Since we kicked off this blog early last year, one of our major themes has been the importance of a recurring revenue model. Heck, at this point, I’ve covered the topic from all sorts of angles. Today I was presented some information at the RSPA INSPIRE conference that made me realize that I missed one of the most obvious angles: simple math.
In this morning’s session, speaker/consultant Tom Bouwer shared a couple of spreadsheets that clearly illustrated the long-term benefits of a SaaS model. Below are some shots I took from my seat to share with you.
Here’s what you’re looking at. Both charts depict a $10,000 sale. The cost of goods is $6,000. In the top example, after you pay out the commission and take out some other costs, the sale nets you $2,560 immediately. In the next two years, you’ll get some additional revenue from maintenance. After it’s all said and done, after three years, that $10,000 sale yielded $3,480.
In the bottom example, which is an -as-a-service model, that same $10,000 deal is on a $425/year plan. All the other costs still exist. The net result at the end of year one is a loss of $3,308. Hang in here with me. Look what happens in year two. You make a large portion of that money back due to that recurring $425. By the time year three ends, rather than netting $3,480, you’d make $5,688 on the SaaS model.
Bouwer shared another set of charts which illustrated the difference in revenue over three years using many customers. I won’t share the images here with you, but I will share the punchline of his example of a fictitious business: Starting with 12 new customers in year 1 and ending with 72 total customers in year 3, the SaaS model brings in about $410,000, while the traditional model yields a paltry $251,000. Same hardware, software, and services, just bundled and sold differently.
I’m sure you have lots of questions. Unfortunately, in the short-term I can’t answer them because I’m here at the event soaking up all this great info. I can’t be any stronger in my suggestion that you make the investment to come to events like this to learn firsthand what it takes to be a market leader. In the long-term, I’ve spoken with the RSPA and I think you can expect to see some co-branded education coming in the future on this topic. I’ll keep you posted.
For now, this data should make one thing clear: if you’re not offering your solutions as-a-service, you’re missing a BIG opportunity.
January 23, 2013 at 7:02 am
Mike,
The SaaS spreadsheet you provided is interesting. I had started looking at how to make money selling the “SaaS model” a year or so ago and I had done a similar spreadsheet on my own for a 5 year period. Of course the numbers are even more compelling (more net cash) when you do the math for 5 years. The million dollar question is this… if a dealer is selling SaaS and competing with the dealer that stays with the traditional POS sales model, who wins the deal? If I am selling the traditional POS model, I would bring this 5 year spreadsheet to the prospect and show them how much more it will cost them (the customer) over a 5 year period if they purchase the SaaS model. I’m having difficulty understanding how POS dealers are going to squeeze that much more “net cash” out of our customers.
January 23, 2013 at 10:01 am
The use of Modified selling where SaaS and Hardware are both rolled together is not easy to sell if you only talk about end numbers. SaaS sales are like leasing more then anything in the long haul. We sell Maintenance and Support contracts don’t we all, and if not isn’t that the real money maker. I think end users will see SaaS for what it is and that is a lease, while modified it contains all the same cost but the revenue for the dealer is greater, I think what Dealers should be doing is a modified sale where SaaS type items are built in over 3 years and First Year income is a wash(flat) covering all cost. Be upfront with your clients is best because they will understand, give them a choice is all I can say!
I think also clients are much for in tuned to the big pictures when SaaS jumps in so selling it can be a challenge – just me two cents or FRAM GUY PAY me Now…..
February 5, 2013 at 9:22 am
The SaaS model is a reality that Var’s are going to have deal with. As a consultant my primary clients are retailers who are either looking for a new POS system or other related store technology. From a small sampling of some new engagements both clients have expressed a desire to evaluate a SaaS based system. One of the questions that was raised in this blog trail is how can a Var compete against himself an offer both a “Fat client and “SaaS” solution. It’s easy it’s called consultative sales. Lay out both options to your perspective client and let make an educated decision. Software vendors need to offer a SaaS pricing model that allows their Vars to offer a sustainable SaaS model. I’ve done some extensive cash flows for a large Var to help him develop a SaaS model. We easily determined that without the pricing support from his software vendor (ISV) the SaaS model was cash negative for the first 18-20 months. Most Vars can’t sustain that 18-20 month period until the model turns cash positive. There’s no question that in the long run the SaaS model is a better business model.
February 8, 2013 at 9:54 am
The Saas cash-flow spreadsheet does not reflect the buyer’s ROI. If the ROI outweighs the difference in cash-flow with the new system increasing revenue above the costs, then the SaaS model works. If the ROI isn’t there, even the traditional system will not get a purchase order. Every client I’ve worked with has done their own cash-flow and ROI spreadsheet. The SaaS model too often is tilted heavily to the vendor. For a short-term account, that’s fine. For long term recurring revenue, you can increase the net revenue and provide a win-win for the client.