During a CXOTALK conversation with NetSuite CEO, Zach Nelson we discussed many topics, including two core issues: the role of professional services at NetSuite and how the company thinks about customer retention and subscription sales.
The discussion with Nelson took place on-stage at the SaaStr Annual, a conference bringing together 5,000 software-as-a-service entrepreneurs.
Here is short video pulled from our lengthy discussion. You can watch the whole thing and read the full transcript over at the CXOTALK site.
As background, recognize that the SaaS ideal is selling products that are easy to use without significant human intervention, although the reality is often far different. Most enterprise software buyers have complex business processes and strong expectations for service and support. These expectations force software companies to create professional services organizations to help customers go live with their software purchase.
For enterprise SaaS companies, professional services are a necessity that risks creating distraction from the core business while watering down margins on software sales.
(As an aside, be aware we are talking about software-as-service vendors; on-premise suppliers have different economics. Maintenance and support revenue at on-premise players in ERP, for example, is typically far higher than license revenue. In addition, that support revenue stream is often more stable than the license revenue. This is distinct from professional services, but the point is that SaaS economics are far different than on-premise.)
Regardless of profitability, professional services are an essential ingredient for making enterprise software customers happy. Enterprise buyers expect responsive vendor assistance during when purchasing and implementing software in areas such as finance, CRM, or supply chain.
In addition, when selling a subscription service, software companies must ensure ongoing customer satisfaction. If not, unhappy buyers voting with their wallet will eventually abandon the service for alternatives.
For this reason, smart SaaS companies have long understood that the successful execution of the subscription business model forces high customer satisfaction. Again, unhappy subscription customers tend to leave. Therefore, churn is a core metric for any SaaS business.
With this background in mind, here are edited comments from my conversation with Zach Nelson, CEO of NetSuite:
Why did NetSuite build a services organization?
We would have rather not built a services organization. However, we had to get customers live and make sure the revenue recurs. If the customer doesn't get live the revenue doesn't recur.
We built our professional services because there was no other alternative, but we did it differently than a services business would. [For us,] services are an investment in recurring revenue. We make a little money on our services, but it's really a necessary evil, even though I'm not saying services are evil.
I'm really happy that 40% of our business now comes from channel partners. The channel was reticent ten years ago but is driving our business today.
In other words, professional services drive recurring software sales?
In our case, yeah.
What are your metrics for correlating customer satisfaction and recurring revenue?
[One] way to align our interest with customers is doing one-year deals because we're incented to get that customer live and they're incented to get live as well.
We've always focused on revenue churn. Every year we say that revenue churn can't get lower and then it goes lower again.
The bad side of revenue churn is [subscription non-renewal] and down-sell; those are the negative inputs. The positive input is up-sell. Year-over-year, our up-sell is more than our churn and down-sell.
As you build company models, up-sell is a very good thing. You need products to up-sell, to replace the inevitable churn and down-sell, even in a sticky application like ours. So, that's a very important piece of the model.
To want to add more things, the customer has to be happy. You also have to target the right group of customers; some upsell just comes naturally. We're probably the platform for 70% to 80% of next-generation businesses such as here in the audience [at the SaaStr conference], so when they go from 50 employees to 500 employees, it's a beautiful thing. Choosing your markets wisely is another important piece.