Revenue as a ServiceThe business end of SaaS

LA2M, January 13, 2010

2000

If you build it,they will come

2010

If they come,it’ll make money

Monumentsin the desert

www.work.com(www.business.com)

Mel Brooks’“The Producers”

www.bolt.com(www.ning.com)

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Fields of Dream

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

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NOT SaaS

• Brick-and-mortar e-Commerce sites, hollanders.com, e.g.

• Banks/brokers, service portals, e.g. bankofamerica.com

• annarbornews.com

• e-Commerce digital pure-plays, iTunes.com, e.g.

• Online financial service pure-plays, e.g. paypal.com

• annarbor.com

• SaaS businesses have entirely different economics that set them apart from other online businesses

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SaaS Cost Centers

Marketing • Listening • Setting Expectations

Closed

Pipeline

Informable

Retention

Conversion

Attraction

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SaaS Cost Centers

Engineering • Managing Infrastructure • Managing R&D - Enhancements and Escalations • Managing Release Trains

New FeaturesBug Fixes

DevelopmentTesting

StagingRelease

SaaS Cost Centers

Customer Service • Issue Resolution • Voice of the Customer • Issue Escalation • Voice of the Company

Customer

Issue

Happy

Pays

Service

V.o.Cust

V.o.Comp

HappyTouchpoint Branding

7

SaaS Cost Centers

Operations • Collecting Money • Spending Money • Saving Money • Making Money • Raising Money

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SaaS Business Models

The A B C’S: • Ad-based revenue • Brokerage-based • Charity case • Subscription

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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!

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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

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12

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)

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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!

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How much for How long?

x

y t

$ revenues

investments

y2 y3 y4

15

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

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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

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SegmentationCost Basis Revenue Basis

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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

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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

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CoSD ~ EngineeringProfit ~ from OpsCoCA ~ MarketingCoCS ~ Cust Svc

20%

80%

5%

20%

65%

10%

10%

20%

50%

20%

15%

20%

25%

40%

LaunchDevelop

Grow

Mature

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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!

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Investment and Return

Mktg Engrg CS Ops Founder OPM Revs

Ads

Broker oy meh hmm...

Charity w00t oh, ok nope

Subscrip-tion

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)

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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!

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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

• Overlook churn at your peril!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

• 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

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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

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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

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Thank You!

David C. Bloom866.205.9780

www.factotem.com

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TLCN = ((Revs - CoSD) * Churn) - CoCA