motors, e.g.) • Give affiliates tools and put them to work! 14
  15. 15. How much for How long? $ revenues y2 y3 y4 t y x 15 investments
  16. 16. SaaS Business Models Charity model: • FREE content/functionality - ask for donation • The good: belonging/supporting/shame works • The bad: NO value proposition • The ugly: non-deterministic business • Freemium promotion moves charity to conversion • Community models spread work/risk/reward 16
  17. 17. SaaS Business Models Charity model success factors: • Invest heavily in viral juice • Invest moderately in IP lawyers • Business model informs the balancing act • Seek out and amplify Opinion Leaders • Agility is key: don’t lock-in long-term resources 17
  18. 18. Cost Basis Segmentation Revenue Basis 18
  19. 19. SaaS Business Models Subscription model: • Tried and tired: Web Apps, Affinities, SocNets • Infomediary: (“publishing”) Edmunds, Nielsen, e.g. • Utility: infrastructure, desktop security, mobile • Pay per ... user, usage, time, or all three! • The good: recurring revenue, ca-CHING • The bad: human nature: people like to own stuff • The ugly: when you charge, expectations skyrocket 19
  20. 20. SaaS Business Models Subscription model success factors: • Closely align fees and costs • Outsource like crazy - DWUD/DDWUDD • Clear ValProp: selling... Access? Functionality? Tiers? • Tease the release train - make it customer-driven • Open up your API’s - support 3rd party apps 20
  21. 21. 5% 10% 20% 65% 10% 20% 20% Mature 15% 20% 40% 50% 20% Grow 80% 25% CoSD ~ Engineering Profit ~ from Ops Launch CoCA ~ Marketing 21 Develop CoCS ~ Cust Svc
  22. 22. SaaS Mutts A? B? C? S? Why choose just one! • Freemium: the Charity/Subscription mutt • Affiliate Marketing: the Ad/Brokerage mutt • Be careful when hybridizing with the Ad model • The exception: house ads, community ads • Franchising: the Brokerage/Subscription mutt • Segment customers, NOT business models! 22
  23. 23. Investment and Return Mktg Engrg CS Ops Founder OPM Revs Ads Broker oy meh hmm... Charity w00t oh, ok nope Subscrip -tion
  24. 24. The Money Shot • Revs = Service Fees Collected per unit time • this is easy: it’s just the gross price you charge (your Business Model determines how much of it you get to keep) 24
  25. 25. The Money Shot • Revs = Service Fees Collected per unit time • CoSD = Cost of Service Delivery per unit time • this is a little trickier: it’s the total Engineering plus Customer Service costs divided by the total number of customers in a unit time - calculus! 25
  26. 26. The Money Shot • Revs = Service Fees Collected per unit time • CoSD = Cost of Service Delivery per unit time • Churn = Customer Retention per unit time • churn is the average lifespan of a customer engagement times the attrition factor - “how many customers lost” per unit time • Example: avg lifespan = 3yrs & attrition = 5%/yr churn = 3 * (1 - 0.05)3 = 2.57 26 • Overlook churn at your peril!
  27. 27. The Money Shot • Revs = Service Fees Collected per unit time • CoSD = Cost of Service Delivery per unit time • Churn = Customer Retention per unit time • CoCA = Cost of Customer Acquisition • this is the total Marketing spend during the period, divided by the number of new customers acquired during that period - ugh, Calculus again 27
  28. 28. The Money Shot • Revs = Service Fees Collected per unit time • CoSD = Cost of Service Delivery per unit time • Churn = Customer Retention per unit time • CoCA = Cost of Customer Acquisition • TLCN = Total Lifetime Customer Net Revenue TLCN = ((Revs - CoSD) * Churn) - CoCA 28
  29. 29. The Money Shot • TLCN = Total Lifetime Customer Net Revenue • TLCN tells you how much money you can make off each customer, over the life of the customer • My favorite dashboard metric • Don’t freak out if it’s sometimes negative • Do freak out if it’s never positive TLCN = ((Revs - CoSD) * Churn) - CoCA 29
  30. 30. Thank You! David C. Bloom 866.205.9780 www.factotem.com TLCN = ((Revs - CoSD) * Churn) - CoCA 30

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