SaaS and the renewal question

SaaS and the renewal question

Summary: SaaS providers rely on the stickiness of their services to keep customers renewing time after time. Will they remain viable if renewals get harder to win?

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One of the unspoken tenets underpinning the SaaS model is that customers are for life. Forget the mantra that it's a pay-as-you-go relationship from which the customer can walk away at any time. Providers know that once they've captured a client's data and daily routine onto their service, moving elsewhere is a pain. This is true even for individual consumer services like FaceBook or Gmail, but it applies far more tellingly when it comes to business applications. Payroll provider ADP's average customer lifetime is around twelve years, and most of the attrition is due to company mergers and failures or wider software upgrades rather than simply losing out to a direct competitor. That's the sort of customer stickiness most SaaS providers are aiming for.

Woman chasing profit signWithout that stickiness, there's a fundamental flaw in the economic model of SaaS, which as I've discussed in recent posts, funds the upfront cost of acquiring and provisioning a customer in the expectation of earning back that investment over the lifetime of the customer relationship. Omniture's Josh James emphasized the importance of renewals to his company's finances when he spoke on this topic at a conference last month. He explained that Omniture carefully watches its customer retention rate to make sure it stays above 95 percent annually, and anytime it looks like dropping below that figure, management takes immediate action to trace and fix whatever's causing the problem.

But what if the cost of restoring renewal rates is more than a matter of hiring a few extra bodies in the customer support team? Speaking a day later at the same conference, Oracle's Anthony Lye, senior vice president of Oracle CRM on Demand, suggested that SaaS vendors have got it wrong on renewals. At a meeting a few days later at Oracle headquarters, he gave me an example he's closely involved in. He has made sure Oracle's CRM OnDemand sales team targets Salesforce.com customers in the lead-up to their renewal dates. He claims this is forcing his rival to spend as much effort — and thus money — securing renewals as it does in landing the account in the first place.

While I'm sure he's over-egging his claims — as mentioned above, the incumbent vendor always has an advantage because changing providers is a hassle — it's still true that on-demand by its nature isn't as sticky as on-premise. I suspect there are three distinct factors he's able to exploit in his competitive pitch against Salesforce.com:

  • Inevitably, there are bound to be some discontented customers who want to evaluate alternatives
  • There will also be contented customers who are savvy enough to drive a harder bargain when renewal time comes around
  • As a trend, customers presumably are getting more comfortable with the on-demand model and therefore may be signing shorter contracts than they did when first switching from conventional licensed software with its three to five year upgrade cycles — thus giving more frequent opportunities to renegotiate renewals.

Did we see the impact of Lye's competitive tactics start to show through in Salesforce.com's most recent financial results? ZDNet's Larry Dignan noted the comments of some analysts that cash flow has been falling. "The cash flow worry is this: Salesforce.com could be seeing renewals fall," he wrote. Salesforce prefers to quote an attrition rate of 1%-a-month rather than the more transparent (and significantly better) annual figure Omniture quotes, so it's difficult to know if renewals are getting tougher to win. But there's no sign yet of increased spending on sales and marketing, which in the past three years has remained very consistent at around 50 percent of revenues. So even if Oracle is making the Salesforce.com sales team work harder, the effect on the bottom line isn't yet visible.

Lye of course works in an Oracle business unit that derives most of its revenues from conventional license sales, so is surrounded by people who want to believe the SaaS model is flawed. I think the important takeaway from his argument is to realize that SaaS providers in competitive markets may find renewals a lot harder work than some have been assuming in their business models. It's important to make provision for the cost of pitching for renewals against a credible, aggressive competitor. But much of the work to keep customers loyal has to be done much earlier. Make sure customers are happy throughout the life of the contract, and they're far less likely to go through the disruption of changing provider than if they've already become dissatisfied.

Topics: Enterprise Software, Cloud, Emerging Tech, Oracle

Phil Wainewright

About Phil Wainewright

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant.

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14 comments
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  • Customers Should Prefer SaaS for these Reasons

    Great post Phil!

    SaaS companies have to re-earn the business constantly. Anyone that thinks otherwise is vulnerable to exactly the kind of strategy Oracle is executing.

    An important point needs to be mentioned: this tremendously benefits customers. Whether it is the idea that SaaS has lower lock-in, or that SaaS vendors are actively jockeying to give customers something for a switch, it places the customer in the driver's seat.

    In my book that's a great reason for customers to prefer SaaS.

    Cheers,

    BW
    BobWarfield
  • RE: SaaS and the renewal question

    There is no question that SaaS vendors not only depend on 'low-cost' renewals, but also upsell opportunities to fund their operations. While Oracle and other incumbent software vendors (iSVs) can claim they have a competitive advantage, customers are telling a different story. THINKstrategies' latest SaaS survey in conjunction with Cutter Consortium found that well over 90% of current SaaS customers are not only satisfied with their SaaS solutions, they also plan to renew and expand their SaaS subscriptions, and would recommend SaaS to their peers. (See, http://www.cutter.com/offers/saassurge.html) I doubt Oracle or any other enterprise iSV can claim customer satisfaction, renewal and referral rates like these.
    jkaplan9
  • Another reason not to use The Cloud

    What would happen if a relationship does goes south? What guarantee does the customer have that All of their data will be transferred in a timely fashion to another provider or back to the owner? Who is responsible for that data? Perhaps this is something that should be agreed upon up front. Get your exit plan in writing and don't be a sheep! Think before jumping on the latest technology fad band wagon.
    jpr75_z
    • What would happen?

      I've been involved as a witness in several civil successful litigations over faulty IT services, providing depositions and direct testimony in court.

      However, I've been involved in many more where the customer simply did not know to protect themselves contractually with the result that they had little recourse later in the effort.

      The other factor I have seen that has resulted in IT vendors running roughshod over their customers is that sometimes internal owners perceive coming to the point of litigation as suggestive of their incompetence. This is a cultural issue that the individual project owner cannot address without management support.

      I really do detest the business of litigating to keep vendors honest and view it as a last resort. However, if it never happens, errant vendors may not have much incentive to improve their services.
      schmandel
    • Re: Another reason not to use The Cloud

      I don't believe SaaS is a "fad". The company I work for (www.datastay.com) deployed it's first solution in 2003 which was used for product lifecycle management and six years later that customer is still one among many that uses Datastay PLM! Just because it is now entering the conciousness of more people, doesn't make it a "fad".

      In regards to renewal and as Phil has stated, we really focus on keeping our customers happy while they are using our solutions. We don't focus on competitors who may try to steal our customers, but instead by delivering a high quality solution coupled with outstanding support. We're constantly making improvements where we can through our own observations and through customer feedback.

      Essentially, we've aligned our goals with that of our customers and it has worked very well for us so far.
      samantha_datastay
  • Making Data Retrieval/Input Easier

    As an employee of a SaaS provider, TrackVia ( www.trackvia.com ), we find it important to make it as easy for our customers to get information out of our online database as we make it to get data in. Excel Import/Export makes this possible.
    EDunigan - TrackVia
  • RE: SaaS and the renewal question

    For this argument to make sense, it suggests that companies will buck the trend and move from SaaS to a licensed model- which doesn't seem likely. Otherwise it ends in a zero sum game.
    ericrubin
  • RE: SaaS and the renewal question

    There are very few products that I renew - antivirus, magazines and newspapers.

    I recently tried a software product and found out after the sale that it had to be renewed each year. I now watch very carefully what I purchase. That renewable software was uninstalled from my computer before the expiration date.

    Any product that renews must convince me that constant contact with its producer is critical to its value. So far I have yet to find a SaaS product that meets that need.

    I do not exist to provide a profit for a company. A company exists to fulfill my needs.
    shanedr
  • RE: SaaS and the renewal question

    Renewal is an essential ingredient for a SaaS provider. Salesforce.com and Oracle seem to suggest that renewal is a function of marketing and sales dollars expended. I, on the other hand believe the renewal is dependent on the value the software provides to the buyer, just as one of the previous comments pointed out. One measure of value comes from analyzing usage information. If a customer has not used a critical feature of a SaaS offering in months the provider can kiss the renewal good bye.

    Ranjit Nayak
    rnayak
    • RE: SaaS and the renewal question

      I think you are on the right track Ranjit, analyzing usage is one good passive measure and a good start for many. I would argue that renewals and account management belong in the Services organization. These are the fine men and women who implement and support the customer and are the closest to driving the user experience. I would also argue that if you need to look at how you as a SaaS provider can drive the usage. Having good services implementation is one 1/3 of the puzzle. As a SaaS provider you must also look at how you drive or influence adoption and then how do you drive or influence value. A successful implementation, adoption, and value realization generate the usage and renewal. The real challenge comes with figuring this out under the economics of a SaaS pricing model. It can be done.
      stray_dog
  • Makes me wonder

    Totally agree with the premise of the post - a business measure all SaaS vendors should be watching is churn - both dollar churn and customer churn which are the operating metrics we associate with renewals. The best SaaS companies actually have negative churn - that is they get more revenue from the subscriber base year over year through increased usage without having to sell new products or new clients. <a href=http://www.intacct.com>Intacct</a>
    , where I work, hit 16% negative churn last quarter. Postini also achieved negative churn. The general rule is good SaaS companies need to be running in the single digits or negative for the business model to tie out. <br><br>

    What made me raise an eyebrow was Tony's claim about targeting Salesforce clients in a large scale programmatic way at renewal time. While this sounds good, it would would require you to a) know what companies are using salesforce and who the person who is who in charge of renewing the salesforce contract at that company and b) knowing what their renewal date actually is, ahead of time. Since Salesforce isn't going to share either of these data points with Oracle, it makes me wonder how Oracle would do this in any high volume programmatic way, unless they lost a deal to Salesforce originally and so have some idea of what companies selected Salesforce and when. <br><br>

    The idea of trying to damage a competitor by queering their maintenance / renewal revenue is not a new one - Google Apps is currently doing this to Microsoft Office and this was also the idea behind what SAP was trying to do to Oracle with TomorrowNow. (And which Oracle promptly sued SAP for) In the enterprise software world, for large vendors maintenance margins are about 90%, it's the most profitable revenue stream for the enterprise vendors and the biggest ripoff for their clients. <br><br>

    To the poster that is worried about getting your data out in the world of SaaS / cloud computing. The best SaaS vendors have a contractual SLA that guarantees you can get your data out if you ever decide to leave. I posted about this on my blog here <a href=http://intacct.blogspot.com/2008/10/saas-service-level-agreement-20.html>SaaS Service Level Agreement 2.0</a>
    ddruker1
  • SaaS and the Creativity Question

    <p>This post is very timely, and the comments couldn't be more telling in terms of where the crux of the issue lies...most SaaS products are undifferentiated commodities that emulate some fraction of their enterprise cousins. Simply lower TCO is not enough, and early entrants like sf.com have evolved to such complexity that they can cost as much as licensed products.</p>

    <p>There is nothing wrong with the SaaS model. The problem is that SaaS vendors have failed to be more creative in their product offerings. Why create a product that looks just like a younger version of it's enterprise older brother. Under this theory, Amzaon.com would have simply created a online cash register for books, not a social experience for book buyers. SaaS vendors need to <a href="http://chaotic-flow.com/2008/12/15/saas-economics-101b-differentitate-via-the-internet/">think like Web publishers</a>, because they are on the Internet and their software counterparts are not...that is their advantage.</p>

    <p>And, why should they look to 3+ years of renewals to cover acquisition cost? Why not cover acquisition costs in six months...by lowering them! SaaS vendors that think they deserve three years of renewals for a commodity product to cover acquisition costs that are arbitrarily too high should expect exactly what they are getting...big losses.</p>

    <p>There is a <a href="http://chaotic-flow.com/2008/11/30/saas-model-economics-101-competitive-advantage-in-software-a-a-service/">better way</a>.</p>

    <p>by <a href="http://www.crunchbase.com/person/joel-york">Joel York</a></p>
    <p>at <a href="http://chaotic-flow.com">Chaotic Flow</a></p>
    york_joel
  • SaaS isn't just about the technology

    Interesting thread as always as it proves that SaaS companies generally really does not have the work cut out from them despite the economic downturn but on the contrary will have to exert effort on a lot of things - creative offerings, 'SLA's' that require better relationship management - all customer-focused and very much a return to business fundamentals.

    Best
    Alain
    Alain_Yap
  • Find the SaaS that suits your business

    Another good topic and I agree on the fact that renewal has many factors but most importantly the all inclusive value your SaaS delivered is the key. SaaS is supposed to enhance the overall IT infrastructure not replace unless it make sense.

    Customers will always want to evaluate alternatives, it's like getting a new car when your current lease is up, to keep or to return? Wouldn't you want to try or checkout other brands even if you were completely satisfy with your last contract?

    On the length of the contract as a Saas provider; I always feel that once a subscription starts it would take a lot of screw ups to get someone to leave. Not every business is nimble enough to switch SaaS providers frequently (move data around), either you provide an easily replaceable service (commoditized) or you simply have an inferior product. Either way if you're confident with your SaaS offering, adding value to it should be your priority to customer retention.
    elitetuner