Threat!!! SaaS is Cannibalising Licensed Revenue!!! 2 Steps to Win the SaaS Game

Three recurring themes that I pretty often hear from my clients:

“But David, can’t you see that this SaaS thing will cannibalise our licensed product’s sales?”; or

“What will motivate my sales people to sell zero-upfront-revenue SaaS Vs high-revenue licenses?”; and then comes the:

“We have tried, but almost none of our Customers want to move to the Cloud”

This is surely a dilemma and if I have no good answers to the questions above, I can close the shop today … And I won’t close the shop as you’d guess … If this dilemma exists, that’s a good indication of a lack of segmentation or an issue with sales incentive plans. Keep reading if you’d like to learn how to split eggs with bare hands …

spilt

Step 1: Find your new niche

First of all, comes consumer psychology to solve the segmentation problem … Many ISVs spend most of their time serving only one segment of customers – for a reason. It took them long years and several experiments to find their niche where they can become a market leader and a trusted partner in one industry. Not an easy job and well done if you’re there … However, purely focusing in one segment means that they don’t know much about others. And as they run a product business and sell licenses, they anchored themselves to a customer segment who can afford buying the licenses and with whom they resonate well. This segment presumably are also happy with the on-premise offer, otherwise, they would have raised their demand towards a hosted (or SaaS) model over time. So, most of your current customers are happy with what they’ve got today and they don’t want to move into a new model – why change if it works?

So, if you can’t position SaaS to your existing customers, let’s look at winning new customers – right? Now, the task is difficult as this group may be out of your comfort zone. A few ideas to start the segmentation exercise:

  1. Think of clients who found your offer too pricy or too heavy to deploy/host, or simply too big for them. These clients might have been just silently ignoring your offer and never came back to you – so it’s time to interview some of your recently lost prospects and position a SaaS (smaller, easier, less costy and NO_CAPEX) version of your service;
  2. Think of smaller companies in your industry who could benefit from having the same (but simpler) software as their larger competitors!

All in all, the point is to find a new market niche and position a simpler and more cost efficient SaaS solution, which is faster to deploy, easier to use and implies no commitments. If you find this niche, SaaS is complementing your revenue and not cannibalising it.

Step 2: Splitting the egg

Almost every CEO or Sales Manager who I speak to are concerned about their sales force’s performance and selling decisions when it comes to SaaS. Don’t be surprised if your sales decides to sell the $100k license instead of the $0k NO_CAPEX money-back-guarantee pay-nothing-for-90-days SaaS offering. And they are right, I’d do the same thing – it’s a motivational problem, or in other words, a problem with the sales incentive plan. Then I see companies where sales are motivated with a double or triple quota relief if they sell SaaS, but then the company suffers from license revenue declining (again, cannibalising the company’s main revenue stream). Cul-de-sac …

Splitting the egg means separating the license and SaaS sales activities. While license sales is more tactical and short-term win, SaaS sales is long-term and more strategic. Hiring a separate SaaS sales or involving a re-seller partner (or partners) could be a solution. I’ve even seen successful SaaS businesses split their P&L from license and SaaS to not sacrifice long-term SaaS for short-term license revenue. Extreme, but will keep your company a peaceful place to work …

Conclusion

SaaS introduces a completely new way of thinking about the software business. No doubt that Salesforce choose “NO SOFTWARE” as their slogan. Although these are new concepts to software companies, this is how the world of services/consultancy businesses work for a long time. For the first sight, it may look challenging, but companies who ignore SaaS today will have greater challenges ahead in time once SaaS becomes the standard and expected.

Please share your thoughts and I hope to see you on #WPC (Worldwide Partner Conference) next week! Ping me – I’m up for a chat!

Linkedin David Szabo, SaaS Strategy Advisor, Intrapreneur, Firestarter and Rulebreaker at Microsoft. Startup-addict, SaaS & Cloud consultant, blogger at http://cloudstrategyblog.com and LEGO serious play facilitator. Follow me on Twitter!

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3 Responses to Threat!!! SaaS is Cannibalising Licensed Revenue!!! 2 Steps to Win the SaaS Game

  1. Pingback: Threat!!! SaaS is Cannibalising Licensed Revenue!!! 2 Steps to Win the SaaS Game | MSDN Blogs

  2. Hey David,

    Cool and informative article! I like your style!

  3. Andrew Jackson says:

    Hi there!

    I’m Andrew,a writer.I enjoyed some of your articles posted on your blog (cloudstrategyblog.com ). I must appreciate your hard work and wish you good luck.
    I’m Interested in submitting an unique article on a relevant topic that is still need to cover.Let me know what you think.Thanks for your time!..:)

    “Always do what you are afraid to do”
    Best regards,
    Andrew Jackson

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